Can a Grand Bargain Ever Work?

A version of this post originally appeared at Townhall.com

The idea behind a grand bargain to get the federal budget deficit under control is a simple one. Republicans agree to tax increases and Democrats agree to spending cuts. Yet, in a previous post I warned that this could be a trap for Republicans, just like similar budget deals have been in the past.

There are two problems. First, the tax increases will hit immediately, while the spending cuts will be mainly in the future. That means future Congress’s will have an opportunity to renege on the agreement before any serious spending reduction takes place. Second, all the serious spending increases in future years are on health care and health care spending cannot be curtailed unless there is fundamental reform. Since the Democrats have signaled they won’t agree to fundamental reform, that means no deal that can be agreed to will be workable.

Unless…unless even Democrats come to understand that health reform is in everybody’s self-interest. That’s real reform, not phony reform, mind you.

November…December…HELP!

Consider that Medicare has a list of about 7,500 separate tasks that it pays physicians to perform. For each task there is a price that varies by location and other factors. Of the 800,000 practicing physicians in this country, not all are in Medicare and no doctor will be a candidate to perform every task on Medicare’s list. Still, Medicare is potentially setting about 6 billion prices at any one time!

Is there any chance that Medicare can make the right decisions for all these transactions? Not likely.

What does it mean when Medicare makes the wrong decisions? It often means that doctors face perverse incentives to provide care that is too costly, too risky and less appropriate than the care they should be providing. It also means that the skill set of our entire supply of doctors will become misallocated, as medical students and even practicing doctors respond to the fact that Medicare is over-paying for some skills and under-paying for others.

And what is true for Medicare is also true for Medicaid.

What could we do differently? Former Medicare Trustee Thomas Saving and I made a few proposals in a recent post at the Health Affairs Blog. Here are some highlights:

Pay Market Prices. All over the country there are retail establishments that are offering primary care services to cash-paying patients. Walk-in clinics, doc-in-the-box clinics and free-standing emergency care clinics post prices and usually deliver high quality care. Many follow evidence-based protocols, keep records electronically and order prescriptions electronically.

MinuteClinic in Dallas charges about $75 for treating an earache or a sore throat. But since Medicaid pays only half that much, this high-quality, very accessible form of primary care is off limits to the entire poverty population of Dallas. This needs to change.

Medicare and Medicaid should allow enrollees to obtain care at almost all of these places — paying posted, market prices, not the government’s fee schedule. Since these prices are below what taxpayers would have paid at a physician’s office or hospital emergency room, this reform would lower overall costs, even as it makes primary care more accessible.

Pay No More than Market Prices. Medicare and Medicaid do something you and I would never do in a normal market. They pay different providers different fees for performing the same service. For example, Medicare typically pays two or three times as much for a service performed at a hospital as it pays for that same service at a physician’s office. Why be so wasteful?

Let’s suppose that a MinuteClinic offers a flu shot for $40, then that is all Medicare should pay — whether the shot is given by a doctor or a nurse; whether at the MinuteClinic, in a doctor’s office, at a community health center, at a hospital, etc.

Selectively Contract. Almost every hospital in Dallas takes Medicare patients and bills the taxpayers for the services it performs. Yet some hospitals are billing Medicare twice as much as other hospitals for such standardized procedures as knee replacements. What could be more wasteful?

The alternative is to do what you and I would do if we were shopping for other goods and services. Medicare and Medicaid should contract with low-cost, high-quality facilities. If patients want to go to a more expensive hospital for their surgery, they should be free to do so. But let them pay the extra cost out of their own pockets, rather than out of the taxpayer’s pocket.

Liberate Paramedical Personnel. One way to expand the supply of low-cost medical care is through the increased use of nurses and physician assistants to perform tasks that do not require a physician’s level of expertise. The current system discourages the creative use of paramedical personnel, however. The reason: when a task is performed by a nurse rather than a physician, Medicare automatically reduces its fee. (See the example here.)

A better approach would be to allow doctors to profit when they find ways of reducing costs. This is the natural outcome in a free market. Doctors who want to practice medicine in a different way and be paid in a different way should be allowed to do so long as the cost to the government goes down and the quality of care patients receive does not suffer. The principle: doctors should be encouraged to earn more income by saving the taxpayers money.

