Medicare Reform: It's the Price-Fixing, Stupid

The National Health Expenditure projection is expected to increase by 6.3% annually from 2009 through 2019, but no one in the government or the media wants to talk about the root cause of the increase.  There are two parts to the problem: who is paying for medical care and who is setting the prices.

The first part of reform is getting Medicare out of the price-fixing business.  Medicare sets the reimbursement rates on approximately 7,800 procedures and services physicians perform in the form of Current Procedural Terminology (CPT) codes.  These CPT codes include everything from a normal office visit to hip replacement surgery.  The American Medical Association (AMA) developed the system and updates and publishes the CPT codes annually.  All private commercial health insurance companies use Medicare rates as a base.  They set their reimbursement rate for the CPT codes as a multiple, usually 110 to 140%, of Medicare's reimbursement rate.  By law, Medicare rates must be lower than private commercial insurance rates.

For example, the Medicare reimbursement for a standard office visit (CPT code 99213) in my region of Missouri is $52.  There is some variation depending on where physicians are located.  The typical private commercial insurance reimbursement for the same office visit is $65.  The Medicaid reimbursement for the same office visit is $30, which is well below the cost of doing business.  The actual billed charge for the same office visit is $93.  This is the price charged to a self-pay patient. 

Private commercial (usually employer provided) insurance is typically discounted from the standard actual billed charge.  Physicians give insurance companies discounts to attract business.  This causes physicians to artificially inflate their billed charges to compensate for the discounts.  Because of this artificially inflated system of charges, patients without medical insurance that can least afford care end up paying the most.  Historically, a patient with private commercial insurance or government insurance (Medicare, Medicaid, or VA) paid little, if anything, for the same services.  Private commercial insurance and Medicare patients are increasingly paying more out of pocket due to the skyrocketing costs of medical care.  Even with this increase, they still pay significantly less than an individual without insurance.  This price-fixing, discounted, variable reimbursement system causes distortions in the normal marketplace.

At the other end of the transaction is the patient.  According to the latest update of the National Health Expenditure Projections, the United States is now one-third of the way to a single-payer system (pg. 5).  The 2011 estimate shows the federal government pays for 36.5% of all medical payments.  When state and local governments are included it is 50.1%.  Currently only 11 cents of every health care dollar is paid for by the patient with a future downward trend.  That's the other part of the problem.  When you are spending someone else's money there is no incentive to control costs.  In my office, I hear patients say, "Well, I've met my deductible for the year, so now I want my knee surgery, a heart stress test, a carotid artery test, or any number of other tests done."  There are an excessive number of x-rays, ultrasounds, CT scans, and MRIs due to patient demand and physician compliance because an insurance company is willing to pay for them.  This is normal human nature to take advantage of an opportunity.  Patients request tests that are not medically necessary.  They make medical decisions based on how much they will have to pay instead of whether or not it is good for their health.  The entire health care system is set up to incentivize patients and physicians to make inefficient costly decisions.  The medical marketplace is not close to a normal marketplace.

As I mentioned in a previous American Thinker article, all free-market competitive systems have two characteristics in common: increasing quality and decreasing prices.  The difference between a normal marketplace and the medical marketplace is striking.  In a normal marketplace: consumers spend their own money, producers search for ways to reduce costs, individuals choose from diverse products, technological change is good for consumers, and producers advertised price discounts and quality differences.  In the medical marketplace: consumers are usually spending someone else's money, physicians and hospitals increase costs and perform more procedures to increase their income, most people who have health insurance are covered under an employer or government plan, third-party payers are increasingly hostile to new technology, patients cannot find out the costs prior to admission and cannot read the hospital bill upon discharge, and patients rarely can obtain information about the quality of physicians or hospitals.  In a normal marketplace quality increases and prices decrease with time.  In the medical marketplace quality improvements are questionable and prices continue to rise.

The evolution of mobile phones is a good example of how a normal marketplace works.  Twenty-five years ago mobile phones were large and bulky, limited in their features, and very expensive.  Today's mobile phones are compact, have multiple applications, and are relatively inexpensive.  The two areas of medical care where quality has increased and/or price has decreased are plastic surgery and corrective eye surgery (radial keratotomy and now Lasik).  This has occurred because the individual consumer pays for the entire bill.  When you have a third-party paying for the majority of any particular expense there is no incentive for the individual consumer to control costs. 

Transforming the medical marketplace into a normal marketplace begins with eliminating Medicare price-fixing.  The free market system works when physicians are allowed to set their own prices and patients control their own health care dollars.  Patients must have the incentive to seek out the best value for the lowest cost.  The best way to accomplish this is through Health Savings Accounts (HSA).  To get complete free market competition, the Stark Laws and Certificate of Need laws need to be repealed.  In addition to HSAs, numerous authors have written books recommending various reforms such as making health coverage portable, eliminating mandated benefits from health plans, tort reform, and allowing individuals and families to purchase medical insurance with tax-free dollars.  All of these actions will help make the medical marketplace more competitive, but until the Medicare price-fixing is eliminated, the National Health Expenditure projections will continue to rise.

John Lilly, MBA, DO is a family physician and President of The Y.O.U.N.G. Conservatives of America (  He can be reached through his website (