COST SHIFTING

July 14, 2009

Dartmouth College researchers have been studying Medicare spending patterns for years and they've discovered wide variations in Medicare costs that seem to have no relation at all to the health outcomes of the patients.  Assuming that there is no reason to spend more rather than less, the Dartmouth group concludes that if doctors across the country practiced medicine the way doctors in the lowest-spending areas do, we could reduce total Medicare spending by one-third with no harm to patients.  U.S. Budget Director Peter Orszag calculates that the potential savings could be a whopping $750 billion a year; that's enough to cover about half the cost of Obama's health-reform plan.

Of course, to get even close to realizing that level of savings, doctors almost everywhere would have to change -- in some cases, radically -- what they are now doing, says John C. Goodman, President, CEO and the Kellye Wright Fellow with the National Center for Policy Analysis.  And that, of course, would require a lot of friendly persuasion.  But with the power of the purse (government already spends almost half the U.S. health care dollars), Orszag reasons that this is doable.

The implicit assumption Orszag is making is that the doctors who treat Medicare patients must be treating their non-Medicare patients the same way.  But this assumption, it turns out, is not true, says Goodman -- differences in Medicare spending are, in many cases, offset by spending on other patients:

  • For example: Although Texas is fifth from the top in Medicare spending per capita, it is seventh from the bottom in per capita spending for the state's population as a whole.
  • And California is eleventh from the top in Medicare spending, but eighth from the bottom in spending overall.

What's going on here, probably, is "cost shifting," says Goodman:

  • When Medicare underpays, doctors, hospitals and other providers try to recoup their losses by overcharging other patients.
  • To the degree that cost shifting is going on, we would expect an inverse relationship: When Medicare pays less, private patients tend to pay more, and vice versa.

Source: John C. Goodman, "Scapegoats in White Coats: Doctors are not to Blame for the High Cost of Medical Services," National Review, July 20, 2009.

 

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