Medicare drives up cost


You don’t believe me? Would you believe the guy that help set up the medicare doctors pay tables then?

From NPR;

DAVID KESTENBAUM: Califano was President Lyndon Johnson’s adviser for domestic affairs. And the government was about to get into the health insurance business in a huge way – about to launch the largest health insurance plan we’ve ever had: Medicare. But the idea made doctors nervous, so LBJ, Califano and lawmakers made what seemed like a small concession. The government told doctors: We will pay you for every procedure you do. How much will we pay you? Whatever you think is right.

KESTENBAUM: Why were you worried they wouldn’t participate? You were going to pay them whatever they wanted.

Mr. CALIFANO: They were so opposed to it. I mean, they reluctantly – believe me, within two years, they love it. But they really didn’t understand what a bonanza this was going to be for them.

KESTENBAUM: Turns out, doctors had been giving out a lot of free care to old people and now they were going to get paid for that, and within limits, whatever they asked for.

So Government intervention crowds out pro-bono charity work. Who wouldn’t take money for something they were doing for free anyway right?

Dr. LUCIAN LEAPE (Surgeon): We found out what the general fee for our service was and charged that or maybe added 10 percent, ’cause of course I’m better than average. And so it was an incentive for doctors to charge what they thought was reasonable for them, and then of course to increase it every year by, say, 5 or 10 percent.

KESTENBAUM: Medicare solution for how to pay doctors put into cement this idea of fee for service, paying doctors per procedure for every test, every scan. That sounds reasonable, but it served as a nudge to err on the safe side – to do more tests, to do that exploratory surgery.

JOFFE-WALT: LBJ and Califano, all their people, all realized they created something of a monster right away. I mean, two years after Medicare passed, LBJ is pleading with Congress to let him change the way Medicare pays physicians.

It only took two years for reality to hit the politicians. When you pay doctors for every little test, some of which they used to do for free, costs go up. Any person with an ounce of common sense could figure that out. No wonder the politicians couldn’t figure it out.

Mr. CALIFANO: I know it. But we saw what was happening with costs so fast. So fast.

KESTENBAUM: But they couldn’t change it. Doctors now like the system. They were getting paid for work they’d previously done for free. And that was that. This system, with all its problems, stayed in place for almost 30 years. Meanwhile, medicine got more expensive.

So you have a system in place with rampant price inflation, created due to Government interference with the market. So what does the Government, in it’s infinite wisdom decide to do?

KESTENBAUM: And yet, in 1986, one man was convinced he could calculate the prices. An economist at Harvard by the name of William Hsiao; an economist with a small voice and a big, kind of weird idea.

Professor WILLIAM HSIAO (Harvard University): So the question is: Can we find a rational method that could be used to set physicians’ fees?

Now this next part is the best. Anyone read their Das Kapital lately, if you did you’ll recognize their solution right away.

JOFFE-WALT: Professor Hsiao decided, okay, the market does not work for health care services. So I will calculate the right prices for each and everything a doctor does.

Sound familiar?

KESTENBAUM: Hsiao brought in groups of doctors and asked them some pretty crazy sounding, almost philosophical questions like: How much mental work does a regular checkup require? He had them compare everything they did to one reference point. For surgeons, it might be a hernia repair: How technically hard is it, how stressful, how many supplies? Hsiao had doctors do this for thousands of procedures.

JOFFE-WALT: While Hsiao was creating his Relative Value Scale, he’d invite groups of doctors in to advise him. And the doctors would bring their own advisors, consultants – lobbyists, really. Hsiao wouldn’t let them in the room, so they’d sit outside. And then those consultants started coming out with their own relative value studies that were more favorable to whatever group of doctors they represented.

Relative Value System? Using measures like mental capacity, equipment used, stress….well it’s our old old friend the Labor Theory of Value, the workhorse of every Marxian economist.

You might want to ask Russia, Cambodia, Cuba and North Korea how well that has worked for them.

JOFFE-WALT: In 1992, Congress adopted Hsiao’s Relative Value Scale, that enormous spreadsheet. And it worked for a while until just a few years later, it didn’t anymore.

Gee I wonder why it didn’t work anymore? Maybe it’s because you can’t set arbitrary prices and expect efficient use of resources? If they would have read their Mises and Hayek, they would have known that an arbitrary price system doesn’t and never will work. (If they had read their Mises and Hayek, they’d have seen the Housing bust coming too.) It’s the Economic Calculation Problem. It’s the reason why every socialist economy is doomed to failure.

Don’t believe me? See how well off they are in Cuba, or North Korea.

Anyway, the point of this post is that Government interference makes the problems much worse than they otherwise would have been. Markets aren’t perfect, but they are a thousand times better than government planning. Also, we can see how Government intervention directly causes rent seeking. The best part of the whole piece is that it was from NPR!

