Can an Independent Medicare Commission Control Health Care Costs?

No. At least not the way politicians are thinking about it in Washington.

Wait a minute Goodman. Don’t you remember a letter signed by 23 economists (including two Nobel Prize winners) saying that we need an Independent Medicare Advisory Board (IMAB) to “bend the cost curve?” Darn. I was hoping you had forgotten that.  I certainly tried to forget it, but the memory lingers. I also remember a second letter, signed by 26 economists, saying that the IMAB needs even more power than the Reid bill proposes to give it.

But as previously explained, their recommendations have no connection to any economic principles taught in any economics textbook. They should be thought of as “wishful thinking,” rather than “economists’ advice.”


Is that all there is?


To avoid the charge of hypocrisy, let me say up front that I too have called for an independent body — a Medicare Czar, if you will — with broad powers to renegotiate the way providers are paid. The difference? I want to liberate doctors. The gang of 26 wants to control them. I want doctors to tell Washington how things should change. The gang wants Washington to dictate to doctors how to practice medicine.

Take Geisinger Health System in central Pennsylvania. It has a warranty on certain heart surgeries and other procedures. If Geisinger makes a mistake and the patient is readmitted, the second episode is comped. In contrast to other hospitals, which make money on their mistakes, Geisinger loses money on its warranties — even though it provides lower-cost, higher-quality care. So other hospitals have no incentive to imitate what Geisinger is doing.

Everybody cites Geisinger’s experience as an example of something that should be encouraged. But we have radically different ideas on how to do it.

Goodman’s Liberation Approach. Medicare should pay Geisinger something for its warranties — say, 50 cents for every dollar they are saving the government. Then Medicare should boldly advertize what it has done, inviting every hospital in the nation to propose similar warranties, or even very different warranties and payment schemes. The parameters: the government’s cost cannot go up; the quality of patient care cannot go down; and the provider must propose a way of measuring results to make sure the first two parameters have been met. In so doing, we would create a market in which providers compete with each other to lower costs, raise quality and profit by doing so.

The Gang of 26 Command-and-Control Approach. If my approach is all carrots, this approach is all sticks. Washington would study Geisinger and decide which readmissions are in principle avoidable. Then it would announce which readmissions Medicare would no longer pay for. The operating principle: bureaucrats (many of whom have never been in a hospital) will tell doctors how medicine should be practiced and then refuse to pay them if they don’t fall in lock step.

Candidly, I’m not sure how well my approach will work. After all, it does involve the government. However, I am sure that command-and-control will not work.

Here are five reasons why:

1. Variations in Medicare spending are often offset by non-Medicare spending.

Exhibit A for the command-and-control approach is the Dartmouth Atlas, showing wide variations in Medicare spending — despite similar health outcomes. Such variations have led Obama point man, Peter Orszag, to conclude that the country as a whole could save $700 billion a year by eliminating unnecessary care.

The existence of wide geographical variations in Medicare spending has also been verified by former Medicare Trustee, Thomas Saving, Andrew Rettenmaier and their colleagues (here and here). However, Saving and Rettenmaier discovered that variations in Medicare spending are often offset by non-Medicare spending. For example:

  • Although Texas is fifth highest in Medicare spending per capita, it is 43rd in per capita spending for the state’s entire population.
  • California is 11th in Medicare spending, but 42nd overall.
  • North Dakota is 43rd for Medicare, but 11th overall.

These findings are consistent with cost shifting between public and private payers, although there may be other explanations as well.

McAllen, Texas has been frequently cited as near the top of Medicare’s high spending areas — with the implication that spending could easily be reduced there with minimum social harm. Yet McAllen is a poor border town, with very little private insurance and a Medicaid program that pays bargain basement rates. It appears that Medicare is paying not just for Medicare patients. It seems to be the primary source of third-party funds for everyone’s care.

2. Very little savings will come from forcing the rest of the country to adopt the medical practices of the most efficient areas.

