The Problems With Reforming Medicare

Speaking to seniors at an AARP panel on health-care yesterday, President Obama defended his administration against the worry that "saving money" on Medicare would necessarily entail cutting benefits. "Nobody is talking about cutting Medicare benefits," Obama said, according to the Wall Street Journal. Instead, he said, the savings will come from reducing waste and inefficiency in the system. 

Two points:

First, there's genuine reason to worry that reducing Medicare payments would reduce access to doctors. Shifting costs onto doctors will make it tougher for them to operate, and some may respond by simply turning away Medicare patients. This should not be surprising: Medicare fees, which reimburse doctors at rates set by the government, are essentially a form of price control, and price controls almost always exacerbate the possibility of shortages.

Second, it's true that White House budget director Peter Orszag has long argued that there is a significant amount of waste in the Medicare system. He says the government may be able to cut costs by as much as 30 percent. But as former Reason editor Virginia Postrel has already wondered, if that's true, why not simply reform Medicare first and hold off on the rest of the health-care system?

Furthermore, shouldn't we be suspicious of expanding government influence in the health-care market if large government medical programs result in massive, well-documented fraud, waste, and abuse?

Read Reason's archive of health-care coverage here.

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  • The Wine Commonsewer (TWC)||

    If we are all to have mandatory, universal health insurance coverage why do we need to reform Medicare? Can't we just abolish it? And every other tax paid health service? Surely we won't need to pay for illegals ER babies or welfare queen's appendectomies anymore. After all, they'll all be covered by mandatory health insurance.

  • ||

    But, Peter, haven't you heard? The right people are in charge now.

  • Warty||

    price controls almost always exacerbate the possibility of shortages.

    Almost? When haven't they?

  • ||

    It's not really a price control. A price control is when the government says that no one can charge or pay over a certain price, and then punishes those who violate the rule.

    Medicare is simply a (major) buyer who is offering to pay below market prices. A doctor might take that price (in the short term) if 1) he still covers his marginal costs, and 2) he can't get enough other higher paying patients. In the longer term, if he can't get enough patients to cover both his marginal and fixed costs, he will go out of business or have to cut back on his fixed costs.

  • New World Dan||

    This should not be surprising: Medicare fees, which reimburse doctors at rates set by the government, are essentially a form of price control

    But again, let's be honest. That's exactly the way private insurers work. Private insurers and HMOs set rates that they impose on providers. And if you want to accept patitents with a given insurance program, you have to accept the given rate schedule. That's why my own health insurance is only works at about 65% of the clinics in town here.

    The problem I have with that is that it creates a lack of transparency. No one knows what their health care really costs, and no one cares. And even worse, no one talks to their doctor about options and the price of them.

  • ||

    "In the longer term, if he can't get enough patients to cover both his marginal and fixed costs, he will go out of business or have to cut back on his fixed costs."

    Or drop Medicare patients.

  • ||

    Or drop Medicare patients.

    Until it's made illegal for him to do so.

  • ||

    "Or drop Medicare patients.

    Until it's made illegal for him to do so."

    In which case he just leaves the business and finds something else to do with his life.

  • Rich||

    "Or drop Medicare patients.

    Until it's made illegal for him to do so.

    In which case he just leaves the business and finds something else to do with his life."

    Until it's made illegal for him to do so.

  • ||

    Or drop Medicare patients.

    Until it's made illegal for him to do so.

    In which case he just leaves the business and finds something else to do with his life."

    Until it's made illegal for him to do so.


    And then he moves to Costa Rica...

  • ||

    That's exactly the way private insurers work

    Exactly. 94% of insurance markets are saturated. Doctors and hospitals have to eat shit and accept below market rates from insurance companies or risk forgoing those patients that have the dominant insurance. They aren't "negotiating" anything at all. The insurance companies have more levearage because of their market share Yet no one bitches about that when insurance does nor when Wal-Mart does it or any other large private organization. But god forbid the government do the same thing (despite what the dishonest folks say that ain't price controls.)

    Until it's made illegal for him to do so."

