A Dumb Payment System
The other day I ran across five items of interest:
- A news article about Medicare paying $800 to rent a wheelchair that could have been purchased outright for $350;
- An article in The Atlantic arguing that the United States spends more on renal dialysis and gets worse results than other countries because of the nonsensical way we pay for dialysis;
- A Uwe Reinhardt explanation of how Medicare pays hospitals (via an approving pointer from Austin Frakt) along with Uwe’s defense of the system; but nonetheless linking to
- A Reinhardt Health Affairs interview with former CMS director Tom Scully who opines that “Medicare is a dumb payer;” and
- A Reinhardt explanation of how Medicare pays doctors (7,000 physician tasks, each with a price that varies for every city, town and hamlet in the land), along with a challenge to readers to come up with a better way.
Okay. I accept the challenge.
I sometimes wonder if health economists actually understand how other markets work. Let’s try a thought experiment. Suppose you ran a business that purchased lots of wheelchairs and you had the misfortune of paying the way Medicare pays. What do you think would happen?
httpv://www.youtube.com/watch?v=JdsMqRaz2WY
Stupid is as stupid does.
The minute your presence in the market was generally known — probably before the first wheelchair was even delivered — you would be visited by a rival vendor offering to meet your needs for, say, two-thirds of what you were paying. Then another rival would offer to top that — say, cutting your costs in half… and before long the cost of the wheelchair to you would be a fraction of what it started out to be. This is how normal, sensible people function in typical markets, day in and day out.
[Parenthetically, I meet people every day who could save Medicare tens of thousands of dollars, but they can’t get the bureaucrats at CMS to return their phone calls because (like the TSA agents who search for bombs while ignoring passengers) the system is not guided by anyone with a modicum of commonsense.]
I’ll skip over the dialysis case because we have previously pointed out that that particular payment system is dumb, dumb and dumber and the principles are pretty much the same.
That will let us jump to the really interesting question: Is it possible for Medicare to purchase wheelchairs (and other health care) the way a rational person (spending his own money to meet his own needs) or a for-profit enterprise (spending its own money to meet its own needs) would do?
[Sorry for all of those qualifications, but in health care people rarely are spending their own money to meet their own needs — which is the source of most of our problems.]
The answer is: We could get huge improvement if Medicare followed the scenario I outlined above, including these commonsense steps:
- Wheelchair vendors must be able to approach Medicare with offers to be paid in a different way, provided that the cost to the government is reduced and quality of care is maintained or improved.
- Medicare does not set preconditions on what it will or won’t do, but leaves the private sector completely free to innovate and find ways to lower cost and raise quality.
- Medicare enters contracts as quickly as the private sector does — without long delays and inordinate paperwork.
- Medicare devotes some of the savings it expects to realize to monitoring contracts and assuring promised performance and ending contracts or renegotiating if the terms are not abided by.
- Medicare accepts upfront that not every contract will work out as expected and some decisions will retrospectively be seen to be wrong, because that is part of normal business experience.
Alert readers will notice that I have proposed this strategy before — in The Wall Street Journal, in the study A Framework for Medicare Reform and in many other places. I even showed how such as approach could radically transform diabetic care, for example. Alas. It all fell on deaf ears. Alert readers will also notice that this approach is the exact opposite of the approach taken by the Obama administration, and before that by Bush, Clinton, and Bush. Instead of letting wheelchair vendors propose new ways of producing, renting and selling wheelchairs, the inside-the-Beltway mentality wants Washington to make all these decisions.
Any “reform” following the inside-the-Beltway approach will only substitute a new dumb payment system for an old one. Okay, maybe the new one will be a little bit smarter, but the bottom line will be the same. All the vendors will analyze the new payment formulas and set out to maximize against them.
Can you imagine the CEO of a private company reading in the newspaper that he is renting something for $800 for 13 months that could have been purchased outright for $350 and doing nothing about it because his company is committed to a payment formula that allows only renting and not buying? Of course not!
Here is Goodman’s Law for Efficient Purchasing:
There is no such thing as a smart formula.
Excellent, as usual. I’ve always liked your ideas on how Medicare could pay differently. But they rely on markets and entrepreneurship and competition — concepts that people in Washington don’t understand.
