Medicare rates and capping payments to hospitals

If there is anything about economics that has been proven over and over, it is that price controls do not work. The unintended consequences are usually worse than the problem that led to the solution in the first place.

Massachusetts legislators, feeling the frustration of higher insurance premiums, are now considering a bill to limit doctor and hospital reimbursement payments to 110% of Medicare rates, or perhaps some other percentage of Medicare rates. The problem with this is that Medicare rates are not fully compensatory to doctors and hospitals and have contributed to the increase in private insurance company rates. This was one of the conclusions reached by the Attorney General in her extensive investigation of these matters.

An unreported fact in Massachusetts is that Tufts Health Plan, at the request of the Group Insurance Commission (the agency that manages the state employees’ health plan), recently sent out a request for proposals for a new insurance contract for the tens of thousands government employees covered by the GIC. The main provision was that the doctors and hospitals would have to agree to rates set at 110% of Medicare.

The result: It was a bust. Hospitals and doctors did not express interest in the contract because they knew that they could not cover their costs with it — even though they could have been included in a limited network and have an effective monopoly to serve this large group of customers.

If today legislators adopt price controls over hospital and doctors’ rates, tomorrow they will have to deal with layoffs and closures in the Commonwealth’s strongest economic sector. These organizations are not for-profit enterprises with shareholders who can absorb losses.

It is interesting to me that a state in which many people decry the idea of rate-setting would consider the idea of picking a certain price target by fiat for the medical sector. If we are going to move towards government supervision of reimbursement levels, please instead set up a regulatory body to determine the appropriate level of rates based on best medical practices and true underlying costs of hospitals. An evidentiary hearing in which all those factors are considered by qualified administrative law judges would do more to provide a sound basis for determining rates than the price control approaches being raised.

Paul Levy is the former President and CEO of Beth Israel Deaconess Medical Center in Boston and blogs at Not Running a Hospital. He is the author of Goal Play!: Leadership Lessons from the Soccer Field and How a Blog Held Off the Most Powerful Union in America.

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  • Happy Hospitalist

    Since when did Medicare rates become some sort of gold standard from which to set prices? I agree completely with the notion that Medicare rates are vastly inferior to a sustainable business model. Any plan that increases Medicare (or even Medicaid rates) will certainly mean fewer hospitals, and fewer doctors. Perhaps that is exactly how reducing health care inflation will occur.

    Insurance doesn’t equate to access. In this case, poorly paying insurance will actually mean less access as the good CEO states correctly that hospitals will close, and providers will quit, or they will stop accepting a money losing insurance standard and turn to a cash only model of care.

    The whole idea that some how Medicare is the acceptable standard is simply false. Medicare rates are a major part of the problem that got us into the mess we are in today. We all pay to subsidize inferior, less than cost, Medicare rates that pays for all the wrong benefits at all the wrong prices.

    • IVF-MD

      HH: I am not sure if I understand you incorrectly or if we are just in full disagreement.

      When you say Any plan that increases Medicare (or even Medicaid rates) will certainly mean fewer hospitals, and fewer doctors., I would think that the OPPOSITE would happen. Can you please elaborate?

      • Vox Rusticus

        I think it’s obvious he meant the increase in the prevalence of Medicare rates or of the scope of the Medicare-rated reimbursement “market.”

        • IVF-MD

          My apologies. I misread it as referring to the reimbursement rates, as in the dollar amount. Never mind. -_-

      • The Happy Hospitalist

        I wasn’t referring to the increase in Medicare payment rates, but rather an increase in the penetration of Medicare or Medicaid into markets, thereby increasing the rate of substandard insurance payments.

  • SmartDoc

    Economics 101: pay hospitals & doctors less than the cost of providing services and said services promptly vanish.

  • Healthcare Observer

    The answer surely can’t be to start raising rates substantially as the US is already paying much more for healthcare per head. The answer surely lies in stopping the huge overtreatment and testing in American hospitals, and paying the people who run them less than corporate level salaries.

    • Anonymous

      sure, it’s always pay them less because you feel like they don’t deserve it despite you not having a conception of their job or the infrastructure constraints that force hospitals and providers into their current practices. if your moniker is indeed reflective of comprehensive knowledge of cost structure of health care, then you would realize reimbursements do not account for a high yield area that can be altered to cut costs without substantially affecting access and quality. ‘surely,’ practice environment changes beget positive adaptation of individual practicioners and hospitals better than directives from a centralized bureaucracy that it seems your ilk seek to run.

      • IVF-MD

        How about this innovative idea? We, as consumers/patients pay providers as much or as little as WE choose based on how much we think it is worth to us and how much value we think we will be getting. No subsidies. No caps. No artificial bureaucratic regulations. No coercion. Let free people decide.

        Furthermore, how about lifting restrictions on who out there can compete for our healthcare dollar so that the barrier to entry for healthy competition is not so great?

        If somebody wants to open up shop and offer MRIs or blood tests or colonoscopy or In-Vitro-Fertilization or primary care at a lower price with better service, then let them try. The burden is on them to build a reputation so that people would be willing to entrust their care to them. But by lifting monopolistic restrictions, it makes everyone make a better effort which is what we, as consumers/patients want. We want quality doctors and labs to freely compete so that the prices come down and the service goes up. Isn’t that how it works with everything else?

        Granted there are going to be inherent hurdles, such as transparency and making contingencies for catastrophic events, but that’s where innovative smart people will figure out ways to fill those needs. Somebody will come up with a way to make a living organizing an accurate provider-rating system. Someone will offer a plan of paying for our catastrophic illnesses based on us paying them a regular premium (ie an insurance company). In addition, keep in mind that people will quickly awaken to the reality that they have to do their due diligence when making decisions and that relying on politicians to decide on their behalf might delude them into feeling safer, but it’s a false sense of security by any standard.

        Historically, price controls have never achieved their overall goal beyond maybe a few hours. In all instances that I know of, the magic power of the free market machine starts to whirl in the background so that when all is said and done, the artificial price controls or subsidies end up achieving nearly the OPPOSITE of what they professed to achieve.

        I’m open to being educated on any historical example of when price controls were a success. Until that happens, I will remain (temporarily at least) a believer that social goals can best be achieved through persuasion and incentive rather than by coercion and force.

        • SmartDoc

          Brilliant points! Bravo IVP-MD!

        • Healthcare Observer

          This is the usual nonsense that has been discussed in other posts. The last thing an already fragmented healthcare system needs is more unintegrated diagnostic and treatment shops springing up away from the lifeblood of medicine, which is multidisciplinary expertise in a teaching hospital or network setting.

          • IVF-MD

            The point, HO, is to let people decide for themselves. They like that. I know I do.

            You speak often of integration. So those who want INTEGRATION can choose the integrated models. If they have to pay more and sacrifice service (longer wait times) and fewer options to choose from, maybe it’s worth it to them in order to get the integration that they so highly desire.

            Other people, who want quality care, with convenient hours and lower fees can choose to sacrifice “the value of integration” for the criteria that they want.

            In time, the people will decide which format succeeds. If integration is the holy grail, then you won’t have to worry about all these high-value low-cost alternatives springing up, because nobody will patronize them and they will go by the wayside. OR perhaps they will adopt ways to form alliances that integrate and provide even better care. It’s arrogant for a few elite bureaucrats in a distant ivory tower somewhere to dictate what the people want as if they could possibly know what that is better than the people themselves could. My view, shared my others, is that freedom and choice beats political coercion in everybody’s eyes (except of course, in the eyes of the politicians who seek to benefit from the grab of power). Makes sense.

          • SmartDoc

            The VA, the Indian Health Care System, and Public hospital/clinic systems are all “integrated diagnostic and treatment shops in the multidisciplinary expertise of a teaching hospital or network setting.”

            And they truly suck.

  • David Allen, MD

    I can’t completely disagree with cutting Medicare payment rates. It would be one way of attempting to phase out Medicare all together (though not the best way). A better way to proceed, though, would be to slowly phase out the system by increasing the age of eligibility by two years for every one year that passes. This will allow folks to know what is coming, and will slowly diminish payments as the number of people eligible will slowly decline. This slow progression would also allow private insurance companies to prepare for the coming demand (a demand they have been deprived of by Medicare) and to meet that demand.

    In addition, Medicare should simply allow for balance billing (allowing physicians to collect from patients their own fees, that are not covered by Medicare). This would make patients again pay attention to costs (to some degree).

  • Vox Rusticus

    Why not just allow balance billing of Medicare with a requirement of menu pricing or an alternative of a “price not to exceed” notice as is done with current ABNs?

    Price caps just don’t work, unless you intend to restrict overall consumption by the inevitable reduction in supply (except for the black market.) The legislators of the Bay State need to be better students of history. They might start with postwar Eastern Bloc Europe before 1989.

  • Stalwart Hospitalist

    David makes an interesting suggestion, but I would offer that you can’t raise the eligibility age faster than one year per year, or you will have already eligible Medicare beneficiaries become ineligible as the age minimum passes them by. Even at one year per year, you’re essentially saying that the only people who will ever be eligible for Medicare will be those who are already eligible now.

    • David Allen, MD

      Stalwart Hospitalist. Sorry. I actually was trying to say to raise it by one year for every two years that pass. That’s the slow phase out I was promoting.

  • family practitioner

    How about means testing for medicare?
    There are many well-off retirees who could contribute more to their insurance coverage.

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