How Price Controls Contribute to High Medicare Bills


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The New York Times tells the story of a man with insurance coverage who, after a three-hour neck surgery, was billed $117,000 by an "assistant surgeon" he had never met. This was on top of the $190,000 worth of bills he expected to receive for the procedure.

What's happening here is a familiar story of unintended consequences. Medical price controls and billing systems that were put in place in hopes of controlling health care costs and spending have instead created opportunities and incentives for providers to innovate—not in the way they practice medicine, but in the way they bill for services.

The basic issue here is that when you cap prices on services, you end up creating a system in which providers have a huge incentives to bill for more services. As Brookings health policy scholar Dr. Darshak Sanghavi tells the Times, "The notion is you can make end runs around price controls by increasing the number of things you do and bill for."

Indeed, pricing systems end up creating opportunities for consultants and middlemen to help doctors figure out how to maximize their billing:

To counter that trend [of declining salaries for neurosurgeons], some spinal surgeons have turned to consultants — including a Long Island company called Business Dynamics RCM and a subsidiary, the Business of Spine — that offer advice on how to increase revenue through "innovative" coding, claim generation and collection services.

The main story in the article is about someone covered by private insurance, but the pricing systems built into Medicare remain a factor. As the article notes, the same procedure would have been subject capped billing if performed under Medicare; the assistant would only have been allowed to bill equal to 16 percent of the primary surgeon's fee.

The implication, as in a number of recent articles on high medical bills, is Medicare's pricing systems offer a potential solution to this sort of billing fiasco. But Medicare's rates, which are typically lower than private insurance and which have been lowered recently, are arguably the problem; providers look to make up for lower public-insurance payments by billing the privately insured.

The history of experiments with clever payment schemes is revealing. When federal officials tried to control the growth of Medicare inpatient hospital spending in the early 1980s with a new payment scheme, hospitals changed the way they provided services—and outpatient medical practices boomed. Over the last few years, electronic medical records have been installed in hospitals in hopes of generating efficiencies and savings; instead, they have been sold to providers as tools to extract money from Medicare by exploiting the billing system. State-level universal payment schemes in the 1970s and 1980s proved confusing to the legislators who passed them, and exploitable by the big hospitals that had an incentive to maximize their billing. There's always a loophole.