    Except that many doctors have already stopped accepting Medicare patients and yet there is no mandate to accept. And are we really to believe that the US Congress will vote to force doctors to accept Medicare? Not gonna happen

  • Rich||

    It better not be turtles all the way down!

  • Gunboat Diplomacy||

    "Furthermore, shouldn't we be suspicious of expanding government influence in the health-care market if large government medical programs result in massive, well-documented fraud, waste, and abuse?"

    But we have the right people in charge now.

  • ||

    Isn't The Obamessiah also saying he won't cut out the massive Medicare waste and fraud if he doesn't get his healthcare plan?

  • ||

    Exactly. 94% of insurance markets are saturated. Doctors and hospitals have to eat shit and accept below market rates from insurance companies or risk forgoing those patients that have the dominant insurance. They aren't "negotiating" anything at all. The insurance companies have more levearage because of their market share Yet no one bitches about that when insurance does nor when Wal-Mart does it or any other large private organization. But god forbid the government do the same thing (despite what the dishonest folks say that ain't price controls.)

    SUPPLY KURV!

  • Gunboat Diplomacy||

    Dear Peter,

    What's that idiot Palin's terrifying plan for healthcare reform?

  • ||

    Doctors and hospitals have to eat shit and accept below market rates from insurance companies or risk forgoing those patients that have the dominant insurance.

    Really? It really costs a hospital $15 for a Tylenol? Because that's what they charged my insurance company, and that's what they got paid, BTW. Also, if hospitals were taking it up the arse so badly, why are they building them on every freaking street corner? Medicaid and Medicare pay far less than private insurance payments, plus insurance payments are negotiated with hospitals all the time. Medicaid and Medicare payments are dictated to the providers and non-negotiable.

  • ||

    ChicagoTom,

    Laws for mandating that insurance companies be required to cover people with pre-existing conditions are bandied about constantly, but a law requiring that doctors have a certain percentage of their practice devoted to price controlled patients is a whacked out libertarian fantasy?

    If enough doctors pushed back, if it actually became difficult for Medicare patients to get treated, it would sail through Congress.

  • ||

    Laws for mandating that insurance companies be required to cover people with pre-existing conditions are bandied about constantly, but a law requiring that doctors have a certain percentage of their practice devoted to price controlled patients is a whacked out libertarian fantasy?

    Looking at the current climate of Congress, yes it is a fantasy. With 60 Dems they can't even get a public option and you expect people to believe that the GOP and the Blue Dogs will allow passage of mandating accepting Medicare? That is funny!

  • ||

    Really? It really costs a hospital $15 for a Tylenol? Because that's what they charged my insurance company, and that's what they got paid,

    This is an odd line of argument for someone arguing against medicare or a public option.

    They would charge $30 dollars to someone who doesn't have insurance, so what's your point? Insurance does force them to take less than what they want (or what they apparently think the "market rate" for Tylenol is since that is what they charge the uninsured)

    And If a gov't option or medicare forced them charge only $8 would that be a good thing or a bad thing? I think it would fucking great, but people around here are yelling PRICE CONTROLS!!!!!!!11111!!


    Medicaid and Medicare pay far less than private insurance payments, plus insurance payments are negotiated with hospitals all the time.

    1. By your own admission, hospitals are gouging even at the discounted rates. Medicaid and Medicare paying far less is a good thing. No one should be charging $15 for a couple of Tylenol.

    2. You can call it a negotiation all you want, but when an insurer in the state controls over half the market, it's not really a negotiation. Just like with Wal-Mart. They don't negotiate, they demand lower prices from producers and they get them. Why is it ok for the private entities to do it but the end of the world when gov't does?

  • ||

    By your own admission, hospitals are gouging even at the discounted rates.

    As evidenced by their massive margins. Why, some hospitals have a margin threatening to break into the double digits.

    The reason hospitals charge private payers so much is because Medicaid only pays a small fraction of their actual costs for providing service to Medicaid patients, and Medicare pays only a large fraction of their actual costs for providing service to Medicare patients. Its called "cost shifting", and without it most hospitals would close.

    Also, if hospitals were taking it up the arse so badly, why are they building them on every freaking street corner?

    Most hospitals have cancelled any large capital projects that they may have been planning. A combination of the credit markets drying up and "regime uncertainty."

