Spend More, Save More

Can Medicare save money by giving patients cash?


Medicare is on the path to bankruptcy. By 2024, the Congressional Budget Office estimates that the seniors health program will be insolvent. It's not just the program's fiscal health that's at stake either. In the long term, the program is the single biggest drive of the federal debt.

Yet reforming the program remains a dicey proposition. During the ObamaCare debates, Republicans latched onto the law's cuts to Medicare as their most effective messaging attack against it. In recent months, Democrats have responded in kind with similar attacks on Republican plans to overhaul the program.

With major changes to the program tied up in political gridlock, health wonks are on the hunt for innovative ways to lower spending. Lorens Helmchen, a professor at George Mason University's Department of Health Administration and Policy, has proposed a novel method of constraining the program's spending: He thinks the program may be able to save money by spending money—specifically by giving cash to patients who make more cost-effective choices.

The basic idea, dubbed cash-for-care, is as simple as a year-end performance bonus. When faced with two treatments of roughly equal efficacy but dramatically different cost, Medicare would pay patients a cash fee if they chose the less expensive option. The idea is a form of shared savings. But where most shared savings plans share exclusively with health care providers, Cash for Care shares it with patients.

In a coauthored working paper, Helmchen notes that end-of-life care currently accounts for a quarter of the Medicare's total spending. And much of that spending, in turn, is devoted to cancer treatment. But when it comes to cancer, cost-effectiveness varies wildly. Treatments for the same class of cancer can range in cost from as little as $1,300 a month to more than $7,000. 

Greater utilization of lower-cost treatments could be a vehicle for savings. But many doctors are reticent to factor cost into their treatment decisions. And efforts to reorganize Medicare's payment system to give providers financial incentives to utilize more cost-effective care by paying single lump sums for entire treatment regimes run risks. So-called shared-savings programs give providers an incentive to provide less care overall, and to only steer patients toward the cheapest treatments. They also continue the longstanding pattern in American health care of insulating patients from patients, who may rebel against provider-side incentives out the belief that more expensive treatments are more effective.

There isn't much precedent for the specific approach in the U.S. Over email, Helmchen points to a Medicaid demonstration project labeled "Cash and Counseling" that gave patients the ability to manage their own individual Medicaid budget and retain the savings in cash, but that program paid mostly for counseling, not clinical services like cancer treatment.

But the underlying idea—giving patients financial incentives to make wise health care decisions—isn't new. According to Devon Herrick, a senior fellow and health care expert at the National Center for Policy Analysis, Cash for Care is "definitely trying to harness the same type of incentives as consumer-driven healthcare plans," which typically pair high-deductible insurance with health savings accounts. Under those plans, patients have a financial stake in their care decisions, and can save money depending on what sort of care they choose. The fundamental idea is to take bureaucrats out of the equation and put patients in charge. Cash for Care, Herrick says, is essentially "giving patients a bonus to ration their own care."

Critics argue that consumer-driven schemes encourage patients to skimp on necessary care. But Herrick points to the Rand Health Insurance Experiment, the most comprehensive study of its kind, which found that when insurers increased cost-sharing, individuals reduced their care consumption by about 30 percent. The vast majority, however, suffered no ill effects. Herrick notes that Cash for Counseling improved patient satisfaction and had no negative effects on the health of participants. "If anything," Helmchen says, "shared-savings supplements might encourage too many patients to seek a diagnosis because we're attaching a cash payment to the choice of the least costly care options."

What about savings? Multiple studies have reported that consumer-driven care plans produce substantial savings when compared with traditional health insurance plans, but Helmchen says he currently has no big-picture estimates of Cash for Care's potential savings. He expects, however, that the biggest savings would occur over time, "as shared-savings supplements stimulated the use of care that beneficiaries value most relative to its cost."

"I don't want to oversell the likely savings because at this point they are difficult to estimate," Helmchen cautions, but he and his fellow researchers would like to see the idea tested in a pilot program. That would allow them to estimate how many people would actually switch to lower-cost care, and thus to produce better cost estimates.

