Healthcare Myths: I. The Cost Shift

This is part of a series of posts I’m writing, partially here and partially at Right-Thinking, busting Left wing myths about healthcare reform.

Before we start, a caveat. I am not a professional policy wonk nor a consumer advocate. Doubtless there are aspects of these issues about which I am, at best, ignorant. I’m coming from the point of view of someone from a family of medical workers who was in medical management for 13 years.

I also come at it as a libertarian who is fundamentally suspicious of grand government plans for running the Universe. I believe that markets will always trump central planning, although I believe we can and should help those who can’t help themselves.

Those are my biases and faults. But I still feel more qualified to talk about this subject than Michael Moore.

I was going to put up a post addressing the “our system stinks” myth. But an announcement today made this subject more urgent.

The Myth: Medicare does a better job than the private sector in controlling healthcare costs. Over the last 35 years, Medicare costs have grown 1-2% more slowly than private care costs.

Bad Policy Based On The Myth: Barack Obama wants to expand Medicare coverage to millions more Americans, including making it optional for anyone over 55 (which means, in the contest between private and “free” health insurance, it will be effectively mandatory). Obama is further proposing a “down payment” on health care reform financed by reducing provider fees that Medicare provides.

The Reality: It’s notable that no one who promulgates this myth can tell you precisely how Medicare controls costs. It’s not managed care and it’s not cost-benefit analysis. So what is it?

First off, the very idea that the government is better than the private sector at controlling costs should fail the smell test. In addition to the known and demonstrated inefficiency of government, there’s the demographic reality. Medicare covers the old and the disabled, who incur a huge fraction of medical care costs and are the most rapidly growing demographic in the nation. It would make little sense for those costs to be rising more slowly than the general population.

So how do I explain the above figures?

Imagine, if you will, that Obama gave a speech on the spiraling cost of education (federal spending doubled in the last Administration and the stimulus doubles it again). But, he claims, he has a solution. We will freeze teacher salaries … for the next 30 years.

You can imagine the uproar. And you can imagine the effect. All the good people would leave teaching and, eventually, your math teacher would be the guy who couldn’t get a job at 7/11.

But this precisely what Medicare has done. They have essentially frozen provider fees. The fee schedule has been frozen, slashed and reconfigured so dramatically that many procedures pay no more than they did a generation ago. In essence, every time a doctor or hospital treats a Medicare patient, they lose money.

Providers have only been able to make ends meet by (1) increasing volume; i.e. providing more healthcare than strictly necessary; (2) cost-shifting; i.e, charging non-Medicare patients more (which is why private insurance spending outpaces Medicare); (3) gaming the system.

The last is particularly noteworthy. By discharging patients before they are fully healed, then re-admitting them for later procedures, doctors and hospitals can make up the revenue loss. Obama’s proposal is supposed to crack down on this practice. But providers wouldn’t be engaging in the practice in the first place if they didn’t have to. Contrary to popular belief, health care providers are not, generally speaking, unethical.

Concrete example? Breast cancer. It is possible, in this country and this country alone, to biopsy a lump in a woman’s breast, have it evaluated the lab and, if necessary, do a mastectomy in one surgical setting. For years, Medicare refused to pay for the biopsy, arguing that since you removed the entire breast, they shouldn’t pay you for removing a small part of it. This encouraged doctors to do the biopsy, send the patient home and then later do the mastectomy, with concordant increased risk to the patient. I fought a battle against Medicare for years on this subject. They changed it after I left medical management.

If (and it’s a big if) Medicare closes off the system gaming, that will leave volume. But providers are near their limit and Congress restricts volume.

So that leaves us with cost-shifting. Doctors simply raise the fees on non-Medicare patients to keep their practices going. So if it costs $100 to do a procedure and Medicare only reimburse $75, you bill your non-Medicare patients $125.

This is Medicare as a pyramid scheme — even beyond the payroll tax pyramid. Providers raise medical fees on young people so the government can finance the care of old people.

But like all pyramid schemes, it collapses if you run out of suckers. And the current proposals dramatically increase the pressure on the sucker pool. Every patient going into the Medicare system increases the costs of those not in the system.

And of course, if, as many Democrats want, we shift the entire population to something like Medicare, there’s no one left to cost-shift to. All the options for making up Medicare fees are lost. Doctors will make dramatically less money and, pretty soon, your doctor will be, at best, a medical student hoping to get his education in the United States before practing somewhere — like wherever our politicans get their care — that pays a decent wage.

Medicare is not the model we want to build a healthcare system on. I can outline numerous problems but this is the biggest and the most relevant. The proposals to expand Medicare — and shrink payments to providers — are merely going to hasten the toppling of the pyramid.

And we’re all in the shadow of this one.

One Response to “Healthcare Myths: I. The Cost Shift”

  1. rpl says:

    “like wherever our politicians get their care” — I think that is a telling statement. If tis new system is going to be so great, then politicians should want to use it too, right? They shouldn’t have any interest in going elsewhere for care, right? Therefore, I propose that all these plans for healthcare reform be accompanied by one more provision; viz., that it be a crime, punishable by jail time, for any elected official, appointed official requiring senate confirmation, or any member of the immediate family of one of those people to seek medical care outside of the new system. So, if a member of Congress does as the Canadian PM did some years back and sends his mother to another country to get medical treatment, then he goes to jail. Since this new system is going to be so wonderful, there is no reason for Congress to object; why would they even *want* to go somewhere else. And if they do object, then you know what they actually think of the prospects for health care under the plan.

    Write your congressman today, and you’ll see what he really thinks.