On Reforming Medicare and Controlling Costs

12/14/2012 11:44:00 AM
Lately congressional republicans have painted a bullseye on Medicare as an area to cut spending. This is somewhat understandable because most, if not all, of the long-term deficit problem in the federal budget is caused by rising health care costs. Moreover, Medicare costs more for the same benefits than does government health care in any other developed country. The trouble, though, is that almost none of the republican ideas on Medicare actually reduce spending. For example, the most common idea for cutting Medicare, with tons of support from various beltway GOP policymakers, is raising the Medicare eligibility age. I noted here that not only does this save the federal government almost no money at all, it actually doubles costs to those taxpayers, since private health insurance costs twice as much as Medicare. Moreover, the idea is founded on a faulty premise, since for most 65 year olds, life-expectancy actually hasn't increased much at all--most of the increase in average life-expectancy has been due to fewer infant deaths, which has nothing to do with whether people are able to work past age 65.

There are a couple other ideas out there though, Ezra Klein explains. One idea is to reform the system so that seniors pay higher co-pays, a policy espoused by Jim Capretta. Capretta doesn't actually say "co-pays" specifically, preferring the vague more benign-sounding term "beneficiary engagement." I'm assuming what he means is co-pays but this could also mean privatizing Medicare, as well as charging higher deductibles. Capretta notes that only 10% of seniors use traditional Medicare alone, which is sort of misleading because the reason for that is that since the mid-2000s, traditional Medicare has enforced severe penalties on seniors who choose not to purchase some type of supplementary coverage. In fact, Capretta, as a Bush-era budget advisor, helped create that policy. But, at any rate, his point is that as a result seniors pay almost nothing out of pocket meaning they have no incentives to cut unnecessary treatments and expenses. In theory, Capretta has a point worth considering--reforming the system to include co-pays and deductibles might restrain costs by eliminating frivolous expenses. I'm skeptical the deductibles are a good idea for Medicare. They work very well for private insurance, which are not actuarially fair and charge a hefty risk premium of about 20% on top of average expenses. That means that private insurance is only beneficial for large incidental expenses, and horribly inefficient for routine procedures. But Medicare is actuarially fair, so this is not a factor. Medicare is an efficient way of paying for routine expenses. That said, co-pays represent a much better idea. Unlike deductibles, co-pays actually incentivize people to cut costs, both in terms of avoiding frivolous expenses they don't medically need, as well as in terms of taking better care of themselves to avoid needing medical care. The RAND health insurance experiment conducted a couple decades ago studied just that. What they found was that having a co-pay dramatically reduces health costs compared to completely free medical care. But here's the caveat: there was very little effect of the size of the co-pay on health care utilization. That means that it turned out that requiring seniors to pay for 10% of their medical expenses would barely reduce health care utilization compared to requiring them to pay a nominal fee of $5 for each procedure. Thus, even if Capretta is right that seniors have almost all of their medical bills covered by various insurances, he is wrong to expect that decreasing this coverage rate would significantly control overall health care costs because they do still have to pay nominal co-pays under the current system. In light of the empirical evidence, I'd say that Capretta's argument is mostly a Trojan horse, an argument to persuade people to accept to cuts in government spending that won't actually reduce the costs to taxpayers, who will still have to pay the same amount for all those expenses, whether or not they do it through taxes.

Tom Coburn has some other ideas. Unlike Capretta, he has actually come out explicitly for raising deductibles, though I've noted that co-pays are a better way to go for Medicare. In addition he wants to voucherize Medicare, which I've already noted will double, not reduce, costs. But he has another idea, not included in any of the bills he sponsored: he wants to compensate doctors based on time, not fee-for service.

Granted, Coburn has not committed the plan to writing, so maybe there are details he has in mind that would change this analysis; however, on its face, compensating doctors on time rather than per proceedure is a remarkably stupid idea. First of all, if you listen to Coburn's argument, the plan would actually increase, not decrease costs:
"What we’re doing with fee-for-service, and most people don’t realize this, is when you go to the doctor, they have this pressure to see X number of patients a day to meet their numbers....[When we cut Medicare reimbursements,] they’re going to cut the time they spend per patient."
See that? Right there he admits that fee-for-service causes doctors to spend less time per patient in order to reduce costs per patient. By his own logic, compensating doctors by time should increase costs. Now, maybe there is room to argue that the increased doctor-patient time is worth the higher cost because of better medical care. Maybe. That is an empirical question for which I don't have data. But as a health economist, having worked in a hospital for three years, I sincerely doubt it. Some doctors did see tons of patients, but doctors focusing a lot of time into a few patients was actually remarkably common, and for one simple reason: even though the hospital is compensated based on fee-for-service, the doctors are paid salaries and not in any way involved in billing the patients. I will admit, though, that the story is a bit different for private practices, since those doctors actually do manage their own billing, meaning they have an incentive to provide unnecessary procedures.

Based on first-hand observation, I'd say that part of the cost control problem is due to the fact that doctors have no incentive not to order every procedure that might be relevant. Consider the case where a patient is admitted with an unknown illness, the doctor has two possible routs to follow: 1) order tests in series until the disease is confirmed, or 2) order tests in parallel. Now, for urgent-care conditions, you have to do option (2), which means ordering all possibly relevant tests simultaneously, because time is life and you need to identify the disease as soon as possible. But this is the most expensive rout you could possibly take, because only one of those tests will tell you anything useful. For the vast majority of patients, it is healthier and cheaper to do option (1), where you follow a Bayesian search method: test for the most likely disease first, and run subsequent tests only if the prior test is negative. Option (1) has many advantages. It reduces the total number of tests in for almost every patient--only if the patient has the least likely possible ailment will it not be cheaper than (2), and even then it will merely cost the same. Moreover, (1) reduces the suffering of the patient, since it involves less poking and prodding. The trouble is that there is absolutely nothing in the current system that incentivizes (1) over (2), with the result that doctors are running lots of unnecessary tests and procedures. And no, "beneficiary involvement" will not in any way reduce these unnecessary costs, because the patient has absolutely no way to know whether those tests the doctor is running are really the most cost-efficient ones to be running. In most cases, patients have only a vague understanding that tests are even being run. And we shouldn't blame them for being unsophisticated consumers--they didn't go to med school, the fact that they are at the doctor's office is a good sign that they are not in a good condition to be scrupulous about their finances, and, frankly, the whole reason we pay doctors is so that they can make these decisions for us. I don't have a simple fix to incentivize (1) over (2), without running the risk of harming quality of care. Perhaps one way to do this would be to pay less for negative results than positive ones.

I would also add another minor reform: fee-for-service should be forward-looking, not retrospective. Currently, when a doctor or nurse performs a procedure, all of the instruments they used are carefully documented, and you pay after-the-fact based on what was actually used. That means that there is no incentive to discourage waste--if it takes the nurse three tries to properly place an IV drip, you pay for all three drips, even though you only benefited from the one that actually worked. My view is that you should only pay a single flat fee for a procedure, regardless of how many resources it took to perform it on that particular patient.