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Does Medicare Work by Dictat?

A couple of conversations I've had recently have convinced me that people are confused in an important way about how Medicare -- and thus a possible public plan -- sets its prices. So here's a crude explanation: Congress creates what's called the Medicare Physician Fee Schedule. Explaining how it does this would make your eyes glaze over, but suffice to say that Congress decides how much it'll pay for various procedures.

This, I think, is where people get confused. Some of the folks I've talked with seem to think that because Congress sets these prices, providers have to accept them. The long arm of the government reaches in and breaks the window and unlocks the door and pushes the elderly into the waiting room. But that's not true at all.

At the beginning of each year, providers decided whether they will do business with Medicare. In other words, they choose whether or not to accept public insurance like Medicare or Medicaid. Almost all of them choose to do so, because providing health services to Medicare patients is actually a very profitable business (Medicaid patients, less so). But you can go here for a list of "participating" physicians. And for all the talk of underpayment, these providers don't participate because the law says they have to. It doesn't. They can refuse to participate in Medicare just as they can refuse to participate in Aetna. But by and large, they don't refuse, because it's good business to work with Medicare.

Which makes a bit of a hash out of these dark warnings that a public plan would somehow choke our health-care system to death. If it underpaid providers, providers would stop accepting it. And if they stopped accepting it, then people would switch to a private insurer because they'd want to be able to keep their doctor and they'd be willing to pay the difference to do so. Just as private insurers could lose members if their rates weren't low enough, the public plan could lose members if its rates were too low.

By Ezra Klein  |  June 29, 2009; 6:31 PM ET
Categories:  Health , Health Coverage  
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Comments

I'm on your side of the debate, Ezra, but there are reasons for accepting Medicare and Medicaid, other than studying the payment schedules and figuring it's a good deal. My wife, a dermatologist, accepts Medicare and Medicaid because she feels compelled to serve those patients as part of the social contract she made when she became a doctor.

Posted by: jjgould | June 29, 2009 7:41 PM | Report abuse

Some things I've heard about Medicare - the artificially low rates that docs accept to treat Medicare patients are one reason why prices in the private sector are high - to compensate for the lower Medicare reimbursement.

How can we find out if that is true?

Also, I was talking with my doc today, who feels that the way we reimburse health care favors tests, not the relationship between docs and patients (phone calls not reimbursed, but pretty much every test is...) So with Medicare, is there a tendency to over-use tests to jack up the bill - to get it to where a doc might think it is fair?

I think given the McAllen story, this is a fair question - why are docs so eager to order tests that do nothing to change the health outcome for a patient? Is there a difference in how docs who are reimbursed primarily through the private sector order tests?

Do the best hospitals and the best docs accept Medicare? Most do not accept many HMOs - because of the cost differential. So I do wonder if the very best docs - the ones you want to see if you're in real trouble with your health - will accept public plan patients.

Posted by: anne3 | June 29, 2009 8:03 PM | Report abuse

I hope you're right Ezra. The last thing in the world we need are for doctors to be employees of the federal government. I know we're a long way from there, but I get the feeling every time Obama opens his mouth he says: this won't hurt a bit, we're doing this for you, we're from the government and we're here to help, don't worry about those deficits, don't worry about us issuing so many bonds, don't worry about inflation increasing or our inability to pay for things, don't worry about that man behind the curtain.
Bush was so quick to create the TSA, creating a zillion government jobs. And I don't think it was the best answer to the issues at hand. I'm afraid of the next steps. And the fact is that my aunt and uncle are paying $200 per month over and above for medicare premiums - that doesn't include one penny for actually paying a doctor.

Posted by: atlmom1234 | June 29, 2009 8:56 PM | Report abuse

"In other words, they choose whether or not to accept public insurance like Medicare or Medicaid."

And increasingly, they do not accept it. There are about 1.5 million links on Google acknowledging how difficult it's becoming to find a doctor who accepts Medicare.

Economics clearly explains that a seller will deliver some items profitably below the average cost.

