Some private care organizations have made progress in avoiding this overdoctoring by paying salaries to their physicians and giving them incentives based on patient outcomes. Medicare and private insurers have yet to find a way to do that with doctors, nor are they likely to, given the current structure that involves hundreds of thousands of private providers billing them for their services.
In passing Obamacare, Congress enabled Medicare to drive efficiencies in hospital care based on the notion that good care should be rewarded and the opposite penalized. The primary lever is a system of penalties Obamacare imposes on hospitals for bad care—a term defined as unacceptable rates of adverse events, such as infections or injuries during a patient’s hospital stay or readmissions within a month after discharge. Both kinds of adverse events are more common than you might think: one in five Medicare patients is readmitted within thirty days, for example. One Medicare report asserts that “Medicare spent an estimated $4.4 billion in 2009 to care for patients who had been harmed in the hospital, and readmissions cost Medicare another $26 billion.” The anticipated savings that will be produced by the threat of these new penalties are what has allowed the Obama administration to claim that Obamacare can cut hundreds of billions of dollars from Medicare over the next ten years without short-changing beneficiaries. “These payment penalties are sending a shock through the system that will drive costs down,” says Blum, the deputy administrator of the Centers for Medicare and Medicaid Services.
There are lots of other shocks Blum and his colleagues would like to send. However, Congress won’t allow him to. Chief among them, as we have seen, would be allowing Medicare, the world’s largest buyer of prescription drugs, to negotiate the prices that it pays for them and to make purchasing decisions on the basis of comparative effectiveness. But there’s also the cane that Alan A. got after his heart attack. Medicare paid $21.97 for it. Alan A. could have bought it on Amazon for about $12. Other than in a few pilot regions that Congress designated in 2011 after a push by the Obama administration, Congress has not allowed Medicare to drive down the price of any so-called durable medical equipment through competitive bidding.
This is more than a matter of the 124,000 canes Medicare reports that it buys every year. It’s about mail-order diabetic supplies, wheelchairs, home medical beds, and personal oxygen supplies, too. Medicare spends about $15 billion annually for these goods.
In the areas of the country where Medicare has been allowed by Congress to conduct a competitive-bidding pilot program, the process has produced savings of 40 percent. But so far, the pilot programs cover only about 3 percent of the medical goods seniors typically use. Taking the program nationwide and saving 40 percent of the entire $15 billion would mean saving $6 billion a year for taxpayers.
The Way Out of the Sinkhole
“I was driving through central Florida a year or two ago,” says Medicare’s Blum. “And it seemed like every billboard I saw advertised some hospital with these big shiny buildings or showed some new wing of a hospital being constructed. … So when you tell me that the hospitals say they are losing money on Medicare and shifting costs from Medicare patients to other patients, my reaction is that central Florida is overflowing with Medicare patients and all those hospitals are expanding and advertising for Medicare patients. So you can’t tell me they’re losing money. … Hospitals don’t lose money when they serve Medicare patients.”
If that’s the case, I asked, why not just extend the program to everyone and pay for it all by charging people under sixty-five the kinds of premiums they would pay to private insurance companies? “That’s not for me to say,” Blum replied.
In the debate over controlling Medicare costs, politicians from both parties continue to suggest that Congress raise the age of eligibility for Medicare from sixty-five to 67. Doing so, they argue, would save the government tens of billions of dollars a year. So it’s worth noting another detail about the case of Janice S., which we examined earlier. Had she felt those chest pains and gone to the Stamford Hospital emergency room a month later, she would have been on Medicare, because she would have just celebrated her sixty-fifth birthday.
If covered by Medicare, Janice S.’s $21,000 bill would have been deeply discounted and, as is standard, Medicare would have picked up 80 percent of the reduced cost. The bottom line is that Janice S. would probably have ended up paying $500 to $600 for her 20 percent share of her heart-attack scare. And she would have paid only a fraction of that—maybe $100—if, like most Medicare beneficiaries, she had paid for supplemental insurance to cover most of that 20 percent.
In fact, those numbers would seem to argue for lowering the Medicare age, not raising it—and not just from Janice S.’s stand-point but also from the taxpayers’ side of the equation. That’s not a liberal argument for protecting entitlements while the deficit balloons. It’s just a matter of hardheaded arithmetic.
As currently constituted, Obamacare is going to require people like Janice S. to get private insurance coverage and will subsidize those who can’t afford it. But the cost of that private insurance—and therefore those subsidies—will be much higher than if the same people were enrolled in Medicare at an earlier age. That’s because Medicare buys health-care services at much lower rates than any insurance company. Thus the best way both to lower the deficit and to help save money for people like Janice S. would seem to be to bring her and other near seniors into the Medicare system before they reach sixty-five. They could be required to pay premiums based on their incomes, with the poor paying low premiums and the better off paying what they might have paid a private insurer. Those who can afford it might also be required to pay a higher proportion of their bills—say, 25 percent or 30 percent—rather than the 20 percent they’re now required to pay for outpatient bills.
