Red Tape By Any Other Name — How Medicare Drives High Healthcare Costs

Yes, Medicare pays the medical bills for millions of people 65 and older. And its benefit is tremendous. But recent studies show it plays another huge role in American healthcare: It helps set prices for everyone in the economy.

For practically every procedure and service — from routine colonoscopies to brain surgery and hospice care — Medicare comes up with a dollar figure that the government considers a “fair price.” This completely defies the notion of a free market, though. And now economists are finding that, largely because of the program’s vast scale, Medicare prices substantially shape what all Americans pay for healthcare.

“Our results suggest that Medicare’s decisions are far more influential than you may imagine,” said Joshua Gottlieb, an economist at the University of British Columbia. He did research to prove that a $1 change in the price that Medicare pays yields a $1.30 change in what private insurers pay.

That raises a question: Where does that $0.30 go? Assuming a zero sum game, it has to go somewhere. And based on steadily increasing profits for drug companies, it seems these large corporations are the real benefactors of red tape’s price manipulation.

But as Direct Care practitioners, we’re fighting to reinstate free market principles. We’re not in the business of denying older patients affordable access. In fact, if quality care was really the main objective of our administration the obvious solution would be to subsidize retirees with non-taxed HSAs that could be used for medical expenses.

However, we don’t see simple solutions like this because of the elephant in the room — red tape. Red tape is what makes one injection of a name brand drug cost $2,000 (even though a generic drug is being shown to be just as effective at a lower price). Careful, though: just because one shot costs that much, doesn’t mean the doctors are the bad guys. No, these fee-for-service doctors have to A) wait, sometimes months, for reimbursement and then B) give back most of that money to the drug company.

The real winner here is the drug company. Think about it, the more dollars flowing between the government and insurance companies, the more a middleman can rake in. It’s the simple reality of being a salesperson.

But what happens when the government gets those prices wrong? In the past year, a Washington Post investigation has shown that Medicare prices are sometimes based on faulty premises, offer perverse incentives for unnecessary care and provide widely varying amounts for equivalent drugs.

The government might be dishing out billions of dollars more than they need to. Moreover, the influence of Medicare prices means that those faults may be replicated throughout U.S. healthcare.

Over the next year, agency officials said they will be developing new ways of determining payments.

“It’s a very big problem — Medicare pays too much for a lot of stuff it buys,” said Bruce Vladeck, who headed Medicare under President Bill Clinton. “If you had better pricing policy, a whole lot of hysteria about long-term insolvency of Medicare would go away.”

“Medicare is a wonderful program, but behaviorally, because of the price-fixing, it’s a mess,” said Tom Scully, who was Medicare chief during the George W. Bush administration and is now a partner in a private-equity firm that invests in healthcare.

Moreover, while some fault private interests for gaming the pricing system, Scully and others said that the root of the problem is mispricing by Medicare.

“It’s all about economic incentives,” Scully said. “If you lay the bread crumbs out, you can’t blame people for following.”

According to estimates from the Congressional Budget Office, Medicare, even after the Affordable Care Act is fully implemented, will consume more federal money than any other health-care program. Its spending is forecast to rise by about 7 percent per year, in part because of our aging populace and rising per-patient costs.

And economists believe that in the absence of a traditional market for medical services, the Medicare prices form the foundation for private insurers, as well.

That is partly because Medicare is such a huge player in the market, accounting for more than a fifth of the money spent on personal health care. But there is a second, possibly more important impetus: Because of the complexity of modern medicine, setting prices is an arduous, time-consuming task. Insurers save money by letting Medicare do the work.

However, there is a way out. We’re paving the way for patients and doctors to get around this mess, and save money every month. We’re helping patients cut down insurance premiums by 30-60% per month. That money can be put away for a rainy day, so to speak.

This collective laziness is allowing crafty organizations to profit, though. The real goal of the free market should be to take back control. And a great place to stake out would be primary care. The government doesn’t subsidize your auto repairs and your gasoline, something that’s predictable and routine. So why should it set the prices on your family doctor?

Yes, the task might seem arduous, to establish market prices all of medicine. But we’re doing pretty well in our field: Make doctors available for the monthly cost of Starbucks, or a phone plan; make everything else as cheap as possible — free procedures, wholesale prescriptions and labs, negotiate for discounted tests…