A nurse, a bed and a room will all cost $800 dollars for the night whether the bed is occupied or not -- so why not sell it to the government for $300 -- as long as you can bill five other patients (or their insurance plans) an extra $100 apiece? Yes, it's still a good deal. And yes, it's below cost, and ultimately it's subsidized by (and utterly dependent upon) charging other customers' plans higher prices. It's marginally profitable -- but only after other payers pick up the fixed costs.

Under such an arrangement, it is in fact impossible for those other plans to compete with the government's deal. If they could all get the same deal, the hospital would go out of business. And since the hospital therefore will not give them the same deal, the private insurers will go under.

Of course, the possibility exists that hospitals could refuse to sell to the public plan below cost, but that will be prohibited by law as soon as it becomes the most economical choice. That's how liberals work.

Posted by: whoisjohngaltcom | June 29, 2009 9:27 PM | Report abuse

Good post and nice clarification.

...."almost all physicians accept medicare" is actually about 73% nationwide.

anne3...there is cost shift from medicare and medicaid to insured rates, more so under medicaid as the fees paid there are quite low. Most managed care plans set physician fees at 105-110% of medicare...so there is some cost shift but not a huge amount.

Posted by: scott1959 | June 29, 2009 9:32 PM | Report abuse

"Good post and nice clarification."

Really? I was thinking "strawman" myself. Everything's perfectly correct, but it still doesn't address the actual problem.

Posted by: whoisjohngaltcom | June 29, 2009 9:46 PM | Report abuse

I don't think it's quite that simple, Ezra. Medicare is variably profitable to hospitals and doctors depending on the patient and diagnosis. For-profit hospital systems will refer out their unprofitable cases to regional nonprofit academic centers that usually lose money on medicare patients but continue to accept them as part of their missions. In these cases, care for Medicare patients is underwritten by payments from commercial insurers, who pay higher rates to teaching hospitals for the privilege of access for their members to more expert care. As for outpatient care, doctors have to find a way to make Medicare patients profitable because they are such a large portion of the patient pool, but they do so by increasing volume, which usually means shorter visits and an incentive to select for simpler cases. Moreover, Medicare reimbursement policies that have lagged behind current practice have arbitrarily made certain procedures/diagnoses more profitable than others. So one way hospitals find a way to be profitable is by investing in capacity for these higher profit services (notice the proliferation of dedicated heart or orthopedic surgery hospitals) and then whipping up local demand, resulting in a lot of costly unnecessary testing and procedures. Since smaller, private insurers peg their rates to Medicare, this distortion is amplified through the system.

So, long story short, Medicare doesn't work by dictat, but it's not inherently profitable unless providers do distortionary things like pawn off unprofitable patients on non-profit centers and inflate demand for arbitrarily profitable services regardless of healthcare value added. Ultimately, Medicare is not sustainable without private insurers to underwrite unprofitable care at nonprofit academic referral centers.

Posted by: gniwor | June 29, 2009 10:06 PM | Report abuse

Do they really have a choice? It is the Government after all? Wouldn't there be a certain stigma to not accepting Medicare patients? Perhaps a little extra attention from the IRS or the licensing board. The Government is not a clean (or even carbon neutral) entity.

Just because lawyers accept some pro bono work doesn't mean that they'd be willing to work for free.

Posted by: fallsmeadjc | June 29, 2009 10:38 PM | Report abuse

"Ultimately, Medicare is not sustainable without private insurers to underwrite unprofitable care at nonprofit academic referral centers."

...Which makes a bit of a hash out of all this naive optimism that private plans could actually compete with something they're ultimately subsidizing themselves.

Posted by: whoisjohngaltcom | June 29, 2009 10:56 PM | Report abuse

Beyond just reimbursement rates, accepting Medicare also comes with mandatory compliance of federal law such as STARK or the various Anti-Kickback provisions. Large hospital networks have the resources to ensure compliance with these overly complex laws, but smaller providers are often surprised by the level of regulation that accompanies Medicare or Medicaid patients. If Medicare or Medicaid works by dictat its through these laws. For instance, a doctor may be guilty of a felony under the Anti-Kickback statute for knowledge of a clerical error in his Medicare billing, but reporting it too late.

It will be interesting to see if a public option plan would include the various laws that now control doctors who accept Medicare or Medicaid. These laws were enacted to limit the incentives of profit in a doctors' decisions regarding his patients. They may have had this benefit, but they have also increased the complexity of the healthcare system, while simultaneously hurting smaller providers with less resources.