Medicare pilot programs designed to save the program money don't have a robust track record of success. But given the program's dire consequences, that doesn't mean they shouldn't be tried. Herrick, who describes himself as skeptical of the savings potential of many pilot programs, argues that even still, Medicare "needs to have more experiments in seeing what works and doesn't work."

Historically, though, what hasn't worked is a bureaucratic approach to pricing and paying for care. And that's the biggest potential problem for a program like Cash for Care: It still relies on experts and administrators to make decisions about which treatments to encourage, and which ones to discourage, and how much to pay for each.

Medicare's current payment system relies on bureaucratic price setting for more than 7,500 different treatments and procedures. Those prices are supposed to be designed in such a way that doctors don't make substantially more from one treatment versus its alternative. But price controllers sometimes get the details wrong. Somehow, the more profitable treatments end up prescribed at far higher rates.

Helmchen doesn't underplay the potential problem. "There is no evidence," he says, "that the demands on administrators would be less than under the current system." And that's the worry. Medicare has already tried setting prices. And according to Herrick, they're "not particularly good at it." Why should the program's administrators be any better at this? "It's not that the program shouldn't try to find better solutions," says Herrick. "It's just the convoluted way that Medicare works. You're unlikely to find those solutions in the bureaucratic system."

Peter Suderman is an associate editor at Reason magazine.

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  1. You know, there is a solution to this.

    We become Europe.

    We turn our military into this, get, oh, I dunno, China into NATO and let them start doing the heavy lifting, and then divert any and all superfluous income into healthcare.

    1. Why only superfluous income? That’s not like us at all.

  2. Hmmmm. Interesting.

    I’m imagining such a program coming up with prostate cancer. Since doing nothing is as effective as ANY treatment including the incredibly expensive proton beam radiation therapy (~$40,000) or in the worst case scenario Zytiga at $5000 a month (to get an extra 4 months of life)
    AND given that the majority of elderly men will eventually get prostate cancer should we just demand the money upfront once we become eligible for Medicare?
    “I’ll skip the PSA and rectal exams right now if you give me $10,000 now”

    1. Why is radiology equipment so damn expensive?

      1. Costs a lot of money to stuff all that radiation inside.

        Surprised you didn’t know that.

      2. Because the Koch brothers want it that way.

        1. Isn’t it because every hospital wants one, while the most cost effective way would be to outsource it to one location that only specializes in radiation therapy?

          1. Jerry|6.16.11 @ 6:04PM|#
            “Isn’t it because every hospital wants one, while the most cost effective way would be to outsource it to one location that only specializes in radiation therapy?”

            Uh, making more of a thing tends to lower the price of that thing.

            1. But having 20 on one location should be cheaper than having 20 hospitals with each one machine…

  3. well, if you cannot make the consumer of the service the same as the one who pays for it, i guess tricks like these are the next closest thing.

  4. The U.S. is so far beyond the need of help…

    1. With every passing day I’m more convinced that the world really did end with the new millennium. The results were just more subtle and slow-acting than everyone expected.

  5. I am a physician and agree wholeheartedly. I think another way to keep costs down is to simply require doctors to post prices that procedures will cost. I have seen many patients upset about a $20 copay for a $50,000 procedure. But the patient have no idea what their procedure costs.

    Why is it that you can get your female dog fixed (bilateral oophorectomy) for $200, but just the anethesia for a human is 700 and the overall cost to medicare $10,000.
    Because we have a screwed up system of 3rd party payors driving up prices and down quality

    1. so you want humans to go to vets. You Monster.

      1. There is a very good analysis that says dogs in britan get better heathcare than humans 🙂

        What is more monstrous? If my dog needs cancer surgery, I can get it next week for about $1000. If I live in canada, I have to wait 3-6 months.

        Which of the above senarios sound montrous to you?

        1. You uneducated troglodyte.

          1. (ok, the one time i meant to reuse a joke handle, i don’t.)

          2. I doubt many troglodytes were educated, but uneducated and old I am not.

            1. J Dog, i feel like we’ve had a serious misunderstanding today. Re-read everything i posted, but this time, read it like i’m trying to joke with you. That should do the trick.