Great Forrest Gump video.
A health care provider I know told me how one of her patients came in asking for approval to purchase a power chair, paid for by Medicare. My friend explained to her patient that she did not want the patient using a power chair — the patient needed the exercise of walking for health reasons. The Store that sold Scooters advised its potential client (i.e. my friend’s patient) to change doctors to get approval for the power chair (the patient declined because she liked her doctor).
Devon is correct…It’s the providers that should be assessing the needs of patients. Cost goes down tremendously if you get out of the way of people who know what they are doing.
The worst mistake we could make is to try to patch up the dumb payment system with minor reforms. We need radical surgery.
I agree with Vicki. The video pairing is great.
John:
Regarding your statement “I sometimes wonder if health economists actually understand how other markets work. Let’s try a thought experiment. Suppose you ran a business that purchased lots of wheelchairs and you had the misfortune of paying the way Medicare pays. What do you think would happen?”, I think I know what is going on.
First, there are two kinds of economists: those who understand spontaneous order as explicated by Hayek (the minority) and those who don’t (the majority).
Second, the farther one is from having the understanding alluded to above, the scarier it is to contemplate decentralized planning. Such persons (the vast majority of people even in America) therefore would be opposed to abandoning the practice of growing food and raising cattle on government farms and ranches, would be opposed to abandoning government run grain elevators and feed lots, would be opposed to abandoning government food wholesaling and government food processing, and would be opposed to abandoning government run grocery stores if the government had already inserted itself into food production like this already. It would just seem too scary – even irresponsible – to turn over that much control on something that important. The government does not have that kind of control in the food industry but ordinary people are unaware of the counterfactual world in which it did and equally unaware that in such a world they would oppose abandoning government control to have the far superior system we presently enjoy.
My fear is that now that we have over 50% of healthcare spending under the auspices of government and extensive government involvement in the healthcare market already, their lack of understanding of spontaneous order in conjunction with their natural risk aversion makes most of them think that a movement back to free markets in healthcare is nothing short of imprudent.
Dave
Joe is right. The Medicare system is fatally flawed in its basic operating premise; and that is the notion that a third party (not only a third party but the government for goodness sakes)can more efficiently cost manage a mega multi faceted service enterprise than the provider and purchaser of that service. The entire mess has to be kicked in the ditch, and re-invented.
There are many many creative ideas to be explored (I’m sure John Goodman has plenty) if we could ever commit to the basic premise that the market is a better caretaker of cost control than any third party, especially and specifically the bureaucracy of government.
Some of the Medicare Advantage programs are on the right track but offer only a smidgeon of what could be done if the bureaucracy is reined in.
Medicare is a governmental bureaucracy. A governmental bureaucracy acts in political self-interest not economic self-interest and as such can never begin to rival the efficiencies that are achieved through a free market. So tinkering with the system and applying to it terrific market-mimicking ideas will have limited effect at best.
Paul, the effect may be limited, but its better than the current system.
I agree with Goodman’s Law. I’ve never seen a smart formula.
Writing in the journal, Regulation, Bob Moffit of the Heritage Foundation criticized the convoluted Medicare payment system 18 years ago.
“Could phrenology, classifying personalities on the basis of physical measurements of bumps on the head, all the rage last century, make a comeback?”
“[F]ew Americans could have guessed that the U.S. government would be officially paying a whole class of Americans citizens–American doctors–on the basis of an updated version of the old labor theory of value, a discarded artifact of nineteenth century socialist economic theory.”
http://www.cato.org/pubs/regulation/regv15n4/reg15n4f.html
A Medicaid patient was due for a replacement chair. She used a certain kind of power chair. She researched her chair and figured out that she could have its replacement drop-shipped from the manufacturer for $8,000. Medicaid said no. She had to buy it through Medicaid. Cost to taxpayers when purchased through Medicaid? $25,000.
When people discover that there are fine physicians who get hoodwinked by the fee-for-service system, with all the absolutely stupid ways of reimbursement.
Medicine, as I recall during my years of training at Yale, was looked upon as a wonderful profession, but now physicians are told what they will get, and is turning my profession into a business. This breaks my heart. I am working on a discourse which I will email to you.