I consider it a good use of my taxpayers money to show the public how inept and asinine government intervention really is. Unfortunately, I think that message will be lost on most Leftists and Statists. Instead of saying; “Man, it worked better before the Government got involved.” They will be sayings something like, “Man, We need more government intervention because the first round wasn’t enough!”

Where have I heard that?… Oh yeah…it’s the same logic they use for needing more stimulus.

If they’d only read their Mises and Hayek…..

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  1. March 1, 2010 at 20:58

    Of course you’re deriving your conclusion based on the “assumption” that doctors would have continued to see elderly patients for free, or that they would do so today. As there are a documented 20,000 uninsured people that die every year, I’m wont to believe that it wouldn’t happen.
    You make very unlikely comparisons to a socialized system of medicine in mixed market countries such as the U.S. to that of state run cultures like Cuba. Further, the current bills being proposed are a long cry from socialized medicine. And, by the way, part of Cuba’s economic woes have nothing to do with their government, but with our sancitons against them.

    • March 1, 2010 at 21:29

      Ever heard of Doctors Without Borders? And of course since your so informed you know that Doctors can’t give free care anymore in the US thanks to Government regulations. So your point is mute, because the law won’t let us test either of our hypothesis. Yet, we do know of US doctors giving free care to people in countries were those laws aren’t present. How many doctors went to Haiti? How many are going to Chile?

      Oh I see, it’s everyone else fault that Cuba is so poor. I got ya. Has it ever occurred to you the reason we have those sanctions is directly because of the kind of government they have? Your not as smart as you think you are.

  2. March 2, 2010 at 00:05

    “Your not as smart as you think you are.”

    Well, maybe not… buy I know that you meant, “You’re not as…”
    And yes, I’m aware of DWB, as I traveled with them to Guatemala.

    What regulations would those be? Doctors give free, or extremely reduced cost care all the time. I did not mean to imply that doctors, as a group, are mercinary or completely without compassion. However, it’s obviously not a cure all.

    As for Cuba, I know the reason for the sanctions, and I didn’t imply that they were just or unjust – only that it certainly adversly affects their economy, which means that your comparison is invalid. You imply that they are poor because they are communist. Maybe they would be, however, what we do know is the negative impact our policies have had.

    • March 2, 2010 at 08:25

      Yes, I meant you’re, one of the dangers of commenting via iphone app.

      You made the statement to the effect that doctors are more selfish today than they used to be, when you said, “doctors would have continued to see elderly patients for free, or that they would do so today.” Now that you acknowledge groups like DWB, do you still think that doctors wouldn’t give free or reduced cost care to the elderly?
      As it is right now Medicare laws don’t let Doctors give free or reduced cost care. Although it’s more complicated than that, Doctors can but they have to remove themselves from the Medicare program. It’s one of those all or nothing propositions that’s used to keep people in line. Think about it like this, you want to give to charity, but the law states in order to give to charity you must work for the charity full time. That would mean giving up your regular job or having to go to extraordinary lengths in order to keep giving to charity. What would you do?

      As for Cuba, I’m not quite sure if your trying to defend Communism or not? I used North Korea as an example as well…are you going to implicate that it’s US action what is causing the widespread famine and suffering under Kim Jong?

  3. yttik
    March 2, 2010 at 09:14

    I support medicare and even medicaid, but we need to look at those programs honestly and acknowledge their problems. Both programs have price fixing which has caused doctors to stop providing services. Who wants to work for 6 bucks an hr? Dentists are an obvious example, there’s hardly a dentist in this country left who will serve patients on medicare or medicaid. There are some who basically volunteer their time to serve kids on medicaid, but adults, the elderly, forget it. The reimbursement rate is too low. We have completely eradicated dental care for low income people in this country in only a few years.

    And because of the low reimbursment rates of medicare, doctors and hospitals must raise their rates on private pay customers to compensate. If you go to a hospital as a cash customer, you will be paying quite a bit more then a medicare recipient. The reason for that is simple, medicare does not pay enough to keep doctors and hospitals afloat so they pass the cost onto us.

    We had a couple of doctors here that stopped accepting medicare and medicaid and even private insurance. They simply took 40% off your bill if you paid cash at the time of service. It was fabulous, you could visit the doctor for 30 bucks. Unfortunately the city and county Gov as well as the hospital got together to run them out of town. They were a threat to the system and accused of stealing all the customers, depriving the county hospital of revenue.

    • March 2, 2010 at 09:34

      My problem is with the perverse incentives that Medicare introduced.

      Doctor’s Pay: As the NPR report said, Doctors, under Medicare, started charging for things they used to offer for free. Now once you start getting paid, you don’t want it to stop! What rational person wouldn’t want to keep getting paid? The problem arises in the long term, like now, when you have 2 or 3 generation of doctors that now think they ought to get paid for all those things. The Medicare not only created an entitlement for Seniors but also an entitlement mentality with the doctors as well.
      Doctors thinking they ought to get paid for those kinds of things, now raise the prices for other things when they think they are not getting paid enough. The system build on itself in an ever compounding way thanks to the unintended consequences of some politicians actions. Actions taken not for the “good of the people” but because they wanted votes.
      LBJ got what he wanted…passed Medicare to get votes because he was tanking in support over Vietnam. Kinda reminds you of what Obama is doing now doesn’t it?

