Fresh from reimaging health insurance, mainstream health policy analysts have now set their sights on the way that people who provide medical care are reimbursed. Initial indications are that this will not go well for patients. Academics and government agencies seem imbued with the conviction that every medical procedure in America costs twice as much as it should due to “flat of the curve medicine,” and that vast fortunes can be saved simply by chopping reimbursements.
The table below lists Medicare’s 17 most expensive conditions. It is from a paper on reducing costs by changing Medicare payments from patient based payments to “bundled episode payments.” The authors argue that this reform could save $10 billion a year. They implicitly assume that higher average payments per patient “episode of care” in the 306 hospital referral regions that make up the upper 75th percentile of the payment distribution have no value. Given that, if one caps Medicare payments for each “episode of care” at the 25th percentile of the average cost per patient episode, one saves a great deal.
This is like saying that housing costs can be reduced by giving the federal government the power to decree that no one can spend any more on housing than the people living in Detroit.
Episode based payment is a compromise between paying a fee for services actually rendered and the capitated payments that pay a flat fee for all of the health care provided to each person every year. Compromise is needed because although mainstream health reformers irrationally dislike fee-for-service payments, they cannot deny that a flat fee structure harms the most seriously ill.
An episode would begin after the first hospitalization to treat an “organ system” provided there has been no hospitalization related to the same organ system within the previous 180 days. A single payment, based on recorded averages, would be made for all inpatient and outpatient spending occurring up to 180 days after the first hospitalization.
The problem with arbitrarily setting payments for knee replacements at the 25th percentile of the averages in specific geographic regions is that expenditures give no clue about whether there is room to reduce costs or whether the prices Medicare sets accurately reflect real costs. If a health problem is well understood, the medical system has a lot of experience curing it, there are a lot of physicians and facilities treating it, and the market is large enough to take advantage of supplier economies of scale, then existing suppliers may already be providing services using the fewest resources required to produce an acceptable outcome under current conditions. Arbitrarily seeking to lower expenditures by paying suppliers less without changing the knowledge base, the regulatory structure, or the cost of essential inputs like available labor would create shortages or degrade quality.
Neither the table nor health system reformers discriminate between cures that are efficiently provided, cures that are genuinely expensive due to the resources needed to provide them, cures that are costly because individuals vary so much that no one has yet managed to invent a standardized process that works, or cures that cost a lot because the regulatory constraints limit competition or regulators have picked an incorrect price.