How Medicare influences private payment systems (model this)

There is a new paper by Jeffrey Clemens and Joshua D. Gottlieb on this topic, the abstract is here:

We analyze Medicare’s influence on private payments for physicians’ services. Using a large administrative change in payments for surgical procedures relative to other medical services, we find that private payments follow Medicare’s lead. On average, a $1 change in Medicare’s relative payments results in a $1.30 change in private payments. We find that Medicare similarly moves the level of private payments when it alters fees across the board. Medicare thus strongly influences both relative valuations and aggregate expenditures on physicians’ services. We show further that Medicare’s price transmission is strongest in markets with large numbers of physicians and low provider consolidation. Transaction and bargaining costs may lead the development of payment systems to suffer from a classic coordination problem. By extension, improvements in Medicare’s payment models may have the qualities of public goods.

This paper, which seems quite sound to me, has a few implications.

First, if you are unhappy with the American health care system, government is more at fault for the problems of the private sector than it may at first appear.  We have a much more governmental system than most of its critics care to admit and that goes even beyond government health care spending as a percentage of total health care spending.

Second, we could cut Medicare reimbursement rates, by limiting the doc fix, without old people all very rapidly going to the back of the health care queue.

Third, the authors find that the larger Medicare becomes, the stronger this “pass through” effect generally will be.  In other words, this result will be all the more true in our future.

Fourth, the cross-sectoral price transmission result implies that long-run supply elasticities in the sector are not large, which also does not bode well for the future of health care access in an aging society.

Overall this is a depressing paper, although it implies that successful Medicare cost control could have significant cross-sectoral benefits, beyond Medicare itself.


Arnold Kling wrote about this in Crisis of Abundance.

There is no real private sector in healthcare to speak of. There are some private firms, but the system is almost wholly controlled by government via the pricing. If you want to talk about private sector healthcare, you have to look to small examples such as lasik surgery, cosmetic surgery, the Surgery Center of Oklahoma. The only way to build a viable alternative would be for a state to try and exit Medicare and Medicaid and instead take a block grant to create an entirely new healthcare system, which isn't going to happen. People just have to wait for the government to run out of money. When there's no Medicare or Medicaid, medical costs will collapse and the private market will return.


I find it striking that anyone still thinks we have a private health care system. Even more shocking is that economists seem to be oblivious to the warping effect of government in any market. When the state steps in and sets prices, you no longer have an open market. It is not just the state. If you make some gadget that requires a unique part that no one else uses, you can set the price to cost plus some slight margin. Heck, even if you are just the largest customer of a small vendor you can do this. GE has made a science of finding small vendors to dominate. Ditto Walmart.

I also agree with your conclusion. everyone wasting time and money on reform proposals are doing exactly that, wasting time and money. Even ACA will have little impact the trajectory of the health care sector. It will run its course, run out of money and then collapse. It will not be all of a sudden. It will be a slow retreat and concierge medicine grows up along with foreign providers. A decade from now Tijuana will probably be a nothing but low cost doctors and suppliers to doctors.

Will US health care "collapse" before those of Canada, France, Britain, Germany, Israel, Switzerland, Japan, Taiwan, Singapore, where the government is more involved in the health care system than US governments are in US health care?

Apples and oranges. But, no amount of facts or experience is likely to leave an impression on your mind, so I don't bother debating guys like you. I don't argue with Muslims about Mohamed or baptists about evolution. Believers can't be taught.

Not before Japan's at least:
Japan’s debt looks like this 1,000,000,000,000,000 yen

And bankruptcy hits health care hard:

I basically think this is all a game where we vote ourselves entitlements until reality hits. All of those countries you listed are doing the same thing so they will have the same problems.

Here's an idea: Nationalize all healthcare (like the countries listed above). The single payer systems are all cheaper than the US's, so this should be a net positive to the balance sheet. Then 10 years later, sell off all the hospitals, insurance providers, etc.

Basically i think we need a big reset button. Nationalization then selling off everything would accomplish that to a degree. At the very least, it should reduce costs.

If we are talking about the dawn of correction maybe it is better that we get there first.

After the ACA: Freeing the market for health care. John H. Cochrane, 10/18/2012.

