Follow the reimbursement rates

That is the theme of my current New York Times column.  Since the non-high-technology supply side of medicine is so restricted and unresponsive to market incentives, the health care market is out of balance.  A large number of doctors, for instance, do not accept Medicaid patients and that is because the Medicaid reimbursement rate is lower than Medicare or private insurance.  It's a key question how the queueing of Medicaid patients (and to some extent Medicare patients) will proceed as the demand for health care rises.

The new health care bill will on net make this problem worse, even though it has some offsetting incentives for more GPs.  Most Republican Party proposals will make this problem worse, by bolstering reimbursement rates for Medicare and perhaps also by worsening Medicaid.  In Massachusetts the number of emergency room visits has gone up rather than down, even as near-universal coverage was achieved.  And so where do we stand?

The American system of federalism, with its checks and balances and slow policy evolution, has many strengths, but it has also helped create this crazy quilt of health care reimbursement rates. The more demand-side pressure is placed on medical supply, the more Medicaid and Medicare reimbursements rates will determine who and what is rationed.

One option is to simply allow budget pressures to dominate, forcing down even private insurance reimbursements. Most people would end up with low, Medicaid-like reimbursement rates, and would endure long waits and low-quality service. But wealthier people could jump the line by paying more. Think of “Medicaid for everyone” but the rich.

An alternative is giving most people means-tested vouchers for a fixed amount of insurance coverage – which can run out or face up-front caps – making Medicaid and Medicare less of a blank check. The cost explosion would be checked by shifting more of the burden onto consumers. We would have better incentives for consumer-oriented care, and cost control, but we would be making an explicit public decision, at some point or another, to let some people do without medical care.

Recently the Arizona state government restricted transplant coverage for Medicaid patients, but it remains to be seen whether such measures can be applied to Medicare recipients. President Obama already has reversed some of the planned, budget-saving cuts to Medicare.

An entirely different approach is suggested by the system in Singapore, where the government requires savings (say 10 percent to 12 percent of income), patients pay for medical care from those savings, and the government takes care of additional catastrophic expenses. That system has a good record for cost control and access, but would Americans accept so much required saving?

The default course is to maintain or extend Medicare reimbursement rates, raise taxes considerably and accept that Medicaid recipients will face worsening health care access. If you hear of a new solution to the health care puzzle, put aside the politics and instead think through the endgame. Ask not about the rhetoric, but rather about the reimbursement rates.

Here is a good post on Medicare reimbursement rates.  Ezra Klein recently had a good post on how the coexistence of private insurance and Medicare messes around with both, but I cannot find it through Google; please leave the link if you know it (update: link is here).

One general problem is that Medicaid is crushing state budgets, but diminishing Medicaid — overall the cheapest form of coverage currently available — would likely impose greater health care costs on some other part of the system.  One big question, which I did not have space to consider, is whether cheap private insurance could be much better in the absence of coverage mandates.

Addendum: Arnold Kling comments.


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