Who Should Set Medicare Prices?

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Last week, the Washington Post published a long article exposing a secret that has been widely known to health-care-policy analysts for decades: The people in charge of setting the rates that Medicare pays doctors are...the doctors that Medicare pays.

" Unknown to most, a single committee of the AMA, the chief lobbying group for physicians, meets confidentially every year to come up with values for most of the services a doctor performs.

"Those values are required under federal law to be based on the time and intensity of the procedures. The values, in turn, determine what Medicare and most private insurers pay doctors.

"But the AMA's estimates of the time involved in many procedures are exaggerated, sometimes by as much as 100 percent, according to an analysis of doctors' time, as well as interviews and reviews of medical journals.

"If the time estimates are to be believed, some doctors would have to be averaging more than 24 hours a day to perform all of the procedures that they are reporting. This volume of work does not mean these doctors are doing anything wrong. They are just getting paid at the rates set by the government, under the guidance of the AMA."

You can probably imagine the reaction that greeted this news; indeed, you are probably having that very reaction right now. Crony capitalism. Pork-barrel politics for doctors. Fox guarding the henhouse...

None of these reactions is wrong. There's good reason to believe that one factor helping to inflate health-care costs is the fact that we let doctors decide what they should be paid. And that's not the only problem with the current setup. While colonoscopies are generously reimbursed, primary-care physicians get as little as $58 an office visit, which is why fewer doctors are taking Medicare, and more and more seniors in affluent urban areas are having trouble finding doctors who do. The reason? Specialists dominate the committee that sets rates.

This is why the nation has a shortage of gerontologists. Because of the way Medicare payments are skewed, gerontologists (who definitionally must survive almost entirely on Medicare) have a tough time making a living. If you have a national health-care system specially for seniors, and this results in a shortage of gerontologists, then by definition, you're doing it wrong.

But here's what I didn't see the outraged critics explain: what should replace the American Medical Association committee. If we take the power of the doctors away, who will set prices, and how?

This question is harder than it sounds. Don't just answer "experts!" because this raises the question, "What should they be expert in?"

If you are tempted to say "patient care," then be aware that what you have just described is also known as "a doctor." If you want to say "health-care-delivery systems," then what you are describing is an administrator at a large group practice or a hospital group -- or perhaps an actuary at a health insurer. Any member of any of these groups will have an obvious conflict of interest. Compose a committee of representatives of multiple groups, and there's a good chance they'll collude to raise all of their reimbursements.

"But that's not what I want!" I hear you cry. "We'll find disinterested experts, like academics!"

Very well. We get a crack team of public-policy professors, economists, professors of actuarial science and so forth. Next question: Where will they get the data to use to set the rates?

Presumably, we don't want our experts to just assemble in a room together with an urn of coffee and a pastry plate and try to reason their way to a Medicare rate schedule from first principles, like Aristotle. We want them to analyze what procedures cost, think about reasonable rates of profit for physician practices, take into account the dangers to patients if doctors start losing money on their Medicare patients, and, of course, note any promising new technologies or procedural innovations that can save money or improve health. How will they learn about those things?

You know the answer, don't you? They have to ask the doctors and hospital administrators and health-insurance executives you just kicked out of our committee.

There is no system of payment-setting that will not ultimately rely on information from self-interested parties, just as there is no system of financial regulation that can be designed without talking to bankers, or a system of education reform that can be put in place without asking teachers and principals how things work now.

I mean, it's theoretically possible to just set health-care prices and gut-renovate the financial system without any input from the people who actually make the systems work, but there's a reason that this didn't work out well when the Soviet Union tried it. Things that sound perfectly reasonable when you have never traded a stock or removed an appendix turn out to be disastrous in practice.

This is an inherent problem with regulation and government price-setting, not some quirk that results from an insufficiency of dedicated technocrats in Congress or the White House. The information that is used to regulate always comes from the regulated. And the regulated always earnestly and sincerely believe that they are overworked, underpaid and excessively supervised. The information they give you will reflect this belief. The fundamental problem facing regulators can be summed up in the old saw: "I think my brain is my most important organ...but look who's telling me that!"

That's not to say that the system of having surgeons tell Medicare that Medicare ought to pay surgeons more is the best we can do; I very much doubt that it is. But it's not enough to say "something's wrong here"; you also have to be able to specify a better system, one that will:

1. Not pay specialists far too well, and primary-care practices far too poorly.

2. Not accidentally cut millions of people off from medical care by setting the reimbursements for common procedures way too low.

3. Not waste more resources than it saves on complying with the regulations.

4. Not create politically unacceptable rationing, such as making people wait for months to see a specialist, as Canada does. Whether you prefer the Canadian system to ours or not, suddenly subjecting seniors to months-long waits will result in the rapid demise of whatever system you have devised.

The history of Medicare is littered with payment reforms that have left us with...well, the expensive and inefficient system we're currently railing against. We've spent the 50 years since it was founded complaining that providers were charging too much and implementing reforms that didn't fix that fundamental problem, as the Official Blog Spouse has extensively documented. That's no reason not to try again, of course. But we probably shouldn't expect too much in the way of fixes.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net