How Medicare Buys Medical Care

Let's see if I can explain the ABCs of Medicare finance:

  • Even though health care spending has been growing at twice the rate of growth of our income since the day Medicare began, the government doesn't want Medicare to grow any faster than income.
  • So it sets the price of every service it pays for and allows increases from year to year no greater than national income growth.
  • But, although the government controls prices, it does not control quantities; and doctors respond to price controls by expanding the number of services (more MRI scans, more blood tests, etc.)-all of which keep total spending growing at two times the growth rate of national income.

  • So to punish the doctors for not following the government's plan, the law requires Medicare to reduce doctor fees to keep overall spending on course.
  • However, anti-trust law does not allow doctors to collude; and since individual doctors in no way control the collective outcome, they are being punished as individuals for outcomes they cannot possibly control, regardless of how they practice medicine.
  • Members of Congress feel sorry for (and pressured by) doctors who are indiscriminately punished in this way, and they periodically override the law and raise doctor salaries back up to the level at which health care spending continues to grow at twice the rate of growth of income.

Makes sense, right?  Here is the NYT description.

Comments (1)

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  1. George Bauchamp says:

    The following comes from the Daily Digest of the ACPE (Physician Execs.):

    CBO director speaks to lawmakers about healthcare policy reform.

    In Modern Healthcare (7/17, DoBias) reports, “Congressional Budget Office (CBO) Director Peter Orszag told lawmakers that the healthcare sector is far and away the most inefficient economic driver in the U.S., with more than $700 million each year being spent on medical procedures that seemingly have no effect on patient outcomes at all.” The CBO is looking into “the idea of a Federal Reserve-like board for healthcare, which would operate independently of Congress to help shape policy and payment rules,” according to Orszag. He also said “that a multi-pronged approach” to healthcare reform “that includes comparative-effectiveness research and a redirection of financial incentives should serve as the bedrock for broader reforms.”

    You may have noted that I made a similar proposal in the book I shared with you. The problem is that this is purveyed by the Masters, and not the physicians who might actually know how to do it. Wonder where the physicians are; where is their outrage? Any interest is exploring this concept?