I’m still digesting this article in the New York Times about a study finding that the important thing to recognize about the relationship between per capita Medicare spending and spending by private insurance is that there isn’t one:
As part of his push for the Affordable Care Act in 2009, President Obama came to Central High School to laud this community as a model of better, cheaper health care. “You’re getting better results while wasting less money,†he told the crowd. His visit had come amid similar praise from television broadcasts, a documentary film and a much-read New Yorker article.
All of the attention stemmed from academic work showing that Grand Junction spent far less money on Medicare treatments – with no apparent detriment to people’s health. The lesson seemed obvious: If the rest of the country became more like Grand Junction, this nation’s notoriously high medical costs would fall.
But a new study casts doubt on that simple message.
The research looked not only at Medicare but also at a huge, new database drawn from private-insurance plans – the sorts used by most Americans for health care. And it shows that places that spend less on Medicare do not necessarily spend less on health care over all. Grand Junction, as it happens, is one of the most expensive health care markets in the country for the privately insured – despite its unusually low spending on Medicare.
My intuition is that it supports the claim I’ve made from time to time, that Medicare functions like a price support system for healthcare, and that otherwise hospitals operate just like restaurants do but given my meager understanding of the article and the underlying study at this point it would be premature to conclude that.
I just wanted to bring it to your attention before I forgot about it.
I don’t think so. If you read the more detailed analyses on this piece, you find that there is essentially no relationship between low Medicare costs and private insurance costs. People had assumed that if an institution was a low Medicare spender, it would also be a low private insurance spender, but it ends up not being true. I have seen it suggested that this is due to market power. Institutions which are able and willing to significantly reduce Medicare spending are often doing it by forming large networks and working together to reduce costs. Stuff like concentrating all of their heart surgery at one major hospital. However, it is also likely that a network which is large enough and successful to do that may also be large enough to command premium prices from private insurers. However, I think we still don’t really know for sure since higher private costs are not uniform.
If Medicare acted purely as a price floor, then private insurers need only make sure that they pay just a bit above Medicare rates to make sure their patients are preferentially seen by providers. Instead, private insurers pay wildly different rates. (They need to pay some extra to get their patients seen, and then a bit more to make up for the higher administrative costs of caring for private patients.)
Steve
Oops. To be clear, a lot of the decrease in Medicare spending comes from lower utilization. The higher spending for private insurers is also heavily influenced by utilization, or so it seems for now. My guess is that you are concentrating on fees per procedure, but utilization is bigger. We really haven’t had much access to data from private insurers in the past, so I think this will need more investigation.
Steve
I think it’s more complicated than that. Specifically, I think that hospitals act to realize revenue based on several dimensions: Medicare reimbursement rates, number of Medicare patients in the target market, number of non-Medicare patients in the target market, and number of competitors. That’s basically the way a restaurant operates with the added factor of the Medicare price floor.
Note that the article is tracing Medicare and private insurance prices per capita, not Medicare and private insurance revenues.
Look at it agin. They are looking at spending per capita, not prices. That is why I noted in my addendum that this is largely about utilization. I think, though don’t want to put words in your mouth, that you are making the cost shifting argument, which has pretty much been shown to not occur, or occur at very low rates.
Steve