Posted by: avanland | June 29, 2009 11:22 PM | Report abuse

My experience with my late, elderly parents was that all doctors accept Medicare, but not all accept assignment, which means that they can charge for their services above the amount reimbursed by Medicare, but that only means that you pay them the difference between that amount and what they charge.

Posted by: newjersey_lawyer | June 29, 2009 11:40 PM | Report abuse

For hospitals, Medicare pays a nationwide average of about 97% of costs, while private insurance pays 115%. The losses on Medicare are primarily due to a fairly small minority of patients who cost more than the allowance. Hospitals make money on most Medicare patients. The degree to which Medicare is a problem for hospitals varies with the percentage of patients who fall in the outlier category. Hospitals serving areas where people tend to have more complicated health problems – urban and rural low income areas – have more of those patients.

For doctors, Medicare is profitable – often highly profitable -- for almost all specialists, but some primary care doctors have trouble paying their overhead with Medicare rates. As a result, in areas where there are significant shortages of primary care doctors, and especially where there are institutions like public hospitals and medical schools to take up the slack, primary care doctors whose practices are full or nearly full sometimes turn down Medicare patients. New York City is the classic example of this.

Reformers are addressing both of these problems. People involved in the Obama health reform effort have suggested that a public option insurer should pay hospitals and doctors 110% of the Medicare rate. MedPAC has recommended new payment schedules raising the payments for primary care while reducing payments for many specialty procedures.

Finally, one of the things that preserves the relative profitability of Medicare for many doctors and some hospitals is that Medicare costs much less – about one quarter to one third as much – in administrative costs for providers to deal with compared with private insurance. This significantly reduces the gap between Medicare and private insurers in terms of profit.

Posted by: PatS2 | June 30, 2009 9:44 AM | Report abuse

Your post is disingenous, and I suspect that you are aware of this. Yes, providers can choose not to participate in Medicare and some doctors choose not to. But hospitals essentially have no choice at all. They have such high fixed costs that they need Medicare volumes/patients to cover their overhead. It's not that Medicare is profitable for them -- it's a necessary evil. Think of it like a unionized auto plant. The plant has such high fixed costs that they must produce a certain volume of cars to cover those costs even if some of the cars are not profitable on their own.

Put in even simpler terms, if Medicare represents 30% of a hospital's business the hospital can't opt out. they can never reduce their costs to offset the lost revenue. Therefore, Medicare works by dictat, at least in the case of hospitals.

Posted by: mbp3 | June 30, 2009 9:55 AM | Report abuse


From what I understand, facilities feel compelled to accept Medicare patients because they cannot expect to receive a managed care referral from a doc if they don't accept his Medicare patients. In other words, they accept the Medicare business as a loss leader to maintain a good relationship with their referral sources.

More importantly, however, in the scenario where public plan reimburses Medicare rates (which are roughly 30% lower than average managed care rates) and can thus charge significantly lower premiums and thereby crowd out commercial insurers, the question of whether or not you want to accept Medicare rates becomes irrelevant, as increasingly it will become the prevalent rate being reimbursed.

It's fine to talk about the different reasons why we need about the public plan, and some of them are valid. But to pretend that all docs and providers could survive on current Medicare rates is conveniently ignorant.

Posted by: akristof | June 30, 2009 9:58 AM | Report abuse

Ezra - This data suggests that Medicare patients are not profitable on their own for hospitals. From the AHA, Medicare pays at 92% of cost, Medicaid pays at 87% and private insurance pays at 129%. This would seem to be at odds with your post.

http://www.bcbs.com/blueresources/mcrg/chapter2/ch2_slide_3.html

Posted by: mbp3 | June 30, 2009 10:06 AM | Report abuse

All of this comes with an undertone that needs to be addressed:

If fixed public plan prices are only sustainable because variable private plan prices cover the fixed costs, then how would private plans who -- a)pay the higher costs, and b)are actually carrying part of the public plan's burden as a result -- how would they ever compete with it?

What is the plan to ensure private plans into the future as promised -- bailouts???