After the ACA: Freeing the market for health care, John H. Cochrane, February 6 2013

A free market? Are we going to eliminate doctor licensing, create more medical schools, eliminate limits on immigration of doctors, eliminate patent protection for pharma, eliminate the deduction for employer provided insurance, etc.? These are massive government interferences in the market. They also have the effects of increasing inequality (doctors have higher income, pharma owners are wealthier, deductions are worth more for higher incomes).

The roads. You forgot the roads.

And Somalia.

Planes falling out of the sky.

Who are you asking? It does seem like artificial scarcity combined with free money is a recipe for a jacked up economic sector. Then we observe a jacked up economic sector. It seems we did the experiment.

Why do private insurers follow Medicare's lead on reimbursement? It doesn't seem like they necessarily would or should.

Basically, my mental model looks like this:

a. We know that, in general, private insurance reimbursement is between 140% and 160% of Medicare because there is zero profit in medicare, and operating losses for Medicaid and uninsured.

b. Doctors have good knowledge of the internal operations and cost to charge ratio of an actual procedure, but insurance do not have this visibility. Medicare's payments board (being replaced next year by the IPAB), in theory, does.

c. Private insurance companies need to negotiate individual reimbursement agreements with a very large number of hospitals and providers.

d. because of the information asymmetry in B, plus the significant time requirements in C, private insurance companies blindly ape Medicare's relative value scheme (known as RVUs) because it is a single nationwide standard for charging healthcare. They simply take the RVU scheme and merely negotiate individual dollar to RVU ratios for every provider.

Bottom line, the linked paper seems to agree with this mental model, when the RVU of a Medicare treatment goes up, private insurance companies follow in lockstep.

There is an important policy implication, if we were to shift to some sort of voucher or premium support model, but only if we eliminate the existing "public option". Then, suddenly the relative value of different procedures would not be set by a panel of bureaucrats and lobbyists. Instead insurance companies would be forced to come up with some pricing scheme of their own, forcing pricing into an open market. This may be expensive (initially) and disruptive, but long term, it could only have positive benefits.

Is it even possible to subsidize certain people (~half) in-kind without the general market price increasing? How many economic laws (e.g. of one price) does that flout?

I think this paper is more about health care reimbursement rates than the health care system, per se. It has always been true that private payers follow Medicare's lead, but it is interesting to what extent. One thing that the paper doesn't comment on is coverage decisions. One of Medicare's big problems is that it pays for just about anything, often without any evidence of the value of the treatment -- and rarely does it have a prior authorization requirement, unlike private insurers. If Medicare can start prioritizing high value treatments, it would have a strong impact across insurers. Another issue not quite addressed is that more and more people are enrolling in privately-run Medicare Advantage plans, which are not subject to Medicare fee for service rate setting. If this trend continues, it is possible the Medicare FFS population may actually decrease in coming years, along with Medicare's market influence. Finally, payment policies are starting to move away from fee for service and towards bundled and ACO models, which could change how Medicare impacts the private market.

Yeah, top-down, one-size-fits-all formulary restrictions from the central government. Sounds like a great idea in a world where it is rapidly becoming easier and easier to tailor health care treatments to an individual's genetic make-up.

They have this in Canada. It sucks. Individualized treatment is the future. Top-down health care dictat is the past.

Is that why some of my relatives in Michigan used to buy their drugs in Windsor? ;-)

The science is there to target care by genetic make up for, what, like .5% of treatments?

No, the reason your relatives bought their drugs in Windsor is because Ontario's drug price regulations created a series of market distortions that resulted in brand drugs being cheaper in Canada, while generic drugs are much, much more expensive.

And when you factor in both generics and branded products, Canadian per capita spending on drugs is much much lower than it is here in the US.

Are you saying that there aren't market distortions in the US? Pretty much every country has regulations that impact drug pricing, it's just that everyone does it better than the US.

Yes, they spend less because they have enacted price controls so strict that some medicines are not even available there. Other drugs only become available once the branded product goes off-patent. Is this how you would like the US system to run?

What happens is that drug companies release their products in the large, profitable markets first, i.e. the USA. Then, once they have made a little money for their 20-year R&D cycle, they start introducing products into foreign markets one-by-one. This is what i mean when I say that the US system subsidizes foreign health care. It is only because companies can make a profit in the USA that they have the financial ability to introduce medicine into other countries. Take away the profits, and why would any of them continue to make and sell medicine anymore?


