Billions Spent to Make Medicare More Efficient Make Medicare More Expensive

Buried within the American Reinvestment and Recovery Act — the 2009 stimulus bill — was a substantial amount of funding intended to encourage health care providers to adopt new health information technology, including electronic health records for patients. The idea was to get doctors to use computers help patients and increase the efficiency of their medical practice, and it lined up what current Medicare director Marilyn Tavenner described in 2010 as "unprecedented resources" in service of this goal — about $27 billion over a decade.

"Once patients experience the benefits of this technology, they will demand nothing less from their providers," Tavenner wrote with a coauthor in the New England Journal of Medicine. "Hundreds of thousands of physicians have already seen these benefits in their clinical practice."

As of yet, the clinical benefits are unclear. But health providers are certainly getting financial benefits from their new electronic records systems. Not only are they being subsidized to adopt the new technology, the new systems are helping them bill Medicare for even more than before. The New York Times reports:

When the federal government began providing billions of dollars in incentives to push hospitals and physicians to use electronic medical and billing records, the goal was not only to improve efficiency and patient safety, but also to reduce health care costs.

But, in reality, the move to electronic health records may be contributing to billions of dollars in higher costs for Medicare, private insurers and patients by making it easier for hospitals and physicians to bill more for their services, whether or not they provide additional care.

Hospitals received $1 billion more in Medicare reimbursements in 2010 than they did five years earlier, at least in part by changing the billing codes they assign to patients in emergency rooms, according to a New York Times analysis of Medicare data from the American Hospital Directory. Regulators say physicians have changed the way they bill for office visits similarly, increasing their payments by billions of dollars as well.

The result of the new electronic records systems, which not only organize patient records but also manage the medical billing process, has not been an increase in medical efficiency so much as an increase in billing efficiency. They can charge Medicare for more services. And they can charge Medicare for services that offer greater reimbursements.

This should not come as a surprise. It is exactly how the medical establishment has responded to government-directed efforts to reform the health system through technocratic payment systems in the past. As I noted in my feature on the history of Medicare's payment reforms in the January issue, doctors and health administrators end up tailoring their practices to the payment system:

Medicare's twin payment schemes are inevitably beset by what George Mason University economist Arnold Kling calls "the socialist calculation problem." The bureaucrats in charge of setting prices have to come up with a rational basis for the prices they set. They have to be justified, somehow, which is where the complex rate-setting formulas come into play. But without price signals, the result is almost always an arbitrary formula based on a limited, imperfect set of factors. When all is said and done, says Kling, "it's just a made-up formula. It has to be." 

The other problem is that any payment system inevitably ends up being manipulated by savvy payees. "You price on the basis of one thing, but then people optimize their behavior to that thing," says Kling. In a sense this is the primary job of health care administrators: to understand payment systems and squeeze every possible dollar out of them. 

In the wake of the two payment reforms, hospitals began to manipulate the system through "upcoding"—systematically shifting patients into higher-paying DRGs. Research by economists at Dartmouth University suggests that during the early 1990s, hospital administrators figured out ways to substantially increase the number of Medicare cases they billed to higher-paying DRGs. Payment games continue today. In October the Senate Finance Committee released a report accusing several large home health care companies of abusing Medicare's payment rules by pushing employees to perform extra therapy visits, thereby qualifying for Medicare bonus payments, even when those visits weren't strictly necessary. But for many health care providers, that's the business. Hospital administrators "are people whose job it is to game the system," Kling says. "They know every little detail of the rules."

The Department of Health and Human Services told The New York Times that these records can "save money" and that the program "has strong protections in place to prevent fraud and abuse of this technology that we're improving all the time." It's hard to find this comforting, however, given how many of these sorts of improvements have only made things worse.