Meanwhile, adding younger people like Janice S. would lower the overall cost per beneficiary to Medicare and help cut its deficit still more, because younger members are likelier to be healthier.
From Janice S.’s standpoint, whatever premium she would pay for this age-sixty-four Medicare protection would still be less than what she had been paying under the COBRA plan that she wished she could have kept after the rules dictated that she be cut off after she lost her job.
The only way this would not work is if sixty-four-year-olds started using health care services they didn’t need. They might be tempted to because, as we saw with Alan A., Medicare’s protection is so broad and supplemental private insurance costs so little that it all but eliminates patients’ obligation to pay the 20 percent of outpatient-care costs that Medicare doesn’t cover. To deal with that, a provision could be added requiring that sixty-four-year-olds taking advantage of Medicare could not buy insurance freeing them from more than, say, 5 percent or 10 percent of their responsibility for the bills, with the percentage set according to their wealth. It would be a similar, though more stringent, provision of the kind I’ve already suggested for current Medicare beneficiaries as a way to cut the cost of people overusing benefits.
If that logic applies to sixty-four-year-olds, then it would seem to apply even more readily to healthier forty-year-olds or eighteen-year-olds. This is the single-payer approach favored by liberals and used by most developed countries.
Then again, however much hospitals might survive or struggle under that scenario, no doctor could hope for anything approaching the income he or she deserves (and that will make future doctors want to practice) if 100 percent of their patients yielded anything close to the low rates Medicare pays.
“If you could figure out a way to pay doctors better and separately fund research … adequately, I could see where a single-payer approach would be the most logical solution,” says Gunn, Sloan-Kettering’s chief operating officer. “It would certainly be a lot more efficient than hospitals like ours having hundreds of people sitting around filling out dozens of different kinds of bills for dozens of insurance companies.” Maybe, but the prospect of overhauling our system this way, displ
acing all the private insurers and other infrastructure after all these decades, isn’t likely. For there would be one group of losers—and these losers have lots of clout. They’re the health-care providers like hospitals and CT-scan-equipment makers whose profits—embedded in the bills we have examined—would be sacrificed. They would suffer because of the lower prices Medicare would pay them when the patient is sixty-four, compared with what they are able to charge when that patient is either covered by private insurance or has no insurance at all.
That kind of systemic overhaul not only seems unrealistic but is also packed with all kinds of risk related to the microproblems of execution and the macro-issue of giving government all that power.
Yet while Medicare may not be a realistic systemwide model for reform, the way Medicare works does demonstrate, by comparison, how the overall health-care market doesn’t work.
Unless you are protected by Medicare, the health-care market is not a market at all. It’s a crapshoot. People fare differently according to circumstances they can neither control nor predict. They may have no insurance. They may have insurance, but their employer chooses their insurance plan and it may have a payout limit or not cover a drug or treatment they need. They may or may not be old enough to be on Medicare or, given the different standards of the fifty states, be poor enough to be on Medicaid. If they’re not protected by Medicare or they’re protected only partly by private insurance with high copays, they have little visibility into pricing, let alone control of it. They have little choice of hospitals or the services they are billed for, even if they somehow know the prices before they get billed for the services. They have no idea what their bills mean, and those who maintain the charge-masters couldn’t explain them if they wanted to. How much of the bills they end up paying may depend on the generosity of the hospital or on whether they happen to get the help of a billing advocate. They have no choice of the drugs that they have to buy or the lab tests or CT scans that they have to get, and they would not know what to do if they did have a choice. They are powerless buyers in a seller’s market where the only sure thing is the profit of the sellers.
Indeed, the only player in the system that seems to have to balance countervailing interests the way market players in a real market usually do is Medicare. It has to answer to Congress and the taxpayers for wasting money, and it has to answer to portions of the same groups for trying to hold on to money it shouldn’t. Hospitals, drug companies, and other suppliers, even the insurance companies, don’t have those worries.
Moreover, the only players in the private sector who seem to operate efficiently are the private contractors working—dare I say it?—under the government’s supervision. They’re the Medicare claims processors that handle claims like Alan A.’s for $0.84 each. With these and all other Medicare costs added together, Medicare’s total management, administrative, and processing expenses are about $3.8 billion for processing more than a billion claims a year worth $550 billion. That’s an overall administrative and management cost of about two-thirds of 1 percent of the amount of the claims, or less than $3.80 per claim. According to its latest SEC filing, Aetna spent $6.9 billion on operating expenses (including claims processing, accounting, sales, and executive management) in 2012. That’s about $30 for each of the 229 million claims Aetna processed, and it amounts to about 29 percent of the $23.7 billion Aetna pays out in claims.
The real issue isn’t whether we have a single payer or multiple payers. It’s whether whoever pays has a fair chance in a fair market. Congress has given Medicare that power when it comes to dealing with hospitals and doctors, and we have seen how that works to drive down the prices Medicare pays just as we’ve seen what happens when Congress handcuffs Medicare when it comes to evaluating and buying drugs, medical devices, and equipment. Stripping away what is now the sellers’ overwhelming leverage in dealing with Medicare in those areas and with private payers in all aspects of the market would inject fairness into the market. We don’t have to scrap our system and aren’t likely to. But we can reduce the $750 billion that we overspend on health care in the United States in part by acknowledging what other countries have: because the health-care market deals in a life-or-death product, it cannot be left to its own devices.