  • ||

    The reason hospitals charge private payers so much is because Medicaid only pays a small fraction of their actual costs for providing service to Medicaid patients, and Medicare pays only a large fraction of their actual costs for providing service to Medicare patients. Its called "cost shifting", and without it most hospitals would close.

    A rather significant number of people who aren't insured don't pay because if they can't afford insurance they can't afford the hospital bill. So I don't think your theory is very valid. What good is cost shifting if the people you shift the cost to don't pay?

    Anyway what are these "actual costs" you speak of?

    These actual costs are inflated because of the current system we have in place where everyone related to medical supplies/care is gouging.

  • ||

    But god forbid the government do the same thing



    Yes, Tom, may god forbid the government from doing the same thing (assuming there is a god). While the insurance companies and Wal-Mart may be monopsonistic, there is a big difference between these types of firms and the government. The worst that can happen if one runs afoul of Wal-Mart is that you go out of business. Stand in the way of a government and your liberty or even your life can be imperiled.

  • EJ||

    "A rather significant number of people who aren't insured don't pay because if they can't afford insurance they can't afford the hospital bill. So I don't think your theory is very valid. What good is cost shifting if the people you shift the cost to don't pay?"

    It's cost shifting from Medicare and Medicaide to private insurance. Some paper i read a while back estimated 20% of the increas in private insurance premiums in recent years was due to increasing "cost shifting" as a greater amount of people have entered public health programs.

  • ||

    US needs to go for rapid increase in supply of physicians and specialist by allowing highly trained overseas doctors to allow to practice in USA after passing similiar evaluation as US physician do like board and other exams but decreasing US residency requirement by just 1 year. In that case supply would cut cost remakably. Also same physician as such treats US citizens when they practice and provide medical tourism. Coronary angiography in India can be done by same high quality in 100 US dollars including docotr, drug and hospital charges. MRI brain with same machine and same quality interpretation is done in 5o dollars. bring the global economy in health care.

  • ||

    Can some of the supporters of Obama's stimulus package explain to me why it's a positive to spend 787 billion to help the economy, but he's now advocating for all sorts of cost saving measures with health care? If the logic holds true that huge government spending is beneficial to the economy, huge government spending in health care would do the same thing. But he's trying to argue now that saving money is the best method of operation.

  • Rich||

    > Can some of the supporters of Obama's stimulus package explain to me why it's a positive to spend 787 billion to help the economy, but he's now advocating for all sorts of cost saving measures with health care?

    No. This would bring (additional) attention to the growing unpopularity of the vast amounts being "spent". The time for fiscal responsibity has come.

  • Rich||

    Send me the "bil". Previewing ...

  • Alice Bowie||

    There is a LOT of fraud in Medicare and Medicaid. Simply going after this would significantly reduce costs. The cost to enforce honesty is going to be worth it...and required for any government run program.

    Nobody wants to give Obama a chance...for many reasons. Including, and especially, political and probably racial in some cases.

    Nevertheless, given the past, I can't blame people for being suspicious/synical.

  • Jed Clampett||

    The Medco link is no good; membership is required to view the article linked to.

  • Medic001||

    How about we start with the root of the problem and quit treating the symptoms.


    If you don't want to spend billions of dollars on diabetics, and unhealthy americans who do this TO THEMSELVES!

    Start early and educate on proper eating. Punish people who don't want to loose the weight, reward the people who take an active part in their health care.

    I'm tired of hearing people say.." Oh I'll go to the gym next week."

    Learn to eat right for crying out loud.

    Eat more veggies than meat. Go for a walk and get off your FAT ASS!

  • Matt Moore||

    Second, it's true that White House budget director Peter Orszag has long argued that there is a significant amount of waste in the Medicare system. He says the government may be able to cut costs by as much as 30 percent.

    And yet, at the same time, fans of nationalized healthcare love to point out that Medicare has tiny administrative costs compared to private insurers. In order to fight the fraud and waste the admin costs of Medicare will have to rise.

    They're trying to have it both ways: Medicare doesn't have the overhead of private insurance! And once we get rid of the fraud and waste, look how cheap it will be!

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