How Controls on Payments to Providers Lead to Lower-Quality Medical Care

When the payment to health care providers is below the cost of care they are expected to provide, their first inclination is to shift costs. However, competition ultimately makes cost shifting impossible. As a result, providers are forced to lower the quality of care they deliver. Some may wonder whether quality really can deteriorate in the face of regulations and tort law. In fact, there is plenty of evidence that a drop in the quality of care coincides with inadequate reimbursement rates in current government programs. Take Medicare, for example:

• Although hearing loss is the most prevalent chronic disability among the elderly and affects one-third of all Medicare patients, Medicare’s reimbursement rate for cochlear implants is so low that only a handful of Medicare patients have received the treatment.
• When Medicare reduced the reimbursement rate (in real terms) for kidney dialysis in the 1980s, many physicians reduced the treatment time - a practice that reduced their patients’ chances of survival.
• A survey of 21 medical conditions for which an implanted medical device was indicated found that for 18 of them the government’s payment was well below hospital cost, and in more than half the cases Medicare patients did not receive the device.

Even when Medicare’s reimbursement equals the average cost of treatment, price fixing discriminates against above-average-cost patients. These tend to be the sickest patients and more often than not they are low-income and nonwhite. For example, blacks and Hispanics have more severe illnesses, longer hospital stays and higher hospital costs than white patients, on the average.

Price controls are also used in the Medicaid program, where it is not uncommon for government to pay as little as 50 cents on the dollar for services for low-income patients. As a result, the quality of service has deteriorated for many Medicaid patients, while Medicaid has not succeeded in controlling spending. For example:

• Medicaid spending in Illinois increased from $200 million in 1970 to $4.8 billion in 1993, an increase of more than 2,000 percent.
• One physician who made $120,000 from Medicaid in 1991 didn’t even take his Medicaid patients’ vital signs until his office reimbursement was increased from $8 to $18 per patient.
• Some physicians who treat Medicaid patients exclusively boast that years of experience have made them efficient enough to see between 60 and 70 patients a day.

Sources: Nancy M. Kane and Paul D. Manoukian, "The Effect of the Medicare Prospective Payment System on the Adoption of New Technology," New England Journal of Medicine 321, No. 21, November 16, 1989; "Proposed Rate for Prospective Payment of Cochlear Implantation," Government Affairs Review, September/October 1990; Edward E. Berger and Edmund G. Lowrie, editorial, Journal of the American Medical Association 265, No. 7, February 20, 1991; and "Medicaid: System in Chaos," a series in nine parts, Chicago Tribune, prepared for the 1992 Governor’s Health Care Reform Task Force by the Illinois Department of Public Aid, October 31-November 9, 1993.