The Power to Walk Away From Medicare and Medicaid

Health policy experts Mark A. Hall and Carl Schneider have recently published a policy brief on “provider price gouging.” I’m familiar with Hall’s extraordinarily wide-ranging and insightful work on health care law, and this research shows once again why he is at the cutting edge of the field. It offers the following findings:

Debates about reform have scrutinized the health-insurance market, but they have neglected a crucially defective feature of the medical marketplace — the way doctors and hospitals charge patients when prices are not set by regulation or by negotiation with insurers. . . .

A comprehensive analysis of data hospitals report to Medicare shows that, on average, hospitals charge uninsured patients two-and-a-half times more than they charge insured patients and three times more than their actual costs. In some states mark-ups average four-fold.

This empirical research confirms what antitrust scholars long suspected: merged hospitals and increasingly powerful single-specialty groups would have a great deal of power to set prices. That’s one reason the “cost shift hydraulic” leaves private insurance payments around 122% of hospital costs, while Medicare pays about 100%.

What’s the end game for ultraprofitable specialties and dominant hospitals?

Perhaps treating Medicare patients with the same aloofness many now display toward Medicaid enrollees. As Joseph White reminds us, “Power in a market is basically the ability to walk away from a contract if one does not get a price one likes—or to force others to agree to a contract on terms that one does like.” The more specialists and dominant hospitals can squeeze from private insurers, the better financially positioned they are to simply refuse to take Medicaid and Medicare patients.

Provider price-gouging suggests a simple truth of zero-sum dynamics in health care financing. To the extent one group overpays for medical services, they start empowering their providers to turn their backs on the rest of the market. For that reason alone, a public plan should pay somewhere between the 100% Medicare baseline and the 120% private insurance payment rates. Without that intervention, we can expect dominant hospitals and powerful specialists to develop even more market power than they currently enjoy. As Abraham Verghese argues,

We may not like it, but the only way a government can control costs is by wielding great purchasing power to get concessions on the price of drugs, physician fees, and hospital services; the only way they can control administrative costs is by providing a simplified service, yes, the Medicare model (with a 3% overhead), and not allowing private insurance to cherry-pick patients (some of them operating with 30% overheads, the cost passed on to you).

Contrary to what we might think, comparative studies show us that the US, when compared to other advanced countries, does not have a sicker population: we actually use fewer prescription drugs and we have shorter hospital stays (though we manage to do a lot more imaging in those short stays—got to feed the MRI machines). The bottom line is that our health care is costly because it is costly, not because we deliver more care, better care or special care. Alas, a solution that does not address the cost of care, and negotiate new prices for the services offered will not work; a solution that does not put caps on spending and that instead projects cost-savings here and there also won’t cut it. Leaders have to make tough and unpopular decisions, and if he is to be the first President to successfully accomplish reform there does not seem to be much choice: cut costs.

Hall & Schneider also offer several compelling policy ideas for checking provider price gouging, including a cap on “what doctors, hospitals, and other providers may charge patients who are not protected by regulated or negotiated discounts.” Such caps are good first steps toward reform.

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