Bob
John:
You “wonder if health economists actually understand how other markets work.”
I wonder whether you know how hospitals and doctors offices work. There is a difference between a wheel chair, a well defined thing, and the myriad of different services produced by hospitals, often for complex cases. Ditto for physicians’ offices.
We all know the simple economics of simple commodities. Even Forest Gump would. The question is: What do you know about hospital pricing?
Thus, in my view, you have not met my challenge. You have side stepped the issue by cross-walking from the complexity of hospitals to the simplicity of a wheel chair.
Write me a blog, then, on how hospitals would advertise their prices to consumers and patients under consumer-directed health care. You know that I have actually wrestled with that issue and written about it. But how would you do it? Ditto for physicians offices.
And, by the way, do you think that the private insurance sector prices more smartly? What evidence would you have for it?
In the early 90’s, the medical equipment scandal then involved “seat lift chairs” that Medicare patients with arthritis were getting whether they needed them or not. I did a couple of TV news stories about that for the local CBS affiliate with no impact whatsoever. All of these economic theory explanations and rational approaches don’t get at the root cause of this problem: medical equipment lobbyists own Congress. Nothing changes. The taxpayers have no say. They don’t listen to John Goodman or the thousands of media reports that have decried this taxpayer ripoff over the years.
Uwe
The Power wheelchair is a nice example of the system. I can guarantee that they could be obtained for a third or less on the open market. The same holds true for much of the health care dollar spent.
As an orthopedic surgeon I see frequent patients that both qualify appropriately and many who in no way qualify but demand them as “qualified” from the TV commercials. Probably half to a third do not meet the medicare guidelines but demand the power chair and are assured from the telemarketering company that they should get it and pay no out of pocket expense. This is a symptom of the whole system. Medicare has then made it more difficult to get them. The latest is that now after I write an approptiate prescription for a power chair, I get about 20 pages of forms, I fill out about 8 blanks on 20 pages from the power chair company. I send that in and then get a note that it is not appropriate and the patient must have a face to face appointment. That will cost medicare another charge and waste my and the patient’s time. I see the patient, often with a rep that comes with them from the home health agency involved with the sale, and refill the form. GREAT SYSTEM!
THIS IS JUST ONE SMALL PART OF THE SYSTEM
GOOD LUCK
Uwe writes: “John:
You “wonder if health economists actually understand how other markets work.” I wonder whether you know how hospitals and doctors offices work.”
Commenting on the doctors office, years ago most patients paid cash. It seemed like a market that was working.
As a government agency Medicare cannot be made to operate in an efficient manner. There is no profit incentive. The only possibility for gain is through corruption.
Detailed procedures will not work.
The only change that will make a real difference is the elimination of medicare. Let it be replaced with unrestricted cash payments to the elderly if we must. Those who wish should be allowed to purchase completely unregulated insurance policies.
The way to “put the consumer in charge” is to simply put the consumer in charge.
Response to AI:
Years ago, did the patient know your prices for all of the distinct services you render ahead of time? Did the patient know which of your services he or she might need ahead of time? Could he or she compare your prices with those of your colleagues ahead of time, to shop prudently for care? Did he have similar data on the quality of you and your colleagues’ services? Is that how it was years ago?
Buy yourself a textbook on micro economics and learn how proper markets really work.
By the way, why “AI”? Why are yu so shy to show your full name? You know mine.
To Mark Fahey:
The wheelchair example is a topic in its own right. Medicare has been wrestling with durable medical equipment for patients as, I am sure, have private insurers as well.
My point is that a wheelchair is one item, whichle hospital care is a huge vector of items. The question is how to make prices transparent for huge vectors of items.
So all I am asking John to do is stick to the topic: the payment of hospitals (and of doctors), not the payment for wheelchairs.
Response to Rich Osness:
Interesting proposal; but please spell it out a bit more for us.
How precisely would it work? How would you take care of different degrees of chronic illness elderly individuals might have?
In other words, think of an indiviual Jones. Who would determine the size of the unrestricted cash payment he or she would be getting, and how would the magnitude of that payment be determined?