Encourage Bundling. One of the obstacles to offering patients a package price, covering all services, is that surgery typically involves several entities who are each financially independent. For example, the hospital, the surgeon, the anesthetist, etc. In a normal market, independent entities come together all the time, jointly produce a good or service, and agree on how to divide the revenue from the exercise. This should happening in medicine as well. Providers should be encouraged to offer package prices for bundled services and Medicare should be willing to pay the package price wherever it is expected to be less than what taxpayers would otherwise have paid.

Note 1: The providers must do the bundling, not Medicare or Medicaid. Let bundling be determined in the marketplace, not by bureaucracy. Note 2: This will require suspending the Stark Amendment.

Encourage Medical Tourism. You don’t actually have to go off shore to participate in the market for medical tourism. There is a flourishing market for it on shore. Canadians, for example, routinely come to the United States for surgical procedures (because of long waits in their own country) and they usually face a package price for all services agreed to in advance. For a knee replacement, for example, Canadians typically pay half of what private insurance pays. Seniors too could be in this market, and they would be if Medicare allowed them to share in the savings created by traveling to a higher-quality, lower-cost facility.

In each of these cases, and in others we could think of, the principle is the same: let markets do what only markets can do well.

Comments (27)

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  1. Louise says:

    “If patients want to go to a more expensive hospital for their surgery, they should be free to do so. But let them pay the extra cost out of their own pockets, rather than out of the taxpayer’s pocket.”

    This makes a lot of sense. Concise, well-argued.

  2. Thomas says:

    “It often means that doctors face perverse incentives to provide care that is too costly, too risky and less appropriate than the care they should be providing.”

    Truth. Compared to other developed nations, the U.S. has not been receiving returns in life-expectancy for all its additional spending in healthcare.

  3. Timmy says:

    “First, the tax increases will hit immediately, while the spending cuts will be mainly in the future.”

    - I think this is the main aspect of why a budget deal is difficult to pass.

  4. Brant S. Mittler, MD JD says:

    Good luck finding low cost high quality faclities.
    The Mayo Clinic is high cost high quality. And no, health care is not like transportation, where economists argue that a Ford Fusion will get you there just like a Mercedes, so why pay more? The problem with low cost purportedly high quality facilities is that you largely have to believe their concocted numbers or their own marketing. And that could mean not getting there – ie fatal.
    I was amused by the NY Times’ recent account of the purchase of the last batch of F-35 fighters, one of our biggest government spending boondoggles. The report said that the government couldn’t tell how much each one actually cost.
    And doctors, according to all the health care policy gurus, are supposed to know how much it will cost to take care of your complicated heart attack. No, they didn’t teach us that in medical school.
    The answer to that question will be found somewhere on K Street.

  5. Uwe Reinhardt says:

    John:

    You write: ” Yet some hospitals are billing Medicare twice as much as other hospitals for such standardized procedures as knee replacements. What could be more wasteful?”

    Could you please explain a bit better how, under the DRG system, Medicare would pay one hospital twice as much as another for the same DRG in the same town (unless you include DSH money and GME payments for teaching hospitals). Can you give an example?

    Furthermore, the prices private insurers pay for the same DRG in the same state — e.g., a CABG — can vary by a factor of 10. I have such data. These variations have never been shown to be related to quality of any sort.

    Finally, you call for bundled payments, like everyone else. Here Medicare had pioneered in the 1970s by funding the development of DRGs and introducing them into Medicare in NJ in the 1970s and nationwide in the 1980s. DRGs are bundled payments. That Medicare innovation has by now been copied worldwide, and even by private insurers in the US.

  6. Uwe Reinhardt says:

    On another note: Does anyone have a link to whatever concrete proposal Republicans have made to avoid the fiscal cliff. I mean here specifics on exactly what tax loopholes they would eliminate to yield added revenue and precisely what benefits they would cut and by how much.

    Paul Krugman asserts that Republicans have not done this and therefore cannot (yet) be taken seriously. I am not aware of such a concrete plan either, but I must confess that I have not followed this debate all that closely.

    Can anyone enlighten me on this score, starting with you, John?

  7. steve says:

    ” First, the tax increases will hit immediately, while the spending cuts will be mainly in the future. That means future Congress’s will have an opportunity to renege on the agreement before any serious spending reduction takes place. ”

    So I assume you opposed Romney’s proposal which exempted all cuts to Medicare for the next ten years on this basis?