              1. You’re joking, right?

              2. adjusting sarcasm meter 🙂

                1. Can so teach an old dog new tricks!

                  1. Can so teach an old dog new tricks!

                    I’ve never met a dog over 10yrsold who didn’t seem smarter than most humans.

    2. “Because we have a screwed up system of 3rd party payors driving up prices and down quality”

      do you have any studies that document that uninsured patients have better outcomes than insured?

      And are you suggesting that a 3rd party payment system “protects” both the provider and the patient from “feeling” the true cost of a decision or are you suggesting that insurance profit and overhead is the cause? I agree with the former. If the latter the studies would not bear that out. All profit and administrative overhead combined amounts to about 8% of the total costs per capita of healthcare. Hospitals account for over 30% and doctors for about 25%.

      1. Chris good point. 3rd party system is a classis case of other peoples money. Instead of, do you want a new knee for $25k, you get do you want a new knee even though there is a risk of x,y,z.

        So maybe instead of driving up costs, it prevents their natural decline due to market forces.

    3. “I think another way to keep costs down is to simply require doctors to post prices that procedures will cost.

      Don’t prices vary based on the agreement between the doctor and the insurance provider? If so, how can a doctor post his fee for a procedure, if the price is purely arbitrary?

      1. This is part of the problem. Most doctors do know how much they will get from a procedure, but don’t know exactly how much the hospital will charge the patient. But this would be real reform to have people at least have an “estimate” of the cost. If a mechanic and plumber can give a reasonable estimate, so can the doctor. I really think some elderly wouldn’t want some of the procedure they get if they knew how much it is costing their grandchildren.

  6. BTW – I have long believed the best way to improve school performance is to pay students to get good grades (as opposed to teacher raises).

    Maybe we should pay sick people to take their medicine and exercise. Mabye we should pay the elderly to sign a DNR.

    1. I always felt i should get paid for going to school. If people wanna waste my time, they have to pay my hourly rate, that’s how the world works.

      1. (I doubt public schools could afford to have me as a student though.
        I was already working @14, and I made at least $10/hr installing photoshop betas from 3.25″in diskettes, setting up scanners/cameras/printers, and hauling garbage. Yeah, I also had to take out the trash, so what?)

        1. Wow, where did you get 3.25″ diskettes? And where did you get the drives to put them in?

          The standard diskette sizes have been 8″, 5.25″, and 3.5″.

  7. Again, this is just ass-backwards. We don’t need to pay the patients, we need to have the patients pay for (at least some of) their care. You know, a market-based approach.

    Instead, we will erect another bureaucratic monstrosity, with hundreds of pages detailing what the government will pay, how to apply for it, what documentation to send in, blah blah fucking blah. How well do you really think that is going to work? Haven’t we learned anything yet?

    1. Haven’t we learned anything yet?

      Yes… that our healthcare bureaucracy doesn’t go far enough.

    2. Why do you hate senseless inversions.

      Upcoming WinningTheFuture Initiative:

      Employees will now pay their Employers!!!! And employees get to do all the same tax paperwork the employer used to do, but now they EACH get to do it, THINK OF THE FUN!!!!! And they don’t even have to pay for the privilege of that fun, how generous!

      Oh, and they still do their previous jobs. Oh, and the employers have to file the same paperwork still, as well as becoming ass-slaves for any medicaid recipients who medically-require ass-slaves (they can’t do the same work as their employees, that would just be degrading.)

      Oh, and any of the customers of such a business need to surrender their house keys, their dog(s), and any contraband they may currently-or-in-the-future be in possession of.

      I don’t see what all the fuss is about. (Thanks to the FUSS10617 Form, which lead to most Americans not disclosing their FUSS assets.)

    3. “we need to have the patients pay for (at least some of) their care. You know, a market-based approach.”

      Agree but of course the “at least some of” part is the hard part. If J Dog is correct and the true market price is what we’d pay to care for our dog then we have a lot of play (i.e. between $10,000 and $200). Its the getting there that will cause a lot of upset. But I do think the economics will catch up to use.

      We have a slowly approaching healthcare bubble.

      1. Although, i enjoy the Dog analogy, I think the true market price for humans is higher. People have a lower tolerance for error and tend to complain more than dogs.