And suppose an elderly opted for an insurance policy with sundy upper limits and then found out, while in some hospital bed, that coverage for what (s)he needs has run out and there is no cash to pay for it.
Do when then say: “Tough. You made ther wrong call, buddy. It’s been nice to know ya”, or what then?
Uwe writes:
“Buy yourself a textbook on micro economics and learn how proper markets really work.”
It doesn’t seem that the textbooks have resulted in the proper use of markets for health care by our elite. They have, however, been used as a smoke screen to prevent the public from questioning the experts and having an appropriate dialogue.
Perhaps these problems exist because it is how one utilizes the markets and not the markets themselves. Most encounters with a physician are not emergencies so some thought can be put into the decision before seeing one. We face similar problems to the ones you describe with plumbers, electricians, lawyers, accountants and any person that has information that we are lacking. Somehow and someway the average American has learned how to navigate the system.
Assumed quality all too frequently is in the eyes of the beholder and what you consider quality I might find useless unless we agree on a specific definition and parameters. Even then one might have differences based upon the trade offs. In the end we are left with price. Isn’t price in the most basic form what markets are all about? I stopped using an electrician because he charged too much and cooked the books. In the end we have the courts to sort out problems that are unable to be sorted out by the individuals involved. Not every transaction will result in fairness, but the prudent buyer will observe what happened to others and will be led by local experts of his own choosing.
You ended your comments with “By the way, why “AI”? Why are you so shy to show your full name? You know mine.”
I’m married so a date is out of the question.
Al
I’m only a family practitioner, not an economist. I have some questions after reading Dr. Reinhardts articles. If the Medicare payment system is the least imperfect of all systems, why does Congress perform the annual Kabuki play in which it threatens to cut physician payments, only to continue them for another term? Why do no other businesses in the world have a payment system anything like Medicare? Why are physicians prohibited by law from advertising their prices or asking competitors what they charge? Why were medical costs parallel to the cost of living until 1965, when Medicare was enacted?
Arguing that people can’t pay cash for health care because health care is a “myriad of different services produced by hospitals, often for complex cases. Ditto for physicians’ offices” is a nonstarter because there is ample evidence that it is government, not markets, that fails to cope with pricing complex services.
The market prices complex services all the time, and payment is resolved in cash.
In health care, dentistry manages to put complex services in packages. Ambulatory surgery centers do the same for a variety of surgical cases as do obstetricians and birthing centers.
Design and build firms price entire office complexes, specialty engineering firms price design and development of new products, and somehow consumers and “providers” manage to navigate the complicated world of communications, figuring out their telephony and computing needs in an extremely complicated environment all by themselves, for cash.
Readers can follow the links I provided for details, but here is a quick response to Uwe. There are numerous examples of high quality, low cost medicine being practiced that have been studied to death by policy wonks. They all lose money under Medicare’s formulas.
So Medicare should let them be paid in a different way. Let Geisinger get paid for the warranty it offers on heart surgery (Medicare doesn’t pay a second time if the hospital screws up and the patient is readmitted) and let Virginia Mason charge extra for sending its patients to the physical therapist before it orders an MRI scan (the opposite of what every other hospital does).
Let’s say Medicare pays as much as 50 cents for every dollar it thinks it is saving. Then tell every other hospital in the country what it just did with these two hospitals and invite them all to propose different ways of being paid.
The rules: (1) the cost to the government cannot go up (2) the quality of care for the patient cannot go down, and (3) we need to know how we will reasonably measure the results to make sure that (1) and (2) are satisfied.
I doubt if there is a hospital in the country that couldn’t come up with a new arrangement under which both the hospital AND Medicare come out ahead.
Yes, John. We have been talking about bundled payments — which is what you are really talking about — for decades.
In fact, the ACA specifically authorizes funds to do research and experimentation on that approach, and the RWJ Fdn. had given Prometheus Payment Inc $6.4 million do go ahead with this research. Furthermore, Mark McClellan’s idea of ACOs — also supported in the ACA –is about this very thing — building integrated health delivery systems capable of managing such bundled payments.
The interesting thing is that over the decades private insurers, not bound by the strictures Congress imposes on Medicare (including an R&D budget next to nil and a budget for administration below 2% of spending).
