How Doctors Game Medicare's Billing System


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Today's Wall Street Journal offers a revealing look at the dilemmas posed by government-run health insurance and centrally managed medical price setting. The story, headlined "Taxpayers face big Medicare tab for unusual doctor billings," builds on a giant trove of recently released 2012 Medicare payment data to examine the more than 2,300 medical providers who got a $500,000-plus Medicare payout from performing many repetitions of a single procedure or service. Basically, they billed for the same thing, over and over and over again, in a way that stood out.

Now, why do you think would they do that? 

The story opens with a bit on Ronald S. Weaver, a Los Angeles doctor whose practice billed Medicare for $2.3 million in 2012—98 percent of which was from a single cardiac procedure. As the Journal story makes clear, Weaver's reliance on the procedure is not typical. The red flags are pretty easy to spot.

The procedure is rarely used by the nation's heart doctors. Patients are strapped to a bed with three large cuffs that inflate and deflate rhythmically to increase blood flow through the arteries—a last resort to treat severe chest pain in people who can't have surgery.

The government data show that out of the thousands of cardiology providers who treated Medicare patients in 2012, just 239 billed for the procedure, and they used it on fewer than 5% of their patients on average. The 141 cardiologists at the Cleveland Clinic, renowned for heart care, performed it on just six patients last year. Dr. Weaver's clinic administered it to 99.5% of his Medicare patients—615 in all—billing the federal health-insurance program for the elderly and disabled 16,619 times, according to the data.

In an interview, Dr. Weaver said he learned about the procedure by "reading lots of articles, studies and clinical trials" and decided to build his practice around it. There is no consensus in the cardiology community whether the treatment provides significant benefits. Dr. Weaver, who likens it to "exercise while lying on your back," says it improves his patients' health.

Weaver isn't the only doctor with large, unusual bills covered in the story. Another one billed Medicare for $1 million for 1,757 instances of a procedures that "involves threading a scope up the male urethra to burn potentially cancerous lesions inside the bladder." On average, urologists in the Medicare billing database performed that procedure just 38 times in 2012. Another doctor mentioned in the article billed Medicare for $2.41 million for a rare radiation treatment, far more than the other two doctors who billed for the procedure.

What could be going on here? Perhaps these providers found an easy way to exploit Medicare's easily exploitable billing system? Well, not according to the doctors. As the Journal story notes, "the doctors featured in this article say financial incentives play no role in their treatment patterns." Indeed, some apparently argued that their treatments actually save money by reducing hospitalizations.

If so, the article presents no evidence of systematic savings generated from these procedures. Meanwhile, there's plenty of evidence going back for years that medical providers of all stripes rearrange their practices so as to make those most of Medicare's complex, centrally managed billing and pricing systems. More expensive procedures are performed more often than similar procedures that pay less. Upcoding, in which providers choose a higher-value billing code to describe a procedure, is rampant in Medicare billing. Big hospitals game state-level medical payment schemes designed to equalize pricing discrepancies.

Payment incentives matter a lot, and it's almost impossible to strip complex billing systems of bad incentives. We recently uncovered an extreme version of this effect in the Veterans Affairs administration, which paid bonuses for lower wait times. So staffers cooked the books to make wait times seem artificially low.

Some of this legally dubious, but a lot of it is just how the system works. When medical bureaucrats design payment systems, medical providers end up figuring out how to maximize their returns from that system, and not always in ways that provide obvious medical benefits: Weaver's chest pain procedure is, as the Journal notes, of uncertain medical value.

These sorts of stories frequently result in calls for more policing of abuse within the system. But I think they raise more fundamental questions about the system itself. Should Medicare be paying for procedures of unclear medical benefit? Should Medicare be paying for a single doctor to perform those procedures over and over again? And if so, how much should Medicare be paying? How should the system's overseers determine exactly what the right price is?

It's what Arnold Kling has called "the socialist calculation problem," and it's not really possible to resolve.

Inevitably, medical providers end up reshaping their practices, sometimes in ways that are obvious and often in ways that are more subtle, to match the incentives of the payment system.

There is nothing inherently wrong with building a medical practice around a single procedure, nor is there an inherent problem with patients requesting or receiving a procedure for which there is no clear medical consensus. The problems arise when the public is paying for these procedures, and when, as seems probable, they are being performed primarily to maximize financial gains from a government-administered system. The system creates opportunities for exploitation. We should not be surprised when some providers choose to exploit it.