How Medicare payments are set

by on July 27, 2013 at 5:42 am in Law, Medicine | Permalink

It’s never a bad idea to bring this point up yet again:

Reporters Peter Whoriskey and Dan Keating have opened Post readers’ eyes to the fact that Medicare pays for physician services — a $69.6 billion item in 2012 — according to an arcane and little-known price list, over which doctors themselves exercise considerable and less-than-totally-transparent ­influence.

Known as the Relative Value Update, the process consists of a 31-member committee of the American Medical Association (AMA) recommending what Medicare should pay for some 10,000 procedures — with the fees based in part on how long it takes to complete each one. This time-and-motion study often fails to take full account of changing technology and other factors affecting physician productivity, so anomalies result: For example, Medicare pays for a 15-minute colonoscopy as if it took 75 minutes.

Here is a bit more, here is the longer article.

By the way, there is also this new result:

In one of the study’s notable insights, Dr. [Joseph P.] Newhouse said, “we did not find any relation between the quality of care and spending, in either Medicare or the commercial insurance sector.”

That is from a new study of regional variation in Medicare expenditures.  The study itself is here, and it seems to imply that regional discrepancies in Medicare expenditures cannot be easily rectified by rewarding the more cost-efficient regions.  For one thing, cost variation among providers, within a region, is large, which makes it hard to apply incentives on a regional basis.

Eric July 27, 2013 at 5:58 am

My main qualms with the ACA were the lack of protest coming from the AMA, hospitals, pharma companies, and health insurers and the lack of any move towards transparency in pricing for “commodity” services.

Andrew' July 27, 2013 at 6:23 am

An actual public good might be the proliferation of best-practices.

JWatts July 27, 2013 at 2:47 pm

How about just transparent pricing of medical services? Most doctors’ offices often can’t tell you the actual price for a service they offer.

Mark July 27, 2013 at 4:45 pm

It’s worse than that…the reported price actually has nothing to do with what is actually reimbursed. Reimbursement is all negotiated separately with each insurance company, so a single physician will be reimbursed different amounts for the same procedure by different payors, all of which are much lower than the theoretical “price.”

Andrew' July 28, 2013 at 6:05 am

So, it seems that single-payer and “using the government’s bargaining power” are just fancy words for ‘price controls.’

I think we need pricing transparency less than we need tradeoff transparency. You don’t really have any bargaining power unless you can opt-out of a procedure. Otherwise it is just price discrimination.

On the other hand, it’s a total mess unequipped to do even the most basic actual negotiating. I went to the DENTIST the other day and told the receptionist: “How much is this visit going to cost, because the last time I went to the dentist it was ridiculous” “Oh, it will be about $150″ 45 minutes later “That’ll be $300″ “WTF!” “Oh, I forgot about the additional cost for X-rays” “Well, it would have been nice to know that because I probably would have declined them.”

Boonton July 28, 2013 at 12:43 pm

In a McDonald’s meal, what exactly is the price of the burger, fries and drink? Likewise consider a market for carpets in the streets of Turkey. What is the ‘price’ is a meaningless question when each customer and each owner haggle before the transaction happens.

The concept of a single price makes sense in the Western concept of mass, big-box retailers where transaction costs make the most efficient option to slap a single price on each type of good and stick to it.

Dan Weber July 29, 2013 at 11:31 am

You have a good point (price isn’t cost), but McDonald’s can always tell you what any bundle of items would cost.

Rich Berger July 27, 2013 at 6:52 am

“The forces that normally determine prices — haggling between buyers and sellers — often don’t apply in health care. Prices are hard to come by; insurers do most of the buying; sick patients are unlikely to shop around much.”

There are quite a few assumptions embedded in this rather terse dismissal of the market, in an article about how central planning doesn’t work. Of course a market can work, if it is allowed to work. But then there are anecdotes about how someone was denied an expensive treatment and the market goes out the window.

Alex K. July 27, 2013 at 11:01 am

What I found shocking is that private insurances use those estimations for their price setting too:

“This point system is critical in U.S. health-care economics because it doesn’t just rule Medicare payments. Roughly four out of five insurance companies use the point system for the basis of their own physician fees, according to the AMA. ”

There is the issue of the difference between “using the point system as a basis” and “using the point system” but still, it seems to be a reasonable description to say that US Medical prices are basically set Soviet-style.

JonF July 27, 2013 at 2:06 pm

When was the last time anyone here haggled over a price? Maybe for a really major purchase like a car or a house, maybe at a yard sale or flea market. But 99% of the time the price tag is written in stone: you pay the asking price or you don’t buy.

JWatts July 27, 2013 at 2:58 pm

But 99% of the time the price tag is written in stone: you pay the asking price or you don’t buy.

Since we started using an HSA account 3 years ago, my wife actively calls around to find out who has the best rate and she’ll ask the doctor’s office for a better rate.