We can dream along all we want, John — and you are the American Dreamer par excellence, along with Porter and Tesiberg — but it is hard to implement such ideas in either the private or public sectors.
I recall Oxford Health Plan trying to do what you describe for heart surgery in the 1990s. Ask Steve Wiggins, then CEO, how that worked out.
In your next post, please play us the Everly Brothers’ “Dream …” song. It could be the theme song for this blog. E.G., “we need to know how we will reasonably measure the results … to make sure that quality doesn’t go down with bundled payments.” Yes, John, we need to do that. Have been saying that for, oh, roughly twenty years. And the results?
Uwe,you are so steeped in the bureacratic way of thinking you can’t get out of it. I said nothing about bundled payments. I said, providers should propose different ways of being paid.
You want to offer a warranty? Name a price? If it looks like we will save money, we take the deal. How many billions of dollars and how many academic studies does it take to do that? You offer to send the back patient to the therapist first if we pay more for the therapy? Based on VM experience, it looks like we should pay something for that deal.
This is not bundling. It is repackaging and repricing.
And Porter and Teisberg were basically right. They just didn’t understand that dotors can’t repackage and reprice if Medicare won’t deal.
From Uwe’s explanation (#5): Cost vs Value [*** are mine]
A “That’s how markets work for bananas, haircuts and even some highly elective services produced by physicians – e.g., purely cosmetic surgery or Botox injections.
***But with day-to-day health care that is problematical.***”
B “First, who actually “demands” most of the 7,000 items in the physician fee schedule: patients on their own, or physicians urging often anxious patients to “demand” the services in question – e.g., diagnostic tests, imaging or surgical interventions?”
I contend a big leap from A to B by the author and that leap is left unexplained. In the end a patient walks into a dermatologist’s office with a small lesion on the arm that is removed and then walks out with a bit of Botox as well. A patient walks into an Internists office with a cough and gets a mammogram scheduled as well.
In both cases the patient sought out a physician based upon the patient’s perceived need. In the end both had additional testing/procedures done with the approval of the patient. I contend the major difference in these “transactions” was the patient paid for the former and insurance paid for the latter.
I should have included in my response that things like Botox, Lasik etc. that are paid for with cash have ever increasing quality and access while costs fall.
Things paid for by mandated or third party insurance have a tendency to decrease in quality and sometimes have access problems while overall costs increase.
I am a high cost claims negotiator and provider contractor for a private insurance company. When I need to negotiate contracts for DME supplies or equipment, I always put language in my contract that if it’s a rental month-to-month service, the full payment for the equipement or device can not exceed to purchase price. (Which is also indicated on my agreement so the provider can’t upcharge the purchase price above what is a reasonable fee for purchase, which is also discussed at the point of negotiation. If Medicare had a ‘Cost Control Hub’ for high cost claim negotiators to ensure reasonable charges, contracts and timely payments to the providers, a HUGE bite in the cost for care could far outweigh the administrative processes necessary to fufill such efforts. The company I work for saved our clients an ADDITIONAL 2 million dollars in year 2008 by special handling 124 claims, which represented approximately 8 million dollars in billed charges. (That equates to over $16,000.00 in additional savings per claim) If a provider is ensured a quick payment, its AMAZING how much they are willing to shave off their bills. Medicare fees are so much lower than private insurance rates though….I wouldn’t expect quite as much success with shaving costs in the Medicare arena. But my point is…..there are TOO many providers out there that can just charge whatever they want for services and 9 times out of 10, they will be paid what they want to be paid without question. (I enjoy what I do and being the exception to the rule)
Response to Al:
I would not date you if they paid me to do it. I just think you’re craven to hide your name.
Of course, because this age is just filled with candor.
Everyone understands that you can’t be an “informed shopper” in the middle of a car accident, heart attack, or stroke. But most of our health spending is on chronic care. Furthermore, after a car accident, heart attack, or stroke, you had better become an informed patient if you want to maximize the likelihood of recovery in the long term.