      • yttik
        March 2, 2010 at 10:48

        Entitlement is an interesting thing, Zombie. It’s not always about greed, it’s more about resentment.

        For example, contractors that do federal projects will often milk the heck out of the job. It’s not necessarily because they’re greedy or see free money, often it’s because working for the Gov is such a fricken pain in the butt. You wind up with mountains of paperwork, waiting months to get paid, having certain expenses disqualified, etc. They begin billing more because of the extra regulations and paperwork required, but they soon move on to billing for pain and suffering, too. By the time all is said and done you feel “entitled” to a share of these bureaucrat’s salaries for all the crap they put you through.

  4. March 3, 2010 at 10:04

    I’m not defending communism. Here’s what I am saying:
    1. You make an indirect comparison to the current health care bill and to state run health care in countries like cuba and n. korea. I am saying that it is not a valid comparison.

    2. You cannot completely blame the economic woes that those countries have simply on the government they have. You also have to look at the global response, i.e. the US, and the economic sanctions placed on that country because we don’t like their government. I am not making a statement as to whether those sancitons are right or wrong. There are true social democracies in the world, which are much closer to true communism than the totalitarian dictatorships in cuba and north korea, that are economically solvent.

    • March 3, 2010 at 10:44

      1. Okay, then. Then please explain how the price control that Obama’s new proposal is any different from the price control in place in the UK, or Canada’s system?

      2. So what I think your saying here is, that we can’t blame countries like N Korea, Cuba, Iran, former USSR etc, for their economic problems because everyone else is out to get em? Should those countries with their government control of the means of productions run more efficient than the quasi-capitalism we have in the West? How do you explain the difference without blaming the US?

      Do you mean that they are poor because the US and the other Western countries don’t trade with them?
      Or do you mean that they are poor because the US doesn’t give them enough economic aid?
      If countries like N Korea, Cuba, Iran etc, wanted to play with the rest of the world, all they have to do is stop oppressing their people and give up totalitarianism. I hope your not making the statement that it’s bad for the West to want those countries to start treating their own people like human beings and give them basic human rights.

      Also, which countries do you think are the models for true communism?

      Plus I think your missing the point, political governance and the economic system a country has are forever linked. The only aberration I know of is China, they only went to a capitalistic economy because their command and control, communist economy was so far in the shitter, they knew without going towards freer markets they’d have gone the way of USSR years ago. But they still deny their own people basic human rights.

  5. March 3, 2010 at 12:45

    You draw a lot of assumptions about what I mean from what I say…

    I refer to my last comment to clarify what I am saying. I’m not condoning or condemning either sanctions or communist governments. I’m only pointing out the flaw in your logic. The countries you mentioned cannot be a valid comparison, because, aside from the government, all things are not equal.
    As I’ve said, I support a mixed economy, which is what we’ve always had. The only issue at debate is the mixture.
    There are no nations that are a model of true communism. As with pure capitalism, human nature gets in the way and causes problems.

    • March 3, 2010 at 17:35

      I am making some assumptions, because your not exactly clear. Maybe it’s because this comment thread has gone a bit off topic. =)
      I agree all things are not equal, they never are. All we can do is make assumptions and judgments from past history. From my perspective of history, communism and socialism has never worked. The only way they stay afloat is because of their reliance on capitalism, through trade or foreign aid with capitalistic countries etc.
      Why do they always fail? Because they can never find the right price for anything. That’s where Mises and Hayek come in. Much smarter men then you and I, who debate much smarter men and came out on top. Almost no Economist, except Caplan and Krugman but that’s a different topic, argues with Mises and Hayek’s conclusion that socialism doesn’t work. It took the fall of the USSR for people to realize they were right, even though it wasn’t a natural experiment because there were many factors in the USSR’s decline.
      Now going back to the topic of this post. Medicare attempted to do what all socialistic planners attempt to do, find the right price. Medicare tried to find the right Doctors pay, it failed. It tries to find the right price to pay for procedures, it fails. Everyone knows it failed, otherwise why would it be in trouble if it worked so well. My post is to point out how, to an extent, Mises and Hayek predicted it would fail, the Calculation problem. If you have a problem with that assumption, then you need to do what no other economist has done yet, refute the Economic Calculation problem…if you do I’m sure you’ll get a Nobel.

      I’m glad at least you acknowledge the incentives with communism. Humans will do what they do, greed is not new. The advantage of Capitalism is that greed motivates people to serve their fellow man. Socialism concentrates power to an elite few, who are almost never benevolent. That’s why the calls for the “right person to lead” coming from the Left are never answered. There is only One person who is “right” to lead, and I don’t even believe in that.

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