Should Medicare pay for patient expenses the way automobile insurers pay for car-repair bills?

Medicare's current method of paying physicians sets fees for more than 8,000 separate procedures and services, totaling over $60 billion annually. With Medicare's formulas underpaying for some services and overpaying for others, this complex system is an inefficient use of resources that discourages the use of primary care in favor of more expensive specialty services. Provided with virtually unlimited medical services at low or no cost, patients today have little incentive to choose their care wisely.

In How to Fix Medicare: Let's Pay Patients, Not Physicians, health economist Roger Feldman argues that a radical shift in Medicare policy is not only possible but imperative. Under Feldman's "medical indemnity" proposal, Medicare would pay each patient a fixed amount of money, reserving larger subsidies for sicker people. Patients, in turn, would select their own medical services from providers who would set their own competitive rates.

A medical indemnity system would do away with the distortion in patients' incentives wrought by conventional Medicare coverage. Given a fixed amount of money to spend on medical care, patients would have strong incentives to shop for the combination of services, providers, and prices that most closely meet their needs.

Medical indemnities have already been tested successfully in the Medicaid program for some patients needing long-term care services. Feldman's indemnity system protects patients whose conditions are much costlier than average while avoiding the proliferation of costly individual indemnities.

Implemented wisely, medical indemnities would expand consumer choice, improve program efficiency, and simplify the Medicare program.

Roger Feldman is the Blue Cross Professor of Health Insurance and professor of economics at the University of Minnesota.

Visit How to Fix Medicare: Let's Pay Patients, Not Physicians AEI Web Page

Paperback: 120 pages
Author: Roger Feldman
Publisher: Aei Press (July 2008)
Language English
ISBN-10: 0844742651
ISBN-13: 978-0844742656

Download How to Fix Medicare: Let's Pay Patients, Not Physicians

PDF format, 293KB, 120Pages.

Introduction
Since its inception, Medicare has been deeply engaged in setting prices for hospitals and physicians. At first, this was done by mimicking the practices used by Blue Cross and some Blue Shield plans at the time Medicare was enacted, namely, paying hospitals’ average costs and physicians’ “customary, prevailing, and reasonable” charges.

During the 1980s (for hospitals) and 1990s (for physicians), Medicare discarded these initial approaches to setting prices and substituted prospective, diagnosis-related payments for hospitals and a fee schedule known as the “Resource-Based Relative Value Scale” (RBRVS) for paying physicians. The RBRVS attempts to base the fee for each service on the amount of work required to produce that service, objectively measured by the physician’s time, mental effort and judgment, technical skill, physical effort, and stress.

While most health-care economists would agree that the prices of physicians’ services should be related to the work required to produce them, the RBRVS does not use market forces to determine the value of the physician’s work. Instead, it controls the prices that physicians are paid for every billable service.

Similar price controls are applied to hospitals, which are prevented from billing patients more than Medicare’s allowed payments. In 2006, Medicare controlled the prices of approximately two hundred billion dollars’ worth of hospital and physician services, or 1.6 percent of the gross domestic product (GDP). ...

About the Author
Roger Feldman is the Blue Cross Professor of Health Insurance and Professor of Economics at the University of Minnesota. Dr. Feldman was a Marshall Scholar at the London School of Economics and holds a PhD in economics from the University of Rochester.

His research examines the organization, financing, and delivery of health care with a focus on health insurance. He also studies competition among health-care providers and insurers. Currently, he is evaluating the effect of “consumer-directed” health plans on medical care utilization and personal saving decisions. Dr. Feldman’s experience in health policy includes serving on the senior staff of the President’s Council of Economic Advisers, where he was the lead author of a chapter in the 1985 Economic Report of the President. From 1988 to 1992, he directed one of four national research centers sponsored by the Centers for Medicare and Medicaid Services (CMS).

He advised CMS on the design of a demonstration of competitive pricing for Medicare M+C plans and, recently, provided advice to the assistant secretary for planning and evaluation (U.S. Department of Health and Human Services) on the potential for health savings accounts to reduce the uninsurance rate in the United States.

Dr. Feldman is a regular contributor to journals in economics and health services research. His research has received four “best paper” awards from the Association for Health Services Research and the National Institute of Health Care Management. He has been a consultant to the U.S. Department of Justice and several state regulatory agencies regarding health plan mergers and ownership changes.

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