These cost-containing solutions are nothing more than strangling the goose when we need eggs. I agree that the US system has problems, but we need solutions that work, not regulations that destroy our ability to supply mankind with medicine.

It is the reason why Canadians cross the border from Ontario to Buffalo for care. Here is an example:
All of the Buffalo area hospitals (and outlet stores) advertise in Ontario.

And as far as genetic targeting, the idea the RPLong is trying to get across is that the future will hopefully be better than the present. There is a lot of room for experimentation in health care, and a top-down approach does not accomplish this.

This study is essentially confirming what everyone already admits. Below is a quote from a basic consumer site:

"Some types of plans, like a PPO or POS, cover some portion of your care if you receive services from providers outside your plan's provider network. Since Medicare is such a large, established plan, many insurers use the program’s payment schedules to help determine what they will pay out-of-network providers.

Medicare’s payments are usually lower than payments from commercial health insurers. So, some insurance plans use Medicare's fee for a specific medical procedure as a base, and then multiply it by a certain percentage to develop the maximum amount that they will pay for that procedure.

For example, if you visit an out-of-network doctor, your insurer may agree to pay 130% of the rate Medicare would normally pay for the visit. This means that if Medicare would normally pay $100 for an office visit, your insurer would agree to pay up to $130."

This is pretty typical more broadly. It's not the case, however, that govt has a monopoly on influence for payment or coverage. The larger health plans that can afford rigorous reviews and coverage decisions can drive payment outside their organizations as well, as can specialty societies. As noted, it does suggest that improvements to the Medicare payment system could have large effects. Of course, if one of the large private insurers came up with a great new system that could, in theory, do the same -- it's just unlikely.

Isn't it possible that cause and effect have been reversed in this analysis? How does Medicare determine its reimbursement rates... by simply naming a price that the government prefers to pay? I doubt it. Would it be more accurate to say that $1.30 change in private payments results in a $1 change in Medicare reimbursement? Medicare must respond to market rate increases and must not lag too far behind the market, otherwise an unacceptable percentage of providers will decline to participate in Medicare.

The beginning of the abstract describes how the authors deal with that possibility. They find a change in Medicare prices that they argue is exogenous.

These researchers keep showing Tyler dirty pictures.

Wait wait. How did you reach those conclusions??

What I see is that private insurance pays 30% more than the public option.

The natural conclusion would be to expand the public option, save 30%!

Every other civilized country in the world has done this, and they all spend far less with much better health outcomes.

Health outcomes are not any better.

are you serious? we're lower in virtually every category

No we're not. Review your sources.

Well, prove the results for all the other nations are worse for everyone living in those nations than the US health care mess is for everyone in the US.

In other words, prove the working poor in the US without employer health benefits get care equal to or better than the working poor in Canada, France, Germany, Switzerland, Britain, Japan, Taiwan, Israel, ....

Eg, the working poor laborer without employer insurance in the US with a bad knee does not need to wait longer to have repair and rehabilitation than in these other nations.

...Or stiff doctors by 30%. All depends on how you look at it.

I keep saying this, but no one wants to listen... but I'll say it again: In Canada, the fact that the US pays more for health care is seen as an enviable fact about our country: "They spend more on their health care system per patient than we do, and we're the ones with socialized medicine! We need to increase funding!"

You'll never solve the health care system's problems by looking at costs. We're just shuffling the deck here. We need more treatments, more medicines, more doctors, more nurses, more innovations. We need to stop pulling on the reins here. The problem is not costs, it is supply. We need more health care.

nobody says that in canada.

If you say so.

I'd like more supply, but its not the biggest issue. The US supply side isn't that different than other OECDs, yet we pay double

Don't even try.

They can't hear you.

This is interesting because it is sometimes claimed private insurance pays more because they must 'make up' for the amounts Medicare is supposedly short changing hospitals and doctors by not paying enough. Yet if this was the case an increase in Medicare spend would cause private rates to fall. After all, if the hosptial is no longer 'getting stiffed' on granny whose having a bypass, then it has less need to 'overcharge' the 30 something woman having a baby with private insurance on the other side.