I like Linda Gorman’s list of examples of “complex” systems that manage to get sorted out without government control. Let’s consider another thought experiment. Suppose that in 1965, the federal government observed that great advances were taking place in aircraft design and manufacturing. In order to ensure that Americans were able to take advantage of this, the government legislated “Aircare.”
Flash forward to 2010: “Aircare” pays for our ariplane tickets. It pays the airlines themselves under “Aircare Part A” and the pilots and co-pilots under “Aircare Part B”. It pays claims under Aircare Part A by a “Prospective Payment System” based on “Distance-Related Groups” (DRGs). The DRGS are calculated for non-labor and labor (adjusted for cost-of-living) costs. Etc., Etc.
The pilots and co-pilots are payed under Aircare Part B’s Relative Value-Based Payment System (RVBPS), which consults with expert panels of pilots to determine the relative values of the hundreds of tasks that the pilot and co-pilot must execute. It then assigns relative values to each, e.g. 2.15 units for making the pre-flight announcement, 3.74 units for checking that the fuel tanks are full, etc., etc.
But there is no Expedia or Priceline or anywhere else where someone can find out what it costs to fly from San Francisco to Chicago. Suppose we wanted to transform air travel to a consumer-driven system.
Airline passengers would be terrified of managing this system on their own, because of the complexity. Put to a vote, a vast majority would shirk, and choose to maintain the status quo, because it is “too complex” for individuals to figure out how to pay the pilot, the co-pilot, the cabin crew, the cleaning crew, the jet fuel, the depreciation, the overhead, etc., on their own.
Prof. Reinhardt would note that the RWJ Foundation had executed a study of “bundled payments” for airline travel and the results will be informative as the government tries to reform Aircare.
Dr. Goodman, Linda Gorman, Devon Herrick and I would say that the government should give every senior an Aircare voucher and it would take the airlines a few hours to figure out how to charge a single price for an airline ticket.
Uwe writes: “Response to Al:
I would not date you if they paid me to do it. I just think you’re craven to hide your name.”
I’m shattered, but my wife is greatly relieved. I don’t understand your fixation with my name especially since one can use any name they choose. I’m not important as my words represent who I am. Your words represent you as well, but you write under your name because you have a reputation and your name gives you more clout. Maybe things should be reversed and I should be writing under my full name and you should be using a pseudonym.
However, all that begs the point I made three comments earlier. You went from A to B commenting “But with day-to-day health care that is problematical.” I responded “I contend a big leap from A to B by the author and that leap is left unexplained.”. I then explained my rationale extending it to the next comment.
The discussion is health care not my name, but you seem more concerned with the latter and less concerned with the former. Understand I have nothing personal at issue with you. I just fail to understand most of your reasoning and am trying to do so as best as I can.
I can’t leave this discussion without noting a fascinating article in the weekend Wall Street Journal: “Assembling the Global Baby,” by Tamara Audi & Arlene Chang (December 11-12, 2010).
The article is about the international market of surrogate mothers. The first example is a Bulgarian woman living in Greece, who is about to deliver a baby from an anonymous European egg donor, whose father is Italian. The mother who raises the baby will be the Italian man’s infertile Italian wife.
The man who brought it all together is a Canadian who lives in California and started this business after a career in software. Other clients include a couple of gay men from Quebec (where, remember, the government guarantees “universal” access to health care that results in a shortage of primary-care doctors) whose baby will be born in India.
The list goes on. It all sound pretty complex to me. How can people figure out how much this service is worth without vast government or health-insurance bureaucracies?
Lo and behold, the WSJ journalists report a price of between $32,000 and $68,000. Somehow, I don’t think that the Canadian immigrant software entrepreneur who founded the service needed a report from the RWJ Foundation on “bundled payments” to figure out how much to charge.
As the report makes clear, the service requires a sort of legal arbitrage around various countries’ rules about donating eggs. I think that this is the future of health care: Every country will have increasingly useless health “systems” that satisfy the needs of government bureaucracies, but this will be countered by more medical tourism whereby entrepreneurs will satisfy the actual needs of real patients.
(I should add a disclaimer: I put my comment forward only to demonstrate that free markets result in easily observed transaction prices. This observation takes no stance on the ethics of the procedure, which results in the destruction of fertilized eggs).