Tuesday, June 23, 2009

Medicare, cutting costs, and magical thinking

Investor’s Business Daily has up an article (via The Corner) comparing the increase in per patient costs for Medicare with the increase in per patient costs for private insurance from 1970 through 2007. The article concludes that:

The results are clear: Since 1970 — even without the prescription drug benefit — Medicare's costs have risen 34% more, per patient, than the combined costs of all health care in America apart from Medicare and Medicaid, the vast majority of which is purchased through the private sector.

Since 1970, the per-patient costs of all health care apart from Medicare and Medicaid have risen from $364 to $7,119, while Medicare's per-patient costs have risen from $368 to $9,634. Medicare's costs have risen $2,511 more per patient.

Fine, but there’s one problem with this: Medicare is for old people. Old people tend to be sicker than young people. If rising medical costs are driven largely by improved diagnostic tools and improved treatment, we would expect that more of those diagnostic tools would be used and more of that treatment provided to older people than to younger people. Thus Medicare costs would rise more than non-Medicare costs.

This doesn’t mean letting the government run all health care is a good idea. It’s just that I’d like to see the same study done controlling for age and/or showing the figures for Medicaid (although there may be age issues there, also).

And as long as we’re on the subject, I have one other thought about Medicare and costs. Part of the ongoing sniping over what to do about health care revolves around the Medicare paradox:

I completely fail to grasp this magical argument whereby Medicare is unreformable now, but adding even more patients to the rolls will create the incentive for exactly the sort of cost-cutting reforms that people hated when the HMOs were doing them in the early '90s, and got laws passed to prevent.

This has evolved into the rallying cry of “let the government show it can cut costs in Medicare and then we’ll let it run the rest of health insurance.”

However, there is a logical reason why the Obama Administration believes it can control costs by developing a universal public option, a Medicare for the non-old. Let’s start by looking at some numbers. There are about 253.4 million people in the United States with health insurance. About 45.2 million of them are enrolled in Medicare. At the end of 2006 (I cannot seem to find more current data) there were about 42.1 million people enrolled in Medicaid. This leaves 166 million people with private insurance. In other words, the number of people with private insurance is about twice as great as those with Medicare and Medicaid combined.

So here’s how the argument for instituting a universal public option to control costs goes (all numbers hypothetical):

Let’s say a doctor charges $100 for a procedure.
An uninsured patient will pay $100 for that procedure. There are so few of these I ignore them for the rest of this discussion.
A patient with individual insurance will pay what his insurance company has negotiated; let’s say $65.

Medicare has to decide how much to pay for that procedure. It would like to pay only $20. But at that low a rate of reimbursement, too many doctors will simply refuse to take Medicare patients: there are lots of privately insured patients who will pay more so why should the doctors take Medicare patients who will pay so little? It’s just not worth their time so long as they can fill up their practices with the privately insured. Thus, grudgingly, Medicare agrees to pay $45. Doctors still don’t like it but the payment is close enough to the private insurance rate so that most doctors will accept it.

This all changes if the Obama Administration gets their universal public option. It is estimated that up to 70% of the privately insured may end up in the public option: 70% of 166 million is about 116 million. That would mean about 203 million people would be in a government run plan - universal public option, Medicare, or Medicaid - and only about 50 million privately insured. At that point if the government wants to pay only $20 for that $100 procedure, doctors would have little choice but to accept it: there simply wouldn't be enough privately insured patients to fill up their practice. And, of course, the tipping point for doctors would probably come much sooner. It seems reasonable to assume that if half of Americans were in a government-run insurance program doctors would find it difficult to limit their practices to the privately insured. Achieving the 50/50 point would require that only about 40 million of the privately insured move to the universal public option - roughly 25% of those who currently have private insurance.

Furthermore, the movement to the universal public option would feed on itself. Let’s say the option goes into effect and 40 million people who are currently privately insured - the uninsured, those buying individual policies, small businesses and their employees - join that option. Now doctors have no choice but to take government-insured patients and to accept payments from them that are below cost. To make up the difference, doctors will have to raise their rates and insist on higher reimbursement from private insurance companies. If the insurance companies refuse, doctors will go out of business. If the insurance companies agree, they will have to raise their own rates. This will make private insurance less affordable and drive more people into the universal public option. Rinse and repeat.

This is doable for a while although it will get very interesting when there are too few privately insured patients to make up the losses doctors will take on the government-insured patients. Still, it does seem clear that while those who insist a universal public option will allow the government to cut medical costs may be short-sighted, they are neither illogical nor indulging in a magical argument. The fact that they appear so may have more to do with their unwillingness to fully specify how the cost savings will come about rather than with any uncertainty on their part about how the process will unfold.

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