It also makes me wonder what would happen if Medicare was simply opened up to anyone who wants it. If they are younger than 65 they simply pay whatever the cost of adding themselves to it (individual, group or employer). Unlike single payer it wouldn't be mandated on anyone and private insurance companies would be free to offer policies in competition.

This is known as a "public option" and would save hundreds and hundreds of billions of dollars a year.

It is dirt, filthy socialism and should never be brought up in America again. Because freedom.

Great post, so Medicare for all cuts the growth of healthcare reimbursement by 30%? When will the deficit hawks start pushing for the fiscally responsible plan?

It doesn't say that. What is the relative rate of utilization? It does say that Medicare will pay for anything without requiring authorization. We know Medicare fraud to be fairly high.

Good point. Medicare costs less, even with all that fraud. Implement some PAs and only pay for treatments that add value and you are talking serious reductions in health care spending.

I don't see the issues here. It's well-known that many insurers peg their physician payment schedules to the Medicare schedule. They typically pay more, by the way, but their schedule will move up and down as Medicare payments move up and down.

That most insurers tie their fee schedules to the Medicare fee schedule is a long standing tradition. Even the lingo reflects this as many providers I practice with will note that their contract with ABC private insurer was pegged at X% of Medicare.

The issue that is a real problem are the rules and regulations that one must follow under Medicare guidelines. The Federal Register has a significant number of just plain asinine rules and regulations that thwart any innovation and in many cases decrease the effectiveness of care delivered. In my field Medicare requires (under threat of Federal prison) the provider to time (they suggest with a stopwatch) various procedures in 8 minute increments, not utilize care extenders allowed under State law (so we have two systems - one under State and one under Federal guidance), not allow patients to be seen in more efficient settings/groups even when the research shows better outcomes and the list goes on....

Of course then there is the topic of the treatment and diagnosis codes we use being "owned" by the AMA and "costing" near $100 million annually based on some reports....

Medicare surely does not "cut the costs" for anything in my particular specialty. Medicare is cumbersome, bureaucratic, inefficient and stifles innovation.....

private insurer bureaucracy is 3x - 4 larger than those seen at Medicare Administrative contractors (MACs).

you have no idea what you're talking about

The MAC's you note are run by private companies under Federal guidelines.

While I can not speak to measures of bureaucracy (surely there are folks here better trained in measuring these types of things..) I live each day with what I have posted and know how it interferes with our mission of helping others. As a care provider, rules and regulations that in get in the way of helping the patients and communities we serve are frustrating at times....

Apologies to you Mr Bradley if I have misspoke or offended you in someway in expressing my current views....

"rules and regulations that in get in the way of helping the patients and communities we serve are frustrating at times...."

Do those rules cause more problems than the lack of insurance and money to pay for the health care you think is appropriate?

Why did doctors join with insurers to put HMOs at such a disadvantage in the 80s Federal tax "reform" that doctors no longer get paid the entire premium to provide all the care you think appropriate based on the collective wisdom and decision making of doctors? It is interesting that HMOs spread through the US in the 70s as a result of Nixon administration policy advocacy. Doctors split on them, insurers who were going after the business that the Blues proved could be viable, the Blues being provider created prepaid medical services, hated HMOs, and hospitals hated HMOs for finding ways to slash hospitalizations, so the solution was taxing HMOs and by the way the Blues, as if they were for profit insurers instead of coops, Ie, they are taxed on the "profit" that the patients and doctors share from lower insurance premiums and higher doctor compensation. In the name of "fairness" - to the for-profit insurers finding it harder to add profits to their higher costs dealing with doctors and hospitals from outside their coops.

Do MACs handle collections, fraud investigations, compliance, sales, etc? Are you comparing similar things?

Good background on the AMA setting Medicare rates: 20/business/40695417_1_doctors-four-other-procedures-medical-journals

It seems the stopwatches the AMA use count really, really fast!

This is what came to my mind too... AMA sets prices for Medicare, Medicare leads the way for private insurance. So doctors are setting their own prices. How do I get in on this scam?

This statement gave me pause:

"It is thus puzzling that insurers' payments to providers are rarely rooted in either the medical benefits or cost-effectiveness of care."