Dan Weber July 29, 2013 at 11:45 am

Even with price tags you can effectively haggle by not purchasing at store X, instead going to store Y. All those little decisions lead to a market price.

You can’t make this decision when your leg is broken and your femoral artery is bleeding out, but that doesn’t mean there aren’t many other places in the medical system where pricing information could be taken into account.

V July 27, 2013 at 7:35 am

The problem with the article as written is a fundamental misunderstanding of what the RUC does–it does not set price levels or even reimbursement levels. Congress (through CMS) does and is responsible for essentially all physician reimbursement in the country (as commercial payors follow Medicare slavishly).

The RUC instead sets relative levels between specialties and allows for a supposedly efficient allocation by experts. This may unfairly penalize primary care but it is hard to see how this affects the larger health care cost issue (especially since effective preventive care usually raises system-wide costs as per the latest research).

In any case, the article advocates either A) shifting to a new system of unaccountable experts –hardly likely to effect fundamental change and in fact, likely to cause adverse effects given the lack of clinical knowledge amongst health economists or B) shifting to bundling which has its own unintended consequences (i.e., significant increase in complexity on the provider end, misaligned incentives to ration care for the sickest patients, vociferous patient pushback, etc.)

Jan July 27, 2013 at 8:31 am

Yes, both the AMA and Congress are to blame for the constantly rising rates: “Between 2003 and 2013, the AMA and Medicare have increased the work values for 68 percent of the 5,700 codes analyzed by The Post, while decreasing them for only 10 percent…Officials determine that spending by several complex formulas laid out in federal rules. One of them forces Medicare to lower how much it pays per point when work values rise significantly. Every year since 2003, however, the other formulas have been overridden by Congress, which has adjusted the payments independently.” I’d favor a shift to experts who are at least unconflicted.

Primary care is shamefully underrepresented on the AMA committee — only two two docs out of 29. It is pretty clear that the AMA’s recommendations favoring specialists have indirectly driven down the supply of GPs.

bob August 8, 2013 at 1:37 pm

But when your experts are AMA members, it’s not really in their best interest to provide an accurate estimate. The only thing that keeps someone like that honest is competition, and the whole system is set up to avoid competition.

In the middle ages, guilds were nothing more than a way of capturing more value. Today is no different

Jeff July 27, 2013 at 9:19 am

This setting of prices according to what “experts” think they should be seems rather Soviet.

Andrew' July 27, 2013 at 1:54 pm

I might have agreed, except they use 31 experts which seems appropriate.

Eric July 28, 2013 at 4:53 pm

We’re the Baskin-Robins of price-controls!

Jan July 28, 2013 at 5:28 pm

Except there’s no control!

Medical Contrarian July 27, 2013 at 11:07 am

This controversy was acted out in the last two centuries where two schools of thought attempted to define the original of value. The objective school posited that value can be defined by the inputs involved. The subjective school believed that value can only be defined by what parties are willing to pay.

The RUC is the embodiment of the objective school of value. The problem is that this line of thought served as the basis of the resource allocation schemes of failed command and control economies of the 20th century. Administrative pricing schemes based upon this fatal conceit have a perfect bating average of success..perfectly awful. They never work.

Pricing by experts fails always. Pricing by markets fails sometimes. Take your pick.

JonF July 27, 2013 at 2:12 pm

It’s far from obvious that Medicare has “failed”. Millions of people receive quality healthcare via the program and the vast majority are, to a first approximation, quite satisfied with it.There’s almost no sentiment (among actual Medicare enrolees) in favor of any sort of massive change– and certainly not for dropping the program and throwing retirees and the disabled onto the tender mercies of the for-profit insurance industry. It’s an odd definition of failure that would ignore customer satisfaction with the product.

Andrew' July 28, 2013 at 6:07 am

Medicare enrolees are not the customers of the product.

bob August 8, 2013 at 1:44 pm

It’s easy to be satisfied with the product when you don’t really carry its costs. I’d probably love a Ferrari if Tyler bought it for me, and kept it insured. But if I have to pay for it, I am not buying a Ferrari, because I get most of the value with a tenth of the price.

The issue is not the quality of the end product, but whether we could get pretty much the same thing for much less. I’d not ask a used car salesman if the sticker he has on a car is a good deal, so I’d not ask the AMA if the price of medical procedures is fair.

Eric Rasmusen July 29, 2013 at 8:59 am

Suppose people in the US pay 69.6 billion dollars for a health service, and the market price would only have been 30 billion dollars. Is that bad news, or good news? The good news is that the real cost of health care in the US is about 40 billion dollars less than we thought, so maybe the US health care system isn’t so bad after all. There are second-order effects, though. People will be consuming too little health care, deterred by the overly high prices.

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