Posted by: whoisjohngaltcom | June 30, 2009 10:24 AM | Report abuse

we have a four sector health care system

the uninsured

the employer-based for profit insurance system

medicare

medicaid

the uninsured sector has always existed, just not counted as a part of the structure of health care, seems to be growing again

there are problems with medicare and medicaid but one of the biggest problems - legislative limits on health care administrator ability to negotiate costs would solve some of the other problems, long term cost issues can be fixed

the employer-based for-profit health insurance sector is failing - it has been failing for some time - it never covered more than some of the population - it is based on an industrial economy model and we no longer have an industrial economy - premium costs continue to rise unabated - this was going on before managed care and it has continued after managed care - despite continuing increased costs, the health plans business model enables them to sustain their profitability and wall street continues to support them - , employers continue to shift premium costs onto employees - most local markets are dominated by one health plan and national employer market is dominated by 2-3 health plans - and it covers a smaller and smaller number of people

Posted by: jamesoneill | June 30, 2009 10:27 AM | Report abuse

As other commenters have alluded to, it's not just physicians but hospitals that get paid by Medicare. And getting kicked out of the Medicare program is for good reason referred to as the "death penalty" for hospitals, since no general acute-care facility is financially viable without that huge payor. Medicare here does work by dictat, and that's a good thing.

Posted by: rick1977 | June 30, 2009 11:46 AM | Report abuse

jamesoneill:
"the employer-based for-profit health insurance sector is failing...it never covered more than some of the population"

Interesting, since it is the one sector that is subsidizing all of the others. Yes, it is a big failure -- until you look at what we ask of it. Then it's a wonder that it even survives.

Also interesting: that the biggest obstacle to cutting what Ezra called the "Gordian knot" between employment and health insurance is liberals in Congress.

Posted by: whoisjohngaltcom | June 30, 2009 11:47 AM | Report abuse

I'm on Ezra's side mostly in this debate, but I have to agree this is a disingenuous post at best.

The one question I have and I wonder if anyone has the answer... is Medicare obligated to pay about 95% of hospital's costs? So if hospitals went through a big push to lower costs and operate more efficiently, would they be rewarded with a Medicare payment cut?

If so, it seems that might need to be changed, but I don't think that's how it works. Hospitals seem pretty unresponsive to cost pressure, why has nobody talked about that? You ask a Lean Sigma person, they'll tell you that hospitals have the most inefficient process of any industry you can think of. There's so much hospitals could do to make a profit off Medicare payments but they don't do it. They just complain about needing to get paid more. There's two pieces to turning a profit: revenue and cost and I only hear hospitals talking about the revenue side.

Posted by: consid24 | June 30, 2009 1:46 PM | Report abuse

you see the point is that on average medicare's reimbursements are 80 cents on the dollar of what private insurers negotiate. Most of the biggest private insurers negotiate around the same discounts (ie Aetna, Cigna, United, BCBS). Regional carriers a little less. The point is from even the largest national carriers its 80 cents on the dollar. The reason the AMA is against a public plan (don't let them fool you they are absolutely against it but they are waiting until all the details come out to be FULLY against it). Imagine if your profession asked you to take a 20% pay cut. Would you do so gladly??

Also those who understand the concept know that IF a public plan was enacted the cost differential would absolutely crowd out private insurers. I own my own business and if i was told most all thing would be equal but I could pay $700 for a public plan that paid doctors 20% less or $1000 for a private plan I'm absolutely going to take the public plan, who wouldn't. And when all those who don't understand it but are afraid to change because they're sick stay on the private plans their costs will skyrocket even further than they are now until they are unsustainable.

Then we're at single payer with rationing of providers even worse than we have now. Who is going to want to have hundreds of thousands of dollars in debt to basically work for the gov't at their lower rates?? Sorry my kids would rather be computer programmers at $100k+ per year as opposed to doctors with high student loan bills making less than that.

Ezra,

whatever happened to an "expose" piece on doctors that own surgery centers and dupe their patients into medical bankruptcy? I'm still waiting for that one. If you need a list of people that fell victim to that I've got an ever-growing list.

Posted by: visionbrkr | June 30, 2009 7:07 PM | Report abuse

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