In light of the Nobel awarded for the efficient market theory correctly determining the price of something as being $5 one day, $10 the next, and $1 the day after, how can anyone determine the price paid is not rooted in the benefits? The benefits of owning TWTRQ were clearly $0.10, then $1.00, then $0.05 on successive days last week, right?

How can an insurer know the medical benefits or cost-effectiveness of care weeks after the fact?

Or years before the fact?

If a patient arrives bleeding from gunshot and is immediately given blood but dies in ten minutes, the cost-effectiveness of the blood was zero? Or the $500 cost of keeping the universal blood on hand?

What is the cost-effectiveness of a polio vaccination? The odds of being exposed to polio are less than perhaps one in a million for Americans. Only about 10% of polio cases resulted in disability.

If multiple insurers are competing and individually determining cost effectiveness of small pox or polio vaccinations, would small pox be eliminated and polio virtually eliminated?

Economists seem to be the least "rational" when it comes to figuring costs and price for just about everything.


I'm surprised that you are making projections based upon the assumption that physicians won't respond to reimbursement cuts. The reason that Medicare payment cuts have a more significant effect in markets in which providers aren't consolidated stems from the fact that small provider groups have little or no bargaining power that they can use to resist reimbursement cuts by large insurance companies who have enrolled a significant percentage of the patients in a given area. In markets where providers have consolidated into large blocks, they can and do use their market power to push back against reimbursement cuts.

Cutting Medicaid reimbursement will drive more physicians to consolidate into groups large enough to defend their reimbursement rates against further cuts. The larger the cuts, the more rapid and comprehensive the consolidation will be, and the more quickly these "savings" will disappear.

Maybe consolidation improves efficiency and thus lowers costs?

Do you believe Lotus and Lamborghini have lower costs in building cars that Ford and GM but sell them at high prices because governments buy 50% of auto industry production in the US and only Ford and GM can defend their prices against the government price setting?

I did some accounting work for an anesthesiologist. His standard fee was 300% of the amount allowable under medicare.

For those with an interest in a sample medicare fee schedule and its to-the-penny reimbursement rates, one can be found at

You're waving away the entire rest of the developed world with your apples and oranges. Why should it be so? More to the point, why do you think a free market system will ever work for seniors or people with chronic illnesses, or that society at large will accept a system that doesn't work for a lot of people?


You understand that that the connection here is between provider consolidation and *higher* prices, right?

If provider consolidation was consistently associated with *lower* prices then one could reasonably make the argument that there's evidence that consolidating hospitals and doctors into larger billing units brought about greater efficiency. It's not clear to me how one would argue that the well established association between provider consolidation and *higher* prices is evidence of greater efficiency, but if you want to make that case, that would certainly make for an interesting read.


Great question you pose Mulp:

Do those rules cause more problems than the lack of insurance and money to pay for the health care you think is appropriate?

The care that our practice would consider appropriate can be delivered more efficiently without the rules. Our practice delivers care in a local free clinic (as well as in a for profit clinic) and it is remarkably more efficient in that setting with outcomes that are not statistically different (on metrics measured).

The rules were put into place largely to combat fraud and abuse of the system. While a noble cause, the unintended consequences have been to create less efficiency and slow or prohibit innovation.

While I can speak only to my discipline, the rules cause more problems than they solve. The rules also increase costs along the entire continuum of care. While a microcosm of a bigger system, many practices could deliver better care for less without some of the rules currently in place.

The regulators were captured by the industry a long time ago. That the government is entirely an agent of monopoly in medical care is evidenced by the patterns of expenditure and investment in health care, nationally.

I know its not popular among libertarians, whose principles regarding free trade and free markets usually ends where monopoly rights (patents and copyrights) and professional guilds (physicians) being, but encouraging the immigration of foreign doctors and other medical professionals, deregulating the medical services that can be offered by physician assistants and nurse practitioners, reimbursing patients for medical care in foreign countries, and eliminating patent monopolies for drugs and medical devices would all put downward pressure medical prices in the U.S. back to the world average. I don't know what the "globalization" revolution should just be limited to blue collar workers. For some reason I don't see Paul Ryan or Rand Paul making any such proposals.

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