The core idea behind the command-and-control approach is that we can learn how to practice medicine efficiently and then force everyone to conform to what we have learned. This hope turns out to be based on wishful thinking. Here’s what Rettenmaier and Saving discovered:

  • Suppose we could magically force every state in the country to practice medicine the way it is practiced in the five most efficient states.
  • Raw data suggest that we could cut Medicare spending by 25 percent.
  • After adjusting for the different characteristics of the states (age, income, ethnicity, etc.), the potential savings drops to 10 percent.

Remember point No. 1, however. Our interest is not just in Medicare, but in total health spending.

  • Taking total health care spending as the focus, raw data suggest a potential savings of 15 percent.
  • After adjusting for state characteristics, however, the potential savings drops to only 5 percent.

That 5 percent, by the way, assumes that the command-and-control orders are carried out perfectly — with no errors or mistakes or bureaucratic ineptitude. Realistically speaking, there are no savings to be expected using this approach. In fact, with imperfect implementation costs could actually increase!

3. The idea that there are common, replicable characteristics of efficient medical practices turns out not to be true.

In order to be able to force all doctors to practice medicine like the most efficient doctors, we have to know what it is that the most efficient doctors are doing. But as previously reported, a study by scholars who really believe in a command-and-control approach found that there are very few common denominators to be copied. Of 10 hospital referral regions identified as health care islands of excellence, researchers found that:

  • Despite the conventional wisdom that ideal medicine requires salaried doctors, only two follow the Mayo Clinic in this respect.
  • Two others pay on a traditional fee-for-service basis; and the rest have mixed-payment schemes.
  • Despite the conventional wisdom that a greater ratio of primary care physicians to specialists is essential, the regions are all over the map in this regard as well.
  • One is twice the national average; two are below it; and the other ranged from 14 percent to 52 percent above the national average.
4. “Wasteful Medicare spending” cannot be arbitrarily reduced without threatening vulnerable populations.

Which are the areas that spend the most Medicare dollars per patient? Some are like McAllen. They are very poor. Yet others have retirees that are very wealthy. In fact, a forthcoming study by Rettenmaier and Saving will document that the highest spending areas are predominantly rich or poor. Since high-income people tend to be healthier as a rule, one could argue that we are overspending on this group — at least relative to need. Low-income people, by contrast, tend to have more health care problems. It’s hard to believe that cutting Medicare spending in a place like McAllen will not potentially harm low-income Medicare patients along with other patients.

5. There is no evidence that we can change the practice of Medicare with demand-side reform.

By “demand-side” reform I mean changes in the way third-party payers pay. Think of every example of high-quality, low-cost care. Mayo. Cleveland. Intermountain. Etc. Can you think of a single one that was created by Medicare, BlueCross or any other third-party payer? I can’t.

As previously explained, every example we have of excellence in medical practice has originated on the supply side of the market — usually in spite of, rather than because of, third-party reimbursement.

Common sense would seem to dictate that we learn from this experience. Let’s free the doctors from the dysfunctional bureaucratic, anti-patient environment they are currently trapped in. At least that idea makes a lot more sense than subjecting them to the dictates of academic economists.

Comments (12)

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  1. Devon Herrick says:

    When you seriously analyze the proposal, it becomes clear that an Independent Medicare Commission is an admission by Congressional backers that politicians cannot be trusted to resist meddling with Medicare at the behest of favored stakeholders. The insurers that provide private Medicare Advantage plans can tinker with benefits packages and adjust networks almost at will. The primary concern is whether the changes will attract or discourage enrollees. But when fee-for-service Medicare tries something as simple as making durable medical equipment providers submit competitive bids, politicians attempt to shield the wasteful vendors from market competition.

  2. Bret says:

    Excellent post. And a perfect counter to the gibberish we have been hearing on this issue over the past week.