Put simply, the bills tell us that this is not about interfering in a free market. It’s about facing the reality that our largest consumer product by far—one-fifth of our economy—does not operate in a free market.
So how can we fix it?
Changing Our Choices
We should tighten antitrust laws related to hospitals to keep them from becoming so dominant in a region that insurance companies are helpless in negotiating prices with them. The hospitals’ continuing consolidation of both lab work and doctors’ practices is one reason that trying to cut the deficit by simply lowering the fees Medicare and Medicaid pay to hospitals will not work. It will only cause the hospitals to shift the costs to non-Medicare patients in order to maintain profits—which they will be able to do because of their increasing leverage in their markets over insurers. Insurance premiums will therefore go up—which in turn will drive the deficit back up because the subsidies on insurance premiums that Obamacare will soon offer to those who cannot afford them will have to go up.
Similarly, we should tax hospital profits at 75 percent and have a tax surcharge on all nondoctor hospital salaries that exceed, say, $750,000. Why are high profits at hospitals regarded as a given that we have to work around? Why shouldn’t those who are profiting the most from a market whose costs are victimizing everyone else chip in to help? If we recouped 75 percent of all hospital profits (from nonprofit as well as for-profit institutions), that would save over $80 billion a year before counting what we would save on tests that hospitals might not perform if their profit incentives were shaved.
To be sure, this too seems unlikely to happen. Hospitals may be the most politically powerful institution in any congressional district. They’re usually admired as their community’s most important charitable institution, and their influential stakeholders run the gamut from equipment makers to drug companies to doctors to thousands of rank-and-file employees. Then again, if every community paid more attention to those administrator salaries, to those nonprofits’ profit margins, and to charges like $77 for gauze pads, perhaps the political balance would shift.
We should outlaw the chargemaster. Everyone involved, except a patient who gets a bill based on one (or worse, gets sued on the basis of one), shrugs off chargemasters as a fiction. So why not require that they be rewritten to reflect a process that considers actual and thoroughly transparent costs? After all, hospitals are supposed to be government-sanctioned institutions accountable to the public. Hospitals love the chargemaster because it gives them a big number to put in front of rich uninsured patients (typically from outside the United States) or, as is more likely, to attach to lawsuits or give to bill collectors, establishing a place from which they can negotiate settlements. It’s also a great place from which to start negotiations with insurance companies, which also love the chargemaster because they can then make their customers feel good when they get an Explanation of Benefits that shows the terrific discounts their insurance company won for them.
But for patients, the chargemasters are both the real and the metaphoric essence of the broken market. They are anything but irrelevant. They’re the source of the poison coursing through the health care ecosystem.
We should amend patent laws so that makers of wonder drugs would be limited in how they can exploit the monopoly our patent laws give them. Or we could simply set price limits or profit-margin caps on these drugs. Why are the drug profit margins treated as another given that we have to work around to get out of the $750 billion annual overspend, rather than a problem to be solved?
Just bringing these overall profits down to those of the software industry would save billions of dollars. Reducing drug makers’ prices to what they get in other developed countries would save over $90 bi
llion a year. It could save Medicare—meaning the taxpayers—more than $25 billion a year, or $250 billion over ten years. Depending on whether that $250 billion is compared with the Republican or Democratic deficit-cutting proposals, that’s a third or a half of the Medicare cuts now being talked about.
Similarly, we should tighten what Medicare pays for CT or MRI tests a lot more and even cap what insurance companies can pay for them. This is a huge contributor to our massive overspending on outpatient costs. And we should cap profits on lab tests done in-house by hospitals or doctors.
Finally, we should embarrass Democrats into stopping their fight against medical-malpractice reform and instead provide safe-harbor defenses for doctors so they don’t have to order a CT scan whenever, as one hospital administrator put it, someone in the emergency room says the word “head.” Trial lawyers who make their bread and butter from civil suits have been the Democrats’ biggest financial backer for decades. Republicans are right when they argue that tort reform is overdue. Eliminating the rationale or excuse for all the extra doctor exams, lab tests, and use of CT scans and MRIs could cut tens of billions of dollars a year while drastically cutting what hospitals and doctors spend on malpractice insurance and pass along to patients.
Other options are more tongue in cheek, though they illustrate the absurdity of the hole we have fallen into. We could limit administrator salaries at hospitals to five or six times what the lowest-paid licensed physician gets for caring for patients there. That might take care of the self-fulfilling peer dynamic that Gunn of Sloan-Kettering cited when he explained, “We all use the same compensation consultants.” Then again, it might unleash a wave of salary increases for junior doctors.
Or we could require drug companies to include a prominent, plain-English notice of the gross profit margin on the packaging of each drug, as well as the salary of the parent company’s CEO. The same would have to be posted on the company’s website. If nothing else, it would be a good test of embarrassment thresholds.
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