    “Canadians, for example, routinely come to the United States for surgical procedures (because of long waits in their own country)”

    Most Canadians who have surgery here have it as emergency surgery, or they work in the US. I have never had a Canadian come to any of the facilities at which I work. I just hired residents from Penn, Duke and Emery. I asked. They did not see any Canadians.

    Steve

  8. Kyle says:

    Dr. Mittler,

    Information asymmetries confuse consumers, because they don’t understand the subtleties of their complicated heart attacks. People tend to think that they are receiving higher quality care simply because they are paying more, this isn’t universally true. It also means that market comparisons are difficult.

    With PPACA on the horizon, I’m not sure that setting Medicare reimbursement ceilings is a good precedent, John. Perhaps healthcare is different, but generally it tends to stifle innovation. Why should I develop a better flu shot if there’s a good chance millions of people will be excluded from the market?

  9. Vicki says:

    Good Willie Nelson song.

  10. Thomas says:

    Seems as if both parties realize that Medicare cuts will be necessary to avoid the fiscal cliff, but neither wants paternity.

  11. Bob Geist says:

    Mittler has the right analysis.
    John, you state: “The principle: doctors should be encouraged to earn more income by saving the taxpayers money.”

    This is the ACO hoax–the only way to “save” corporate or government money is to profiteer from fewer referrals to others and more self referrals. Profiteering from the volume of referrals is illegal outside the umbrella of HMO and PPACA law. Under state Medical Practice statues a physician can only be paid for services delivered–not for collusion with some 3rd party paying a split fee, capitation fees included. Bob

  12. Bill Radiar says:

    The song fits your article so well.

  13. Bob Geist says:

    Mittler has the right analysis.
    John, you state: “The principle: doctors should be encouraged to earn more income by saving the taxpayers money.”

    This is the ACO hoax–the only way to “save” corporate or government money is to profiteer from fewer referrals to others and more self referrals. Profiteering from the volume of referrals is illegal outside the umbrella of HMO and PPACA law. Under state Medical Practice statues a physician can only be paid for services delivered–not for collusion with some 3rd party paying a split fee, capitation fees included.
    In addition Baumol’s “productivity” disease may something to do with cost inflation and thus more blood could be squeezed out of the productivity corpse as “savings”. But please remember that cost inflation did not occur for 100 years before 1965,the tipping point in time, when tax-subsidies made insurance cheap and buying care with insurance a “free” care bargain “paid for by the boss”.
    Bob

  14. Devon Herrick says:

    Hi Professor Reinhardt,

    Sadly you are correct that commercial reimbursements vary tremendously from one provider to another. My post on colonoscopy was an eye-opener. I recently asked a (now former) head of a large insurer why insurers allow enrollees to go to any provider even though a colonoscopy costs more at a hospital (for example) than at an outpatient facility? He said it’s because employers don’t know that it’s happening (his new venture is helping employer plans identify the cost-effective providers).

    You are no doubt aware of this — but maybe other readers don’t know this this works – hospital Medicare reimbursements (i.e. what hospitals earn from each procedure) are based on a variety of factors that take into account hospital region, whether a hospital is urban or rural, and a calculation of hospital costs based on a convoluted formula. I began my career as an accountant at a large Dallas-based health care system. The so-called Medicare Cost Report was the bane of my existence back when I worked in hospital financial management. I’ve seen controllers lose their Job over under-estimating the Medicare “contractual” (i.e. Medicare revenue you book throughout the year that you have to give back based on calculations from the annual cost report). Awhile back John and I worked with some data on knee replacement costs in Dallas for a variety of payers. We found it odd that hospitals’ Medicare payment for a knee replacement varies in such a small region. I discussed our findings with a major Texas insurer that confirmed that the amount third-parties pay varies tremendously. This Health Affairs article talks more about Medicare differences in payments for the same procedures – as does this from a Connecticut news outlet.

  15. Wasif Huda says:

    I agree with everything you said.

  16. Uwe Reinhardt says:

    To Davon Herricks:

    Thanks for your comment. I shall follow the links. I know there are regional adjustments — in the physician fee schedule as well — but I am surprised they could make so huge a difference, even within regions.

    Best

    Uwe

  17. John Goodman says:

    @ Uwe

    As Devon noted, what hospitals ultimately get paid depends on their costs. We never really abandoned the cost plus system! We need to do another post on this in the future.

