When I read Ezra Klein’s post on the difficult and hazards of controlling Medicare costs, two thoughts occurred to me. The first was that Ezra appears to be unaware that Medicare actually has more than one component, see here. Consider the pie chart above.
The entirety of Ezra’s critique appears to be based on Medicare Part B:
The problem is that Medicare can’t control costs too much better than private insurers or, as you see from the article above, doctors will simply abandon Medicare. In a world where there’s only Medicare and Medicare decides to control costs, doctors can either take the pay cut or stop being doctors. And as we see from other countries, lots of people want to be doctors, even if being a doctor doesn’t make you particularly wealthy. But in a world where Medicare is just one of many payers and Medicare decides to control costs, doctors can simply stop taking Medicare patients and a lot of legislators will lose their jobs.
His post is accompanied by what seems to me to be an extremely misleading bar chart graphic which doesn’t look to me to prove what he thinks it does.
Medicare has other components. Medicare Part D is the prescription drug benefit. Medicare Part C (Medicare Advantage) supports managed care programs for the elderly. And Medicare Part A, at $186 billion in 2010 the largest of the components, pays for hospital care. Does any hospital refuse to take Medicare? My understanding is that almost two-thirds of hospital revenues come from Medicare and Medicaid combined, the bulk coming from Medicare.
Is it really not possible to control costs in Medicare Part A without compromising access? That seems incredible. I’m not the only one to notice this. Robert at Angry Bear observes:
Klein seems oddly indifferent to the detailed text of the Affordable Care Act. I never would have guessed that I would ever type that. Medicare is four programs which are differently squeezable. Plan C (take advantage of Medicare) can be squeezed to death with relatively low costs to anyone but insurance companiies. Plan B can’t be squeezed easily. Doctors can and do refuse deal with the CMS. Plan A can be squeezed as I argued here and here.”
The second thought that occurred to me was something I’ve asserted here from time to time: that Medicare is a price support on healthcare. This seems so self-evident to me as to scarcely require proof. How would one go about proving that Medicare, particularly Medicare Part A, was in fact a price support? How would one go about disproving it?
It seems to me that it would be impossibly difficult to disprove without producing an alternative credible explanation for how price discovery is done in healthcare. What say ye? Youth wants to know.
Given this then it is almost surely the case that we are consuming too much health care in this country. The only way for this not to be true is for the price to be at or below the market clearing price (prices actually, but lets not drag vector notation in as it just muddies up the picture and adds very little, IMO). If a price support is below the market clearing price market forces would drive the price up to the market clearing price….that is the price support is not binding. I find this a highly unlikely result given our situation. Similarly for the price to be exactly at or even close to the market clearing price would require huge amounts of information that the Federal government doesn’t have. So again, highly unlikely. That leaves up with a binding price support that is keeping prices above what they otherwise would be and increasing the supply over and above what it otherwise would be.
Bottom line: fixing this problem means less health care consumption. Either that or ditch the view that Medicare/Medicaid are price support systems and that you’ll have a hard time doing, IMO.
Actually you want to look at the likelihoods of the data (i.e. what we have observed) given different alternative pricing methods. The higher one is the one that is most likely true. In other words, look at how likely what we have observed is under the hypothesis that Medicare is a price support system vs. looking at how likely the data is given the hypothesis that Medicare is not a price support system.
Is it really not possible to control costs in Medicare Part A without compromising access?
No, I don’t believe it’s possible to achieve unhindered access within a third party payer system. I certainly haven’t seen evidence to the contrary. We might be able to shed some light on this question if we can find the rate of medical inflation for the period 1900-1960 and compare it to the rate of medical inflation in the period of 1961-2010. Over that span we should see different payment models come to dominance. First there was a strictly private consumption model, then the emergence of a private insurance system and then the passing of the Medicare Act. I would venture the guess that the medical inflation rate was greater in periods where third party payers, especially when the government, dominated compared to when people paid for their own medical consumption.
Given this then it is almost surely the case that we are consuming too much health care in this country.
I get the point that you’re making but I’m leery of using a normative value, as in “too much,” in setting up the problem without there being an account that medical care is a superior good and is more desired as one’s wealth increases. It may be that we are consuming “too much” medical care in a redistributive sense, in that the funders of the the care don’t feel that they personally derive the benefit of the superior good, but we can see in the markets where medical care is not a necessity, like plastic surgery and some dermatology, that people are very willing to pay for their own non-essential medical care as their wealth increases.
1) I think Klein’s data is actually good. Looking at total Medicare and total private insurer spending, private has increased faster. Can find the data later if you want.
2) Reinhardt has written about this for a while. He believes that private insurance drives the costs.
3) I have been on a quixotic quest on this issue. I have emailed economists at many of the major blogs and gotten mixed responses, but most have no definite opinion and are not sure how to prove or disprove it.
4) What I do know is that private insurers pay much more for the same procedure that does Medicare. I can give you the link if you want, to a recent WaPo article on docs dropping Medicare patients because private insurers pay much more. Even Cowen agrees that this indicates that private insurers pay too much. Why do they do that? If Medicare works as a floor, then they should only have to pay a very small amount more than Medicare to make sure their patients are seen. Instead, they pay a lot more, in some cases 300% more (my specialty for one).