  3. Stephen S.S. Hyde says:

    John, you provide deep insights into why Medicare’s top-down, command-and-control approach to price and quality controls not only won’t work, but can’t work. In my view, the only way to spread innovative cost and quality improvement throughout the medical system is to empower patients to demand the answers to two questions: 1. Who are the best, most appropriate medical providers for my medical needs? 2. Of the best, which is cheapest?

    To get there with Medicare, I think we need at least four fundamental reforms: 1. Covert Medicare to a defined-contribution program in which it gets entirely out of the insurance business and just gives the money to its beneficiaries to buy their own insurance and medical care. 2. Create the conditions under which a universally-available individual insurance market can function with private insurers who are allowed (but not guaranteed) to earn a profit. 3. Redefine minimum insurance benefits to include care that is both medically necessary and normally unaffordable as a regular consumer expense, thus excluding normal doctor visits, most Rx’s, massage therapy, hairpieces, and most lab and x-ray tests. 4. Require Medicare to completely abandon provider price controls.

    If you’re interested, this concept is fleshed out in more detail at

    Many thanks for your innovative thinking for the past 20 years. You’ve made a big difference. Steve Hyde

  4. Bart says:

    I like the way you think, Steve.

  5. H.Carroll says:

    Lot of great stuff in the post and comments. As I have watched the development of these features of the suggested “reform for reform and history’s sake,” one of the more frustrating things is this continued idea that an Independent Medicare Commission will have any impact on true, real prices in health care when the stated purpose is essentially to simply control the Medicare (and Medicaid) BUDGET. If they are successful according to that charge, they may have, indeed, controlled the level of a BUDGET, while having had no impact on the prices of health care services other than to make them GO UP by continually and illegitimately ratcheting down what those programs pay providers, who then look to make it up elsewhere. But, the commission will have performed its political duty of controlling that BUDGET, by golly, and what’s more important than that?

  6. Bruce says:

    All talk about cost control from this Administration is a complete sham. Nobody on the political left has any interest whatsoever in cost control. All they want to do is spend, spend, spend.

  7. Neil H. says:

    John, what you have written seems immensely clear. Why don’t people on Capitol Hill understand this stuff? Are they totally blinded by the idea of trying to control everyone’s behavior from Washington?

  8. Adrian Murray says:

    Why worry about whether or not the IMAB has any teeth or not? The real agency to control health care costs was snuck into the stimulus bill in February. Look up Federal Coordinating Council for Competitive Research. “Competitive research” is a buzz phrase for cost/benefit analysis.

  9. John Seater says:

    Why tinker with Medicare at all? It is (a) unconstitutional and (b) doomed to fail in exactly the way it now fails because of its incentive structure.

    Point (a) is non-trivial. The US Constitution is a commitment device that prevents time inconsistency. Abandoning it is reckless folly. However, we already have done that, so let’s move on to fixing point (b).

    If we want to subsidize poor people’s health care, why not abolish Medicare outright and replace it with “health care stamps” for the small expenditures and “health insurance stamps” for the large rare events? The federal food stamp program provides an excellent analogy. That program does not tell poor people what they must buy, does not tell supermarkets what they must sell or what they must charge, and does not tell farmers what they must grow or how they must grow it. It gets poor people fed, but it’s much simpler to administer than Medicare because it does not try to micromanage the health care industry in order to control costs. Wouldn’t doing the same thing with health care subsidies be a whole lot better than the total (and unavoidable) mess that we now have with Medicare?

  10. Stan Ingman says:

    Governor Dean may have a good idea. Do not pass this compromise and then pass real reform in 2010. Would only need 51 votes in Senate. Your insurance buddies would really get nervous then, especially if cost cutting is implemented that you say you are for.

  11. Jack says:

    As an area that per capita has high medical care usage, McAllen, Texas has been brought up in several articles comparing costs and usage, What is missing is that McAllen, Texas is home to a large migration of ‘winter Texans’ from the northern U.S. and Canada, who because of their age must have a considerable impact on the statistics from that community.

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