Medical Pricing Is A Total Scam

Over the weekend, the Washington Post posted a great, long story about how Medicare and most private insurers are basically making up the prices they pay for services.

The short version is this: Medicare bases its payment for any medical procedure on an estimate of how resource-intensive that procedure is. One of the most important resources that goes into a procedure is a physican’s time. So Medicare has the American Medical Association survey doctors about, for example, how long it takes to perform a colonoscopy.

The doctors answering the surveys know they are used to set Medicare reimbursement rates. You can guess what happens next: The doctors vastly overestimate how long procedures take, in an effort to boost how much they get paid.

According to research by the Post, if Medicare’s time estimates were correct, many doctors would be spending more time doing procedures each day than their clinics are open—and a handful would be working more than 24 hours a day.

Barbara Levy, the doctor who chairs the AMA committee conducting the survey, admitted to the Post that “all of the times are inflated by some factor.”

But she still defended the process, arguing that even if the times are wrong on an absolute basis, they are relatively right: everything gets inflated by about the same amount, and Congress can offset the inflation by pushing down the amount it will pay per unit of doctors’ time.

That’s not exactly a heartening defence, especially because the inflated time estimates help doctors argue their payments are being unfairly cut. The medical lobby has repeatedly succeeded in getting Congress to “patch” the Medicare formula that is intended to control the growth of Medicare payments, arguing that otherwise doctors will drop out of Medicare.

When I tweeted about this article on Saturday, some conservatives pointed to it as exposing the folly of government involvement in medical pricing. But private insurers aren’t doing any better. The Post notes that most simply adopt Medicare’s point system, and then pay more per “point” than Medicare does, meaning they keep the same mispricing while paying more overall.

But the biggest outrage about this system is not the mismeasurement. It’s that we’re paying doctors for their time instead of for keeping patients healthy. The amount of time that a doctor spends performing a colonoscopy has nothing to do with how useful it is to the patient. Paying more for longer procedures just encourages physicians to perform more and longer procedures.

This story is a reason to be hopeful about capitated payments, Accountable Care organisations, and other reforms that are intended to shift away from paying for procedures and toward paying for quality of care. What we really want is for doctors to keep patients healthy, and to only perform procedures if they serve that goal cost-effectively.

Paying for outputs instead of inputs will make it less important for Medicare to know how long a colonoscopy takes—and will make medical pricing less of a racket.

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