    @ Brant and Bob

    How could two guys who are so familiar with the health care system not be aware that there is waste and inefficiency everywhere? I want doctors to be able to profit by eliminating waste. For example, a lot of medical practice could be handled by phone or email rather than an office visit — at a great saving in patient and doctor time and expense. Currently, Medicare won’t pay for these modern methods of communication. I want to free the doctors. This has nothing whatsoever to do with ACOs. I hope.

    @ Uwe

    Having the government choose the bundles will accomplish nothing but create more bureaucracy and more perverse incentives. The bundles must be created by the providers. Bundling should be a market phenomenon.

    @ Steve

    We have reported before on Canadians coming to the US for their surgery. There are actual busniesses that arrange this medical tourism.

  18. Uwe Reinhardt says:

    John:

    When Devon says “hospitals ultimately get paid on their costs”, he is right in the sense that DRGs are based on average costs, but averaged over many hospitals, not the individual hospital. Reimbursement of individual hospitals based on the individual hospital’s cost report went out during the 1980s, when prospective payments were introduced.

    In this respect, see http://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/downloads/AcutePaymtSysfctsht.pdf

    There are, of course, regional adjustors for the cost of wages and other costs that have regional variations, but those adjustors are not meant to adjust for the individual hospital’s costs.

  19. Uwe Reinhardt says:

    John:

    You write: “Having the government choose the bundles will accomplish nothing but create more bureaucracy and more perverse incentives. The bundles must be created by the providers. Bundling should be a market phenomenon.”

    With all due respect, I find this a knee-jerk reaction.

    I recall from an earlier post that you favor a system in which every physician (or provider) can define his or her own bundle of services and then quote a price. For something as complicated as health care, that would bring chaos to any market pretending to be price competitive. It would make price comparisons very difficult.

    I know that for cars some items (e.,g., GPS) are not in the standard bundle we call a “car,” but luckily the overwhelming part of what you buy when you buy a car is in a standard bundle.

  20. John Goodman says:

    Uwe, Medicare does not have to accept the bundle or the price. But the innovation needs to be on the supply side. Let’s say we are talking about warranties for heart surgery.

    You want Geisinger to be able to make an offer that includes a package and a price. If Medicare turns them down, they can re-group and make another offer. You do not want the federal govenment dictating what the warranty has to look like. The entity with the most knowledge about what can and cannot be done should be the entity coming up with the innovations.

    This has nothing to do with ideology. It is good economics.

  21. Uwe Reinhardt says:

    John:

    I get it.

    We have close to 6,000 hospitals in the U.S. Each does a whole host of procedures. Si each hospital would compose its bundled price for whatever it wishes to put into the bundle for each procedure. Perhaps we could even vary this by patients, so that we would get the billions of bundled prices that would then be hurled at Medicare’s bureaucracy for its decision whether or not to accept the proposed bundle for procedure j (j = 1, …, N) from hospital i (i = 1, …., 6000), or whether to bargain over both the composition of the bundle and the level of the bundled price.

    So tell me, John, how much personnel would it take to administer this “system”?

    Uwe

  22. John Goodman says:

    Uwe, why don’t you use a modicum of common sense. There are only going to be a few ways to get to the most profitable warranty system. Once the innovators find them, others are likely to copy.

    The point is: the private sector has to be free to find these efficiencies.

  23. Uwe Reinhardt says:

    John:

    Only the waranties change. I thought pevery provider could also define the bundle of services for which a bundled price is quoted.

    If it’s only warranties attached to a standard, marketwide bundle, then I have no objections to you scheme.

    But to have meaningful price competition, bundled prices have to be quoted on something standard that is market wide.

  24. John Goodman says:

    There are hundreds of variables involved in deciding what constitutes a “readmission.” Here’s the important point: you don’t want a bunch of bureaucrats deciding these parameters. Let the hospitals decide. They have the knowledge. They know what they can and can’t do. As long as the taxpayers are saving money, everbody wins.

    Just like in every other market!!!

  25. Charlotte says:

    Great song pairing!

  26. Uwe Reinhardt says:

    John:

    I don’t know to whom this was directed: “There are hundreds of variables involved in deciding what constitutes a “readmission.” Here’s the important point: you don’t want a bunch of bureaucrats deciding these parameters. Let the hospitals decide. They have the knowledge. They know what they can and can’t do. As long as the taxpayers are saving money, everbody wins.”

    Explain a bit more how this would work. Every hospital decides what is a readmission that should be paid for by taxpayers and which readmissions reflect mistakes that should not be paid for? Or is it the AHA?