‘Better Price Controls’ Aren’t the Answer for Medicare

Published January 31, 2015

The Obama administration just announced it will be shifting how it pays doctors under Medicare, seeking to reward “value” instead of “volume.” For a variety of reasons, this is likely to be yet another fiasco, with elderly patients and taxpayers falling victim to the dreams of central planners.

Medicare currently pays most doctors through what is called fee-for-service. It’s exactly what it sounds like: The doctor provides a service to a patient, and Medicare pays the doctor’s fee. In some ways it’s no different from how most of us pay a mechanic, hairdresser, or anybody else who provides a service.

In other ways, however, it’s quite a bit different. For starters, there’s no government agency stepping up with its taxpayer-funded checkbook to pay for your new hairdo. At least I don’t think there is; with the recent growth in the welfare state, hair styling may be an entitlement by now.

And whereas mechanics set their own prices, competing with one another to offer the best price to gain the most customers, Medicare sets the fees it pays doctors, thus placing price controls on medical care provided to the elderly. And as anyone who paid attention in high-school economics class can tell you, price controls lead to shortages; in this case doctors who won’t treat Medicare patients because the fees for their services are set too low.

Medicare officials and others with a penchant for central planning complain paying the bills for every service provided by a doctor to a Medicare patient incentivizes doctors to provide unnecessary services. When President Barack Obama accused doctors of removing children’s tonsils because the payment for a tonsillectomy is better than the fee for treating a sore throat, this is the sort of thing he was imagining.

On top of the concern over misplaced incentives, Medicare’s finances are a mess, and the program desperately needs to reduce the amount of money going out the door. Even the central planners recognize tightening price controls even further by slashing the fees paid to doctors would be a disaster.

So they’ve begun calling for “better price controls” that will somehow reduce the money paid to doctors without decreasing access to care for the elderly. This is where the idea of paying for “value” comes into play.

There are a couple of different ways to pay for “value,” none of them involving looking at the value patients actually place on the medical services they receive. Instead, the price-setting system consists of bureaucrats measuring things like hospital readmission rates and doctors’ use of electronic records, and whether the doctor treated a patient according to guidelines drafted by committees of people who assume they don’t need to actually see a patient in order to know exactly how he or she should be treated.

One important tool in the attempt to shift to paying for “value” is the accountable care organization, essentially an integrated health care system where patients’ treatment can supposedly be better coordinated, saving money and improving quality.

The government will give accountable care organizations a lump sum of money to treat all their Medicare patients, meaning one terrific way to save money will be to deny those patients care. Health maintenance organizations followed a similar strategy in the 1990s, and it proved wildly unpopular, for obvious reasons. 

To date, there’s very little evidence suggesting bureaucrats have a good understanding of how to measure health care quality. There’s even less evidence suggesting these schemes will save money. There are, however, lots of reasons to expect patients to suffer from these “better price controls” and for taxpayers to remain stuck with the bill for tens of billions of dollars in annual Medicare waste and fraud.