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?