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.

How efficient is Medicare?

One of my critics offered the following response to my last post: "The most efficient payment system we have now is Medicare. If everyone were enrolled, payment for all services would be the same and automatic. Insurance companies would no longer be involved in the risk, which is where all the fraud and abuse occurs." His input is appreciated since it focuses the argument. Medicare for all is a commonly heard opinion, essentially the idea put forth by Bernie Sanders during the recent primaries.

Medicare is widely popular. Efforts to change it are "touching the third rail" for politicians. Who doesn't like walking into almost any medial provider, presenting a card, and getting full service. No charge if you've bought a Medicare supplement. Why not just let everyone in on this great deal?

There is one problem that most people are aware of but don't like to think about too much. The system is going bankrupt. Just to give you an idea, the present unfunded liability, which is the amount that is promised in the future for all present eligible citizens but not covered by taxes, is in the range of $50 trillion. Where's our country going to get that kind of money? Well I guess we could raise taxes.

The problem is that's already been done. Part A, which pays for hospitals and home health, is financed through the Medicare payroll tax which everybody pays. That started out way back at 0.3% of your paycheck but now it's up to 2.9% unless you make over $125K in which case it's 3.8% and, unlike Social Security, as of 1994  that applies to 100% of your paycheck. Despite these increases the Part A trust fund has been spending more than it takes in for several years and is predicted by the Medicare trustees to run out completely in 2026. That's 9 years from now folks.

For Part B, which covers doctors, lab tests and medical devices, seniors are charged a premium which is adjusted higher according to their income, and which has been increasing rapidly for everyone in recent years. Originally those premiums were supposed to cover half the bill with the general taxpayers covering the rest. For the last 10 years or so what the seniors pay has dropped to 25% with 3/4 of the cost being added to the national debt.

So for Part A we could raise the payroll tax and take more out of everybody's paychecks. That's not going to be popular considering our stagnant wages. For Part B 3/4 of the costs from the general funds seems like something of an outer limit. We could ask seniors to take a big bump in their premiums, also not likely to be too popular. In fact the amounts involved in each case are a big deal, increases probably not politically feasible.

What else could we do? Here's another idea that some are pushing. Raise the eligibility age, say to 67. Surveys show that present day Medicare recipients are OK with that. No surprise there. Younger folks not so much, although surveys also show that a lot of the youngsters don't expect Medicare to be around for them anyway. But wait a minute!! I thought we were talking about including everyone, not cutting people out. Back to the drawing board.

One other solution that no one likes to talk about is the ace in the hole. Medicare could do some serious rationing. CMS does some of that now, but not enough to be really noticeable. Nevertheless It's a big way that central payers in other countries control their costs, and we're told we should learn from them. The problem we have in our country is that we've got this private system to compete with and how would it look if the feds couldn't manage to provide the same services as the greedy insurance companies. What's worse is that those pesky companies have to do it all with just premiums. No taxpayers to back them up and definitely going into debt is not an option. No profits and they're kaput! Get rid of that troublesome competition and things would go a lot more smoothly.

I think it's fair to ask how all this fiscal problem can possibly be. After all CMS, the agency that runs Medicare,  rigidly regulates the whole blessed thing. Each service, from heart transplant right down to drawing a tube of blood, has a fixed price and its payment is authorized only by absolute necessity. Somehow looked at this way the system doesn't seem all that efficient. I think I know the answer. Stay tuned to this station.

The real cost of free medical care. Concrete examples.

Our system of indirect payment for medical services by insurance or government programs is supposed to be shielding us from high cost and improving access. In fact it is doing exactly the opposite. This arrangement is in fact greatly inflating medical costs, restricting their availability and retarding innovation. I'm going to post a series of concrete examples - things I observed in my own practice.

As a diabetes specialist most of my patients did home blood sugar testing. A tiny drop of blood from a fingerstick is placed on at test strip which is read in a meter. There are a large number of meter companies, each with their own brand, and importantly the test strips are proprietary, each meter requiring its own type of strip. Until the last 2 or 3 years these meters were priced in the range of $100 in most pharmacies although more recently prices have come down drastically. The reason for this is that the meter is a one time sale and the profit for the producers resides in the test strips which require ongoing use. Companies do not rely on meter sales and in fact give meters away in doctors offices to be given to patients who then are tied to those specific strips.