        However, if you want to consider a market, Doctors have an almost complete monopoly on healthcare (with the exception of advanced practice nurses). If we were to remove the licensing requirements (and end the idea of prescription drugs), I am sure prices would plummet and people could go to anyone they wanted, for very little cost.

        1. I died too soon!

  8. How long until someone gets the bright idea to get sick, just to make some cash on the side?

    1. Or get pregnant just to make some cash on the side…oh wait, they already do that!

      1. If we can get that to work for dudes, it’ll be perpetual motion all the way down the turtle stack.

  9. Great timing. I just got an email from Mindfreedom with a link to this related article.

    From the article:

    Data obtained through a Freedom of Information request show nearly half of all seniors in long-term care in BC are being given antipsychotics like Risperdal, Zyprexa and Seroquel. That’s almost twice the average for the rest of Canada and amongst the highest rates found anywhere in the world. And even though Health Canada warns these drugs cause a doubling of death rates in the elderly, care workers admit they’re mainly being used as chemical restraints in the absence of adequate staffing and proper oversight.

    So, the state can get long term savings by doping up the elderly on anti-psychotics that reduce their life expectancy.

  10. Back when Australia was reforming its broken health care system, they instituted a rule made it illegal to insure more than 85% of the cost of a procedure up to a certain limit.

    Forcing people to pay 15% made them suddenly a lot more price conscious. The elderly did not start dying in the streets en masse, either.

  11. My wife needed an MRI and was directed by the doctor’s office to one provider that quoted $3800! Calling around to several others resulted in her getting one for $700 the next day. Since our deductible is $3500, we saved some real money by shopping.

  12. Is that Weiner in the picture?

  13. Back when Australia was reforming its broken health care system, they instituted a rule made it illegal to insure more than 85% of the cost of a procedure up to a certain limit.

    That’s what I’m talking about. Do that and get rid of the benefits mandates and you’ve got yourself something approaching a market-based system.

  14. How about just “Spend Less, Save More”. That’s what the LMAD plan does with healthcare.

    Truth is we CAN balance the budget and stop endless deficits but only if we endorse the LMAD plan. Sure, Republicans and Democrats are offering competing plans to lower the deficit but all they are really competing for is to see who can best manage America’s decline.

    Are you starting to get it yet? What we need is LMAD? Healthcare-for-All? It’s in there. Balanced budget? It’s in there. Carbon tax? It’s in there. Rational taxation? Amnesty? Border Security? Limited government? Social Security and Medicare solvency? It’s all in there; it’s all paid for and it’s all optimized.

    It’s time for American Progressives concerned about rising temperatures, health care for all and illegal immigration and American Conservatives concerned about rising federal debt, bigger government and rational taxation to quit navel gazing and realize the obvious: they need to BUY each other off in order to effectively address their pet ideological concerns?there is no other way. This means trading things like a carbon tax, healthcare for all (with a public option) and amnesty for a balanced budget, strict limited government (tied to GDP) and an end to the corporate income tax plus other tax reforms. This plan is outlined at letsmakeadeal-thebook.com.

    Progressives and Conservatives are actually making the same apocalyptic arguments albeit on different issues. They both make good arguments for action. But the public is yawningly uninterested in global warming for instance and unwilling to make the hard choices on America’s fiscal problems. Buying off the opposition is the American way so use the system we have to get the outcome you want. And that’s what Let’s Make A Deal?The Plan/The Book is all about: getting the outcome you want.

    So get the outcome you want at: http://letsmakeadeal-thebook.com/

  15. What if we did away with the estate TAX and sent a Medicare bill to the deceased’s estate for a % of the last 3yrs cost of care? Your heirs would be responsible for paying for 10% of the cost of your care in the last 3yrs of your life. This total would be capped of course to a % of your total estate. Considering the amount of effort that currently goes into “estate planning” if that effort went into shopping for the best least expensive care, we could put downward pressure on cost. This would of course need to effect estates as low as 500K to work. Medicare patients would ration their own care not knowing when those last 3 years are. Seems much better than just taxing estates just because….

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