The Medicare Monster Concluded

by admin on 10/26/2016 7:12 AM

A cautionary tale-Part IV

Hospitals have adapted to the system by qualifying patients for more tests and procedures, by shifting patients to different DRG designations that carry a higher reimbursement rate, and especially by shifting patients from hospital to outpatient settings, which shifts the cost to the supplemental-insurance program. An HCFA official told us: “There is simply no way to contain costs, and nothing on the horizon to contain costs.” 

The lesson of both PPS and the physician-fee cap is that government efforts to control health costs through price fixing are like trying to press the bumps out of a tube of toothpaste. Press in one area, and the tube bulges in another. To smooth out all the bumps by force, you have to apply pressure to all areas of the tube. The cost-containment logic of fixing prices for government health programs is leading inexorably to government price fixing for the entire health-care system. It is already happening in two ways.

First, private health insurers, wary of having costs shifted onto them, are adopting the Medicare PPS rates as their own reimbursement policy. “Over time,” says Anthony Masso, director of managed care for the Health Insurance Association of America, “you will probably see [the Medicare reimbursement rates] being used by almost all private-sector insurance carriers.”

Second, the latest attempt at Medicare cost containment is an even more ambitious price-fixing scheme that not only restricts the amount the government will pay for hospital procedures but even sets fees individual practitioners should receive in hospital and clinical settings. In the best socialist style of centralized decision making and price fixing, HCFA has commissioned a multimillion-dollar study to develop a ranking of the “relative value” of medical procedures on which to base the new reimbursement rates.

Having learned from the failure of the fee freeze in the mid-1980s, the government is attempting to head off the possibility of increased volume by reducing physician-reimbursement rates by as much as 30 percent in some cases. But instead of increasing volume, this time doctors and clinics are cutting back on their Medicare practices. A 1990 survey by the Association of American Physicians and Surgeons found that nearly 50 percent of physicians would respond to a cut in Medicare fees by seeing fewer Medicare patients.

“Private doctors,” said Dr. Jane Orient, a past president of AAPS, “if they remain in business at all, will probably be cutting back on their Medicare practice, or dropping it altogether.”

Under a universal “all payer” health-insurance policy, the Medicare price-fixing policy would be applied to the entire health-care system. The fears the AMA expressed at the time of Medicare’s enactment 25 years ago that it would lead to socialized medicine seem fated to be realized.

As the nation barrels toward some kind of universal health-care policy, there is an ominous political parallel shaping up between 1965 and 1993. What finally tipped the balance in favor of Medicare in 1965 was the huge turnover in Congress. The next Congress will have more than 100 new House members. Despite some losses, the Democrats will have a solid majority, and even some Republican congressional candidates adopted as boilerplate the slogan that the federal government must take a role in providing some kind of universal health coverage. Bill Clinton has vowed to make health care a top priority, and Congress isn’t likely to hesitate much over the legacy of Medicare.

In light of the alarming actuarial projections for Medicare’s hospital-insurance program, it is no wonder that politicians are loathe to propose a national health plan that explicitly includes a new payroll tax. But the halfway house of “play or pay” that Democrats are advocating will quickly fall into the same trap as Medicare.

First, Medicare is simply one example of the fact that, as an HCFA official put it, the federal government “continually underestimates the cost of social insurance programs.” This problem would be compounded under a “play or pay” scheme because the alternative payroll tax would initially be set low to entice participation.

As a consequence, the government would end up with a disproportionate share of high-cost enrollees (similar to what has happened with the state-run “assigned risk” pools for auto insurance) because companies with high health-insurance costs would find it to their cost advantage to dump the burden onto the government program. Thus, the “pay” portion of the government program would certainly be underfunded. “It is guaranteed to increase the federal deficit,” says a source at the HCFA. “It is impossible to set a payroll tax that will cover the cost.”

A recent study by the Urban Institute found that if the payroll-tax rate of a “play or pay” policy were set at 7 percent, 112 million nonelderly people, or 52 percent of the insured population, would be covered through the “pay” option. This number includes 59 percent of all private-sector workers. If the rate is 9 percent, an estimated 84.8 million would still be enrolled in the public plan, or 39 percent of the nonelderly insured population. These numbers suggest it will be a massive, and massively underfunded, program.

Providing significant funding through cost containment is equally chimerical, unless the government is prepared to administer an onerous “all-payer” regime of price controls on the entire health-care system, and then employ a rigorous scheme of rationing on top of that. Although a few liberals speak openly of price controls and “all-payer” regulations, they are loathe to entertain the necessity of rationing because of the inequities it would generate.

There is one decided difference between the politics of Medicare in 1965 and today. In 1965, all the opponents of Medicare had to offer was a watered down version of that program, Medicare on the cheap. Today, opponents of increased federal involvement in health care have a true market-based alternative to offer. The combination of “Medi-save accounts,” in which people would be encouraged to save their own money for health insurance and direct payment of medical expenses, and tax credits to enable low-income families to purchase health insurance, offer a viable alternative to centralized big-government health insurance.

Although this isn’t the magic answer to soaring health-care costs, it is a policy that rests on the one proven strategy for holding costs down: making the individual responsible for first-dollar costs of health care. If the critics can portray the issue as big government versus individual empowerment, there just might be a chance for positive reform of the health-care mess.

Contributing Editor Steven Hayward is research and editorial director for the Pacific Research Institute in San Francisco. Erik Peterson, a law student at George Mason University, is a researcher at PRI. REASON intern Grant Thompson provided research assistance for this article.

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