All insurance companies and government programs cover the strips so that to the insured patient they are either "free" or require only a small copay. As time has gone on all the major brand name companies have refined their strips, improving their speed and accuracy and raising the prices accordingly. At the pharmacy the price of the major brand name test strips runs around $1.50 per strip and can run up over $2.00. To be sure pharmacy benefit management companies, insurances, Medicare and Medicaid reach agreements with the producers to lower those prices and I am not privy to that information but they are expensive nevertheless.

In the case of most medical items it is not possible to know the true market price, that is the actual price at which a producer can sell his product to a cash paying consumer and make a profit. Normally prices are set with insurance payments in mind and are grossly inflated but adjusted by discounts to insurance companies and by price setting arrangements with government agencies. The case of blood glucose strips is unusual in that Walmart sells a series of meters and strips for cash payment to the public at roughly $10-20 for the meters and roughly 15-20 cents a test strip, that is 1/10 the published price of the major brand name strips, which in fact, unlike the Walmart strips, are sold almost exclusively through insurance. I have assessed these Walmart strips and found them to be equal in speed and accuracy to the high cost brand name strips which I used regularly in my office.

In my office extremely few of my patients used these low cost strips, maybe 2 or 3%, despite the fact that I made an effort to inform the patients of their availability and welcomed their use. Why would anyone pay even a small amount for test strips when they can be obtained for free with one's insurance. In fact the free strips became a problem with wastage, prompting Medicare to regulate their use, limiting the amount authorized to 1 strip/day for diabetics not using insulin and 3 strips/day for those using insulin. Such arbitrary regulations are nonsensical since many factors other than insulin use, including importantly patient preference, determine how many strips are used. In fact such regulations do not stop wastage since many patients obtain but do not use their allotted amount and at the same time many others require more than they are allowed.

Who does buy the low cost strips? Well for one the uninsured who attend the free clinic where I work once a week. These low income people find the strips that are sold at Walmart at the market price to be, as they say, "affordable". Even if they test as often as 4 times daily the cost is well under $1 a day instead of the $6-8 dollar cost of the strips that are "free" to those with insurance.

Of course as we all know the "free" strips are not really free. We pay for them through the insurance premiums that our employers pay for us as part of our compensation and in the taxes we pay and the debts accumulated by government entities. But the "free" strips cost more than you might think. In addition to their inflated price caused by elimination of market forces we pay for the wasted strips that are acquired but not used. And in the process of obtaining them we also pay for the time of the people in doctor's offices and pharmacies filling out forms, the computer systems required for billing and coding, the legions of clerks in the insurance companies and government agencies as well as the bureaucrats and consultants in the meeting rooms working out the regulations needed to keep the system going.

Our medical payment system is shot through with this type of thing and it is crying for reform.

What to do about Pre-existing Conditions.

So what about "pre-existing conditions"? A complicated problem!

To begin with it's pretty clear that the overwhelming majority of our citizens, regardless of political persuasion, accepts that everyone in our country who has serious illness, even when it's caused by bad health habits or personal neglect, should have access to at least reasonable medical care appropriate to that illness without causing major financial hardship. Let's put aside the "medical care is a right" argument and submit instead that in a country with such abundance it is not humane or socially prudent to ignore people who are ill or injured who could be readily treated.

In fact in my 50+ years of medical practice that's always been the prevailing attitude. When I was a kid doctors commonly saw poor people for free and there was no charge at the Scranton State Hospital. In the days before federal government intrusion when I was a student and intern in Phillie we had the ward services at Temple and Penn and of course there was Philadelphia General, all free to all comers. I did my residency at San Francisco General where there was no charge and all California counties had something similar. To be sure this was second tier care by doctors in training but in those days of low tech there wasn't really a heck of a lot of difference between how we treated patients on the ward and private services.

Nowadays this system has been replaced by Medicaid and obligatory Emergency Room and hospital care. We treat people who are seriously ill or injured first and worry about payment later and oftentimes such patients are then enrolled in Medicaid, at least temporarily. Medicaid is a terrible system, at the same time both excessively wasteful and underfunded, but it limps along in a crazy way, often providing its beneficiaries high cost items that the taxpayers who fund it can't afford.

The problem, of course, is the small percent not poor enough to be on Medicaid but for one reason or another left out of the insurance game. Particularly this is problematic for those with some form of stable chronic illness who have no one who will sell them insurance even if they could afford it. These people are stuck facing the grossly inflated prices for medical services caused by the fact that everyone else has some third party paying their way.

