NCPA - National Center for Policy Analysis

Why Medicare Patients See the Doctor Too Much

July 14, 2011

Almost all discussions about Medicare reform ignore one key factor: Medicare utilization is roughly 50 percent higher than private health insurance utilization, even after adjusting for age and medical conditions, say Merrill Matthews, a resident scholar at the Institute for Policy Innovation, and Mark Litow, a retired health care actuary.

Several factors help cause this substantial disparity.

First and foremost is the lack of effective cost sharing.  

  • When people are insulated from the cost of a desirable product or service, they use more.
  • In addition, Medicare's convoluted benefit structure encourages the purchase of various forms of supplemental insurance.
  • Medicare covers roughly three-fourths of total costs, but about 85 percent of the Medicare population has expanded coverage with small to limited cost sharing.
  • This additional cost insulation pushes seniors' out-of-pocket costs toward zero, thereby increasing overall utilization.

Another reason for such high utilization is Medicare's so-called delivery system.

  • In 2007, MIT economist Amy Finkelstein explained the effects of Medicare's introduction in 1965: "By 1970, the program caused a 37 percent increase in hospital spending."
  • That spending explosion led Congress to impose price controls on in-patient hospital expenses in 1983, on physicians' services in 1992 and on outpatient hospital expenses in 2000.
  • Those price controls have led to countless economic distortions, forcing physicians and hospitals to look for ways to maximize the reduced reimbursements.
  • Of course, price controls haven't controlled spending.

A third factor behind increased Medicare spending is fraud.

Medicare needs to be totally revamped.  The benefits package needs to be rationalized so seniors can tell what their financial exposure is and choose from private-sector, high-deductible options, including a Health Savings Account plan.  Giving them more options and control is the best way to reduce that 50 percent additional utilization while preserving the program for the future, say Matthews and Litow.

Source: Merrill Matthews and Mark Litow, "Why Medicare Patients See the Doctor Too Much," Wall Street Journal, July 11, 2011.

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