How Medicare's Payment System Discourages Quality and Innovation

Politicians are always quick to declare that America's seniors depend on Medicare for their health. But seniors also depend on innovation in medical practice and technology. And Medicare's top-down payment system represents a significant burden to improving both. In remarks given at a recent Harvard debate, Neil Minkoff, the founder of FountainHead Health and a commissioner on the Massachusetts Group Insurance Commission, does a good job of summarizing how Medicare's centralized payment system discourages quality in medical servicing:

Government is harmful to medical innovation by setting so much of the reimbursement process. By being, by far, the largest payer of healthcare claims in America, the Medicare fee schedule drives the market for all other private payers. In essence, this sets a floor for clinical reimbursement. Hospitals then set budgets based on expected revenue, not based on the cost of providing specific services.

Patient experience, convenience and quality of care do not effect, or at least significantly effect, clinical reimbursement in the standard, traditional fee-for-service Medicare program. There is therefore no incentive to find ways to create new value in the system.  By law, a physician or hospital cannot charge premium pricing for a Medicare-reimbursed service or procedure. I first notice this while treating patient maybe 15 years ago. A first- or second-year physician, I was treating a patient with a serious lung impairment caused by a blood clot in his pulmonary artery. I was transferring this patient from a poorly run suburban hospital, soon to close,  to arguably the world's expert on these types of clots at the Brigham and Women's, which is consistently rated as one of the nation's ten finest facilities. Medicare was paying both physicians the same fee and both hospitals the same fee.

This is wrong. This encourages a sense in the market of care that is "good enough." Nowhere do Medicare providers have any incentive, outside of their integrity and drive, to develop, improve and excel.

The whole thing is worth reading. It's worth noting that Medicare is America's only single payer system, and even though it's not universal, it still exerts a signficant pull on the whole of medical practice. A universal single-payer system, or even a slightly softer set of universalized price and payment controls foisted on private insurers, like Massachusetts lawmakers are considering now, would only increase the size and scope of the problem. 

Read "Medicare Whac-A-Mole," my 2011 magazine feature on the history of Medicare's payment controls.