The knee jerk response has been to mandate that insurance companies sell policies to such individuals, and to do so for premiums that are too low to cover their costs which of course increase dramatically as soon as insurance takes care of the bill. If this is our answer then there is little point in complaining about the high cost of medical insurance for everyone else. It's all well and good to provide such persons with what they need and want, but it's the most wasteful and inefficient way to do it. When you take that approach you've got a new group of people with the highest medical demands really ramping up medical prices which are already inflated by third party payment and lack of market forces. This mandatory insurability device was one of the major causes for the Obamacare financial woes, namely dramatically rising premiums and insurance company losses and withdrawals.

So what IS to be done about the problem. The new Republican offering is complicated and disjointed, cobbling together a bunch of somewhat contradictory approaches to accommodate all sides. Nevertheless it contains several good ideas. I like especially the major escalation of health savings accounts, and the potential devolution to the states of control over Medicaid and provision of help for high cost individuals. It seems like a good idea to get multiple different centers working on solutions to these difficult problems.

Fundamentally though the solution to our medical economic problems rests in dramatically lowering the prices of medical goods and services by finally exposing them to market forces. We need the 350 million of us out there looking for the best value and all the hundreds of thousands of providers competing with each other for their business. How much better for all of us, but most especially the poor, if our medical goods and services were many times cheaper and more efficiently rendered.

Employer based health insurance is the wrong way to go.

Employer based insurance for medical expenses came about in the U.S. largely during WWll when wage controls were imposed to assure that there would be no labor problems during the tremendous effort to produce munitions. In lieu of increased wages Kaiser shipyards offered medical care to attract employees and that started the trend, one that the federal government solidified by making this employee benefit tax exempt. Whatever its merits originally, employer based health insurance today is a net negative.

Despite the illusion that the employer is paying the bill, the health insurance benefit is in reality part of the overall worker's compensation. However, perversely, since someone else appears to be paying, employees want the most generous benefit possible and often fight tooth and nail to obtain what they would consider grossly wasteful if they were paying the cost - which in reality they are. Who would, for example, wish to purchase homeowners insurance that paid for a handyman to come to fix chipped paint or auto insurance that covered oil changes. And who does not seek to obtain lower premiums for these types of insurance by increasing deductibles. Although we might use the handyman or Jiffy-Lube, we all understand that buying insurance for such ordinary maintenance expenses would be an absurdity. But this is the very situation we find ourselves in with our employer based health insurance.

Accepting health insurance from our employers in place of monetary compensation for our labor has many disadvantages. First there is the cost. Although it is easy and pleasant to simply plunk down the insurance card for any medical service, the luxury of not having to shop around comes at a high price. Not only is the oil change at the dealer instead of at Jiffy-Lube expensive but much more than that would be the back end cost of paying by oil change insurance.

In addition letting our employer do the shopping greatly limits our options to the one or two plans he negotiates. Although he for the most part wants to do right by you his eye is on his bottom line and his overall employment pool rather than your individual needs. Worse than that is "job lock". Changing jobs is a big health insurance hassle and how many are stuck in a job they don't like simply because of health insurance coverage.

To be sure the employer based system has some advantages. First there is the tax exemption for the premiums previously mentioned. Secondly group health insurance has big administrative advantages over individually purchased policies and especially if you have some chronic medical problem that can be a big deal. Thirdly is the phenomenon that the employer, at least temporarily, has to absorb the cost of increasing premiums. That advantage however is illusory, since a moment's thought leads to the understanding that such increases replace wages, and of course lead to policies with increasing copayments and deductibles.

These advantages are not worth the defects and are reportedly being addressed in the new health care deliberations. Firstly if we are to have federal tax exemption for health insurance it should go to everybody regardless of employment status. Secondly, any authorized association, such as churches, social organizations or disease advocacy organizations should be allowed to offer group health insurance, and not just employers. Thirdly the market for health insurance offerings should be expanded nationwide. If there was ever a case where interstate commerce laws should apply, this is it.

We should buy our own health insurance that will stay with us regardless of who we work for. And there should be a wide market with various associations allowed to compete with group policies. Purchased this way we would seek policies which covered only large items with substantial deductibles, and with riders that guaranteed coverage of any new unexpected illnesses. We would see much more stable, appropriate coverage with much lower premiums. And we would get wages for our labor instead of high cost, excessive health insurance. This arrangement would go a long way to addressing the "pre-existing illness" problem. But that is a matter for another time.

Obamacare requires every employer with more than 50 employees to provide health insurance. Needless to say I think this is the wrong way to go by 180 degrees.