Tuesday, July 5, 2011

Why Medicare Needs To Change

This thread kicked off by this item and subsequent discussion here.

First, let's review a couple basic realities of Medicare.  It is a huge portion of the federal budget, and any attempts to seriously address the current out of control deficit and debt will involve some cuts to the program.  The efficiency of the program itself is actually quite good--I've heard before that something like 2% of Medicare's budget goes to administrative costs (confirmed here), the rest goes out in paying benefits.  Fraud does occur, and while it is not an isignificant amount of money, the overwhelming majority of payouts are legit.

There are a number of factors that go into increasing medical costs--R&D, people are living longer because of better treatments and have more chronic conditions to treat, prescription costs (related to the outrageous sums spent on R&D to bring a new drug to market), donated medical care, and also Medicare pricing practices.

The first three items are givens for the purpose of this post, and don't warrant any further discussion.  The fourth item is an interesting side note I'll tackle here in a moment, and the fifth is the main focus of the post.

Donated medical care is a huge sink on healthcare.  Ask anyone who works in another service profession, a restauranteer is my favorite example for this: Could you run your business if 70% of the people who came in never paid a dime for the products or services you rendered them?  This is the reality of some emergency departments in this country.  Thanks to EMTALA, an unfunded mandate if ever there was one, any patient who presents to an emergency room must be evaluated and must be treated if they are unstable or in labor, regardless of ability to pay (or how stupid the complaint).  Now, I don't think anyone wants to say a woman in labor should be thrown out on the street because she doesn't have her insurance card with her, or that someone dropped off on the front steps with a knife in his back and bleeding to death should be left there, but anyone who has been to the ER more than a few times knows that one person's hangnail is another person's emergency.  And, you ask, just how much money is set aside by the government to compensate the hospitals and doctors who treat those who cannot pay?  Why, none, of course.

Now, as to Medicare pricing practices.  Ever looked at a hospital bill before?  Ever wonder why it costs 10 grand to open up an operating room, or how a bag of saline the size of your water bottle could cost $150?  (There are reasons why it does cost significantly more than a bottle of Perrier, but the price the hospital pays for it is much less than $150.)  The only people who pay that much for those services are those with hard cash and no insurance, everyone else pays a negotiated rate--and Medicare sets the bar on negotiated rates, which not only are significantly less than the line item on the bill, they are often at break-even or less than what it costs the hospital to provide said service in the first place.  The actual reimbursement rate of Medicare varies considerably from item to item, surgery to surgery, and each year Medicare decreases the number of items it will reimburse for.

So, Medicare tells doctors and hospitals how much they will pay them ("You billed $15,000 to remove an appendix?  Here's $4,000, take it and go."); private insurance companies in turn set their rates based on Medicare.  These are negotiated rates that typically fall somewhere in-between what the line item charges are and what Medicare will pay for them.  So, private insurance pays better than Medicare, but still less than what is asked (maybe $6,000 in the hypothetical appendix surgery above).

Where is the actual break-even point for the hospital, or physician?  Obviously, it will vary, but in most cases it is greater than what Medicare reimburses.  Think about that for a moment--the government, the single largest payor in the healthcare system, is not even covering the costs of providing the service, yet alone for any profits.  And it's nigh impossible to expand, hire new staff, buy new equipment, or keep up with other overhead costs if there are no profits.  By the way, any healthcare provider or organization that accepts any kind of insurance must accept Medicare, by law.  The government requires that medicine operate at a loss when the government is paying for it--nothing like those fat-cat union contracts handed out for construction projects where everyone on the receiving end comes out ahead.  As to where private insurance falls relative to the break-even point, I do not know.  My gut tells me that it is probably in the black on most things but in the red on some others, though I have no hard data to support this assumption.

And so we come to the last of the three legs that supports medicine, the uninsured.  If Medicare doesn't even cover costs (and Medicaid, a seperate program, pays even less than Medicare) and private insurance isn't sufficient to make up the difference, then the rest will have to pay through the nose to support the system.  That's why it costs the consumer $150 for a liter of saline.  The third leg must bear a disproportionate cost in order to prop up medicine--or rather, to counter the undermining of the system by government.

Do I have the answer for how to fix Medicare?  Hell, no--if I did, I'd have written a book on it and run for Congress.  But I do know that the system has to change, and that it's unrealistic and unfair to ask hospitals and doctors to just suck it up and kiss their revenue streams goodbye--because if the projected shortfall of tens of thousands of doctors in the coming years sounds bad now, wait until they can't make a decent living at it.

Hat tip to Ace of Spades HQ

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