NCPA - National Center for Policy Analysis

A Better Way to Approach Medicare's Impossible Task

November 16, 2011

As Congress faces mounting pressure to rein in Medicare spending, two sides seem to be squaring off.  The don't-touch-a-thing-other-than-squeezing-provider-fees position seems to appeal to mainly Democrats, while eat-your-spinach reforms, including more cost sharing and higher premiums, seem to appeal mainly to Republicans.  Neither position is very appealing to voters, however, nor should they be, say Thomas Saving, a senior fellow with the National Center for Policy Analysis, and John C. Goodman, president and CEO of the National Center for Policy Analysis.

Is there a third way that appeals to voters -- young and old?  Saving and Goodman think there is.  To see how it might work, it first must be understood that what Medicare is currently trying to do is virtually impossible.  Indeed, Medicare isn't just setting prices -- it is regulating whole transactions.

A more sensible approach is to quit asking for the impossible.  Instead, let's begin the process of allowing medical fees to be determined the way prices are determined everywhere else in our economy -- in the marketplace.

In trying to do that, we face two problems.

  • First, we have completely suppressed normal market forces in medical care