Now, as Medicare falls behind, Medicare has not kept up with medical cost inflation since 2000 (unintended consequence of SGR), physicians are dropping Medicare. This all adds up to me, as looking as though private insurance drives costs.
5) If medicare acts as a floor, then when Medicare fees drop, private insurance fees should drop. That is not what has happened. Private insurance fees have stayed even or increased.
6) I think the burden of proof lies upon those who think it serves as a floor. I think that belief is ideologically driven, not by evidence.
http://www.kaiserhealthnews.org/Stories/2010/November/29/Fiscal-Times-Reinhardt.aspx
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/25/AR2010112503638.html
http://www.marginalrevolution.com/marginalrevolution/2010/11/obamacare-where-are-we.html
Reinhardt has been writing on how prices are set by Medicare recently. He has also written extensively on how private insurers set rates.
Steve
” like plastic surgery and some dermatology, that people are very willing to pay for their own non-essential medical care as their wealth increases.”
I kind of wish that people would not think of cosmetic surgery as real medicine. Over the years, I have had the misfortune to work with a couple of plastic surgeons I would rather not work with. They did not, IMO, treat their patients well. They seldom waited for their local anesthetic injections to work well or would keep cutting while the patients yelled, until I would insist they put more local in. But, those two surgeons knew something I did not. Their patients never complained. Nope, in order to look better these people were willing to pay and to suffer if needed. A patient being treated for cancer, subjected to the same pain, but for the purpose of saving their life, will make complaints to every hospital administrator available.
Steve
How much of that is cost shifting. In the utility business we see it all the time. Certain customers classes with political pull don’t pay the rate they should based purely on cost analysis and their actual usage levels. How much are private insurance patients subsidizing those without insurance?
By too much it is more than the market clearing price would yield. Cost containment is going to reduce health care consumption. The idea of faster, better, cheaper is nice, but in reality pick 2.
Nice fine steve on the Reinhardt interview,
Weren’t you telling us that you thought HCR would reduce costs?
I think this is misleading. And here is why,
And if Medicare and Medicaid are sucking up a considerable amount of health care resources, what is left is also going to be a lot more costly if consumption is a given.
Think of it this way: you have 100 oranges. The two big gorillas go and take 80 oranges left. Now, everyone else has to compete for the remaining 20. If over time the gorillas are consuming more and more, but getting price breaks…yeah sure they’ll control costs better…by shifting them to the private sector. We live in a world of finite resources. Reinhardt knows this, but appears to have something of a disconnect.
Typical of a foreigner. The government we were given is not the government we have now. The single biggest event in that regard? The switch in time that saved nine.
“Think of it this way: you have 100 oranges. The two big gorillas go and take 80 oranges left. Now, everyone else has to compete for the remaining 20”
Total health care spending is about $2.4 trillion. Medicare about $450 billion and Medicaid a bit less. It is not an 8:2 ratio.
Cost shifting? Ok, why would the private insurers go along with that? They should be pushing costs down. In order to make sure that their patients are seen, they need to offer just a tiny premium over Medicare rates. Again, when Medicare fees drop, private insurers still pay higher fees. Do private insurers feel obligated to maintain provider salaries? So, outside of gorilla land, dealing with real docs, they drop Medicare if they can. The whole thing hangs together much better with the model of private insurance driving costs and Medicare paying just enough to keep getting their patients seen. It makes it much easier to explain why private insurers pay so MUCH more.
Suppose the IPAB works. Or suppose the magic pony Simpson-Bowles or Ryan plan works. Medicare costs drop, meaning they pay less. What will private insurers do based upon their current actions? Does substitution or income effect dominate for docs as the gap gets larger?
Steve
Cost shifting? Ok, why would the private insurers go along with that? They should be pushing costs down.
Where do you think costs for EMTATA coverage are directed? How about coverage for illegals?
It wasn’t suppose to be realistic, but to show that competition for whatever is left over after the monopsonists get done will likely result in higher prices for those consuming the left overs.
Private insurers are regulated….like a utility…you did see my comment about cost shifting with utilities. Also, if we go with Reinhardt, his explanation is that the hospitals are better organized and thus act for lack of a better word, in collusion.
Yes, and just like a regulated utility they probably do…given the constraints of their regulatory environment. It is wrong to think of things as being a competitive model when that is not the case.
“Private insurers are regulated….like a utility”
Hmm, not really methinks. Private insurers are regulated in what coverages they must offer. They are also regulated like all insurance companies on asset levels they need to maintain to cover payouts. They are not regulated so that they cannot cut costs. To the best of my knowledge, Medicare and Medicaid cover the same kinds of care private insurers cover, and in the case of Medicare, provide broader coverage.
“Yes, and just like a regulated utility they probably do…given the constraints of their regulatory environment. It is wrong to think of things as being a competitive model when that is not the case.”
They are required to provide equivalent coverage, but they can still compete on price. For some reason, they choose to not do so. Partly it is because they have inadequate market power, but even in states where one insurance company dominates, they still maintain higher prices.
Steve