Ethics & Public Policy Center

Medicare and Markets

Published in National Review Online on March 27, 2015

See Mr. Levin’s previous post on this topic here.

Over at Vox, Ezra Klein kindly takes note of my post opposing the Medicare SGR bill this week. I argued, among other things, that the bill would make some of Medicare’s worst features even worse and would make market-oriented reforms more difficult. Klein makes two points in response: that the health-care system we now have, which I have argued for dramatically transforming in a market direction, is actually a market system and shows that markets don’t work; and that in saying the SGR bill would make Medicare worse I’m actually arguing it would make Medicare better, which I don’t want to do because I want to change Medicare.

His first point is undermined by the very evidence he cites. He writes:

There’s wisdom in Levin’s post. Blunt, simple approaches often are superior to finely tuned technocratic plans. There are real difficulties with the government’s efforts to measure the quality of health-care services — a much more subjective concept than the quantity of health-care services.

But the idea that the private market manages to effectively price American health care is … bizarre. Medicare has its problems, but this is the current state of pricing in the market that Levin wants to replace it with.

His link toward the end is to a Vox article describing this 2014 paper by Renee Hsia and colleagues about how crazy health-care pricing is in our system (using prices for blood tests as an example). But that paper attributes a good bit of that crazy pricing to precisely the kinds of distortions that a system closer to a real consumer market would better avoid. As Hsia and her colleagues conclude:

Given past literature suggesting that system-wide factors incentivise nearly random charge setting, we believe that the majority of the variation in blood test charges between hospitals that remains unexplained by our model is not based on cost or observable market characteristics. For instance, previous literature shows that prospective payments from purchasers are often set independently of costs or value, eliminating the typical free-market constraints by which variation in charge and price would be limited. Rather, as payments by private insurers are often negotiated based on charges, hospitals use proprietary formulas to raise their charges in order to secure sufficient funding from third party payers to cover overall costs. This often results in some services subsidising others, with their increased charges generally unrelated to their value.

The most significant of those distorting third-party payers is today’s Medicare system. In 2013, the Washington Post’s Peter Whoriskey and Dan Keating summarized some of that same previous literature under the headline “Medicare pricing drives high health-care costs”:

The government may be spending billions of dollars more than necessary for some products and services. Moreover, the influence of Medicare prices means that those faults may be replicated throughout U.S. health care.

As they note, the fact that Medicare also underpays for some other products and services means that providers in the health-care system often have to price their work based on the distortions created by Medicare’s payment decisions rather than on cost, value, or consumer preferences. And private insurers end up gaming this same pricing system, while consumers are left with very little transparency and some very bad options.

Reforming the structure of Medicare so that it is made more answerable to consumer preferences and real price pressures would be a very important step toward addressing this problem throughout American health care. It wouldn’t make for a perfect market, to be sure, but it would reduce a lot of the distortions and perverse incentives that now bedevil our health-care system. Proof of the craziness of that system is not an argument against changing it; it is an argument in favor of changing it.

To make his second point, Klein seems to assume I just don’t mean what I say about the SGR bill. He writes:

One reason conservatives are frustrated with Boehner right now is that in his effort to make Medicare work a bit better in the short term he’s potentially making it harder for Republicans to change Medicare completely in the long term.

But I’m not a “heighten the contradictions” guy. As I wrote, I don’t think the doc-fix patch would, on the whole, make Medicare work better. It would just make doctors a little happier with it by giving them more public money so they’ll stop bothering Congress. That would make serious reform less likely, but not by making it less necessary.

Yuval Levin is the Hertog Fellow at the Ethics and Public Policy Center.

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