Let's evaluate medical prices by a concrete example. Recently I got a bill for $70 from a lab for a PSA test that I had done last year. This is a screening test for prostate cancer that I like to have done yearly. I had to get some other lab work done so it was convenient to do it when I did. Normally my Medicare coverage would pay the bill but Medicare approves this as an annual test and I happened to be one month early. I don't normally keep that close track of the exact dates of my tests. It's not important to me since the yearly timing for this test is really pretty arbitrary, but for the Medicare regulators it's not necessary at 11 months and 30 days, but is warranted at 12 months and 1 day.
I have access to the Medicare price list so I checked it out and found that Medicare would ordinarily pay the lab $25 for the test and at that price I can assure you that the lab is making a profit. I know that because for a few years I and three other doctors who shared office space had a small office lab and even with a low volume of tests it produced a small income with mostly Medicare payments.
Well where does the $70 charge come from? Medical providers base their charges on insurance reimbursements rather than on market forces of supply and demand. The charge is set to capture payment from the most generous insurers, as common sense would dictate. By law one cannot charge Medicare differently from other insurers but the difference is written off, as it is with other insurers with which the lab has a contract. Of course there is normally little impact on the recipient of the test for whom the charge is $0 unless there are copays and deductibles, but even then almost everyone is protected from the $70 charge by their payer's contract. The only ones who pay the full price are those with no insurance, or those like myself who were thoughtless enough to wish to suit their own convenience.
But wait, there's more. What would be the true market price of the test based on the lab's cost together with the best profit it could achieve in the face of its competition? Well that would only be discoverable in the actual market, but I tried to take an educated guess since I at least know about operating an office lab. Searching the lab supply web sites I found test kits for 100 PSA tests for $350, so $3.50 per test. Of course the lab has other costs and the biggest in any medical operation is personnel. My best guess is that the real market price that one would pay in the absence of insurance or Medicare would be in the range of half of the Medicare payment, $10-15. Keep in mind that some significant part of the lab's cost is involved in the billing process for Medicare and all the insurances. I can't say for sure for labs but for most medical offices this would be in the range of 5-10% of receipts.
I don't know the Medicare process for setting lab test reimbursements, but physician payments are governed by a 30 person committee composed of doctors from every specialty. As in any centrally controlled economic system, as intelligent and possibly as unself-interested as the members of this committee might be, there is no possible way for them to have the on the spot knowledge required to know what the market price should be. Furthermore by setting prices the system is foregoing competitive forces. When all competitors get the same payment there is less incentive to increase efficiency and productivity since doing so will not result in a gain of market share by lowering prices.
The bottom line is that medical prices are far higher than they should be because of our tendency to pay by insurance and yes, Bernie Sanders, because of Medicare. Furthermore since the person who pays the fiddler names the tune our system is paternalistic, requiring permission for everything, so that my test must be done at the convenience of Medicare and not my own. When politicians tell you that they are going to save money for Medicare by eliminating waste you should understand that Medicare by its structure is inherently wasteful. The true cost of that waste is the value of the alternative uses for which these resources could be used.
No comments:
Post a Comment