Price Fixing by Medicare. The Premiere Medical Monopoly.

United States antitrust law, starting in 1890, has regulated the conduct of business corporations to promote fair competition for the benefit of consumers. Government prosecutors bring cases against monopolies and major corporate mergers which appear to be stifling business competition so as to interfere with the functioning of the free market. Sometimes such cases are controversial and are litigated in court. However, some practices are deemed by the courts to be so obviously detrimental that they are categorized as being automatically unlawful, or illegal. The simplest case of this is price fixing, in which a group of businesses, known generally as a cartel, collude to set the price of a good or service so as to avoid competition. In a competitive market producers try to reduce their costs through efficiencies and innovations so as to reduce their prices and gain market share. Those who do so the best will prosper the most and consumers are the beneficiaries. Those who do not measure up will fail. The cartel is set up to protect its members from such competitive forces at the expense of the consumers.

In 1975 the U.S. Supreme Court ruled in the case of "Goldfarb v. Virginia State Bar" that the antitrust statutes applied to the professions as well as other businesses. The ruling was primarily to prevent State law bars from setting minimum legal fees, but the ruling applied to the medical profession as well. The fact is that before Medicare it was customary that doctors entering practice in a community were obliged to adhere to a minimum fee schedule imposed by their local medical society. Doctors were concerned about preventing price competition and maintaining the financial security of their membership. The Supreme Court decision affirmed that such an anticompetitive arrangement was harmful to consumers of professional services. But the reality for doctors was that the introduction of Medicare in 1965 made this a moot point by securing their fees which, in the absence of any consumer restraint, then entered a period of rapid inflation.

The Medicare bureaucracy, after failing to control this period of fee inflation by other means, in 1983 introduced a fee schedule for hospital care, and in 1992 fixed fees for medical services. Thus was introduced the very monopolistic anticompetitive system for which the government prosecutes business entities and which the Supreme Court has ruled against. The price fixing extends beyond the Medicare beneficiaries since almost all private insurance reimbursements other than for pharmaceuticals are based upon the Medicare fee schedules.

Medicare price fixing has the good intention of controlling price increases but has the unintended consequence of precluding price competition thus inhibiting market forces which lower prices. Medical providers set fees based on insurance reimbursements rather than on costs, consumer restraints and competition. Efforts to maintain and enhance income are directed toward providing procedures which are tied to fees that offer the highest profit margins, complying with fee enhancing regulations and simply increasing the number of procedures which are paid for and decreasing those which are not. Doctors of course are in the business of treating patients and are motivated by a number of forces to do the best job they can. However this situation produces a number of perverse incentives that inhibit efficiencies and innovations, produce waste and cause considerable distortions of provider supply some of which I will detail in the next post.

Possibly the worst aspect of this fee control system is the necessity to tie it to ever increasing complex regulation designed to define the procedure which the medical provider must perform to justify the fee which is claimed. In an attempt to preclude gaming of the system documentation is required which has become absurdly complicated, time consuming and expensive. Items such as the number and type of questions asked about the illness, the number of parts of the body inspected, whether aspects of the patient family or social history are included must be counted and have substantial impact on the fee received. In 2009 as part of the federal government stimulus package electronic record keeping was set as a "critical national goal" and various financial stimuli and penalties were put in place for doctors to adopt computerized records. Unfortunately government mandated computerized documentation has added dramatically to the cost of medical practice, has substantially interfered with patient doctor interaction and has virtually destroyed medical records, converting them from a means of medical communication to one of payment guideline documentation. In fact none of this has any positive impact on actual patient care or outcome. Although most physicians have adapted to the system, the way a frog in a heating pot of water adapts and remains in place, it is madness, the stuff of Franz Kafka and Alice in Wonderland. Does any patient with a medical concern care about such things?

What's Happening to Independent Medical Practice?

"Single payer" is another way for saying somebody else pays. Of course the single payer is using our money, but it is convenient to let somebody else worry about the cost. Nevertheless we've forgotten about the old adage, "He who pays the fiddler names the tune".

 

Medicare has been our single payer for everyone over age 65 for the past 50 years. We've given the job to the CMS bureaucrats to worry about the cost, but what can they do? They're not in the doctor's office with you to decide whether you really need this or that test or how often you should come back for a visit and so on. How are they supposed to figure out what the right fee should be for any of the millions of medical transactions that go on every day. So they do the only thing they can under the circumstances, they issue regulations. They put out fee schedules and tell medical providers what they have to do to qualify to get the fees. And this is how they name the tune and run the show.

What's going on in the present bureaucratic highly regulated system reminds me of when I was in the Army and I found out that the way to prosper in that environment was to learn the regulations and use them to get what you wanted. The master sergeants were the ones who played the regs like a Stradivarius. Not that they were bad guys - just the opposite. They just did what any smart person would do considering the incentives. Later when I worked in the VA for a couple of years it was pretty much the same thing.

Well bureaucratic regulations seem like a necessity in the military, but in medical practice? Unfortunately that's where our Medicare single payer has lead us. Complying with regulations is a large part of what your doctor does every day. And to a considerable extent it's taking away from his thinking about you, sometimes even more than he realizes. For the young guys it's the environment they're used to. (For you gals I'm sorry but it's just too cumbersome not to keep using the default English male gender).

In all the medical economic blogs we keep reading that independent medical practice is rapidly declining, now under 50% and even around 35% of doctors in one source I read. Doctors are fleeing to salaried jobs with hospitals and big medical organizations. It's the regulations folks! They're just too complicated and expensive for the little guy. Well you say, what else is new. Isn't consolidation what's happening all over the economy? Well I think it depends on the type of business and how personal you want it to be, and it's hard to think of anything you want more personal than your medical care. I clearly understand the lure for doctors to work for a medical conglomerate as opposed to having an independent practice. I've been in both situations. Especially in the present difficult environment the temptation is great to abandon your independence and leave the complex legalistic and economic headaches to others. But there is a subtle difference in your allegiance. As long as the dominant mode has been independent practice, looking out primarily for his patient's interest was the norm that all doctors adhered to but I fear for how things will go when all doctors become employees of big entities, the point toward which our system seems to be rapidly heading. Then will doctors become just the highly skilled technicians following disease protocols that the medical leaders and bureaucrats envision? Then not just doctors but more importantly patients will be part of the medical brave new world where it is more society's and less individual interest that determines the nature of your medical care.

Medicare, the American Version of Central Payer

Medicare is the American version of "central payer" for everyone over
65, a segment of our population which consumes a disproportionate
amount of medical services. Medicare is popular because it seems like
a good deal, so much so that politicians like Bernie Sanders want to
extend it to the whole population. Unfortunately Medicare has a fiscal
problem in that every day it is substantially adding to our
dangerously high national debt and is rapidly heading toward
bankruptcy.

CMS, the agency that runs Medicare, has been trying hard to get out
from under this financial difficulty by imposing increasing amounts of
new regulations which thus far have added to costs rather than
reducing them. The reality is that if the program is to continue in
its present form the solution must reside in some combination of
either major increase in taxes and fees, serious rationing of
services, or substantial reduction of payments to providers, the same
devices that are used in other advanced countries with government
controlled medical care. Understandably politicians are reluctant to
do any of these things, which would be highly unpopular and in many
ways counterproductive. Americans have been enjoying life on their
credit card but eventually we're going to reach our limit.

Medicare's fiscal problems are well known even though they are too
unpleasant to be talked about much. Less obvious is that Medicare
through its regulations has been adversely affecting the nature of
medical practice for decades but in recent years there has been a
regulatory firestorm which is having major bad consequences for
patient care. I would contend also that Medicare, through its dominant
influence, and government intrusion generally in our healthcare
system, has been a major factor in causing inflated medical prices,
which mostly hurt the poor, as well as disruptions of services
including distortions in distribution and impedance of innovation.
Thus we have a system which was designed to make medical care less
costly and more accessible causing the exact opposite effect.

But first let's examine the fiscal problems. CMS sets the price paid
for every single medical item, large and small, and allows payment
only for those which it deems to be necessary. Why then its economic
troubles? The answer is the same one that has always caused centrally
controlled economies to be consistently outperformed by the free
market. It's the conceit that somehow a central committee of experts
can make economic decisions for individuals better than they can make
for themselves.

The free market works to distribute goods to their best uses and keep
prices as low as possible. Consumers seek around for what satisfies
them for the best value. They behave differently depending on how the
bill is being paid. If you send your teenager out to buy himself a
pair of jeans you can give him your credit card or you can give him a
$100 bill and ask him to bring back the change or you can give him the
same bill and let him keep the change. In either case the result will
probably be serviceable clothing but a world of difference otherwise.
From the producer's standpoint the competitive market makes them work
to produce things that people want at a price they are willing to pay.
Whoever succeeds best will gain market share and prosper. Whoever does
not will fail.

Some contend that medical care is different, that it's too highly
technical for individuals to make their own decisions. But we purchase
high tech things like cars and computers all the time without knowing
the details of their inner workings. And in fact patients also make
medical decisions all the time, including those that are critically
important. Except sometimes in emergencies they decide when and in
what way to interface with medical care providers, and whether or not
and in what way to follow their recommendations. If I recommend a test
or procedure is the patient obliged to accept? Of course not. The
patient, like the consumer in every other area, is the final
decision-maker. And in fact it is the patient who makes the economic
decisions as well, but in the context of a distorted system bad
results follow. When offered items at no or little cost there is no
incentive to decline except where there is risk or pain involved.

Those who jump to the "central payer" idea will accuse me of being
hard-hearted, of having no sympathy for the poor and unfortunate. On
the contrary! It is they who are unwittingly favoring high prices and
restrictions, not just for the poor, but for everyone. Medical goods
and services are not free. Doctors and nurses and technicians will not
work without being paid. Likewise hospitals and nursing homes and
medical equipment must be paid for. The question is how to pay. In the
central payer scheme I give my money to government bureaucrats to take
their share, then parcel it back out, while regulating the providers
and restricting my choice. When I pay directly and control the funds I
select what service suits me the most and the market works to lower
prices. I buy insurance, not for ordinary costs but for unlikely and
unforeseen circumstances because in such cases I want the money I
spend on insurance to provide generous coverage. Yes there are those
who through misfortune or lack of foresight or indolence are unable to
afford basic care and for whom society should provide. Other than that
the intervention of society does more harm than good.

But if the truth be told it is not the unfortunates who are the chief
interest of central payer proponents. In such a highly commercial
society as ours is we should be immune from ads that claim to give us
items that are "absolutely free". But the idea that someone else is
paying is a siren song that is too sweet to be resisted. The
government will arrange things so that "the rich" will pay more and I
will pay less, the rich being anyone with an income larger than mine.
The link between this arrangement, high taxes and restricted services
is papered over as much as possible. But what is completely lost sight
of is the tremendously destructive effect of eliminating market forces
which bring down prices and reward efficiency and innovation. I've
tried to give some examples from my personal observations in previous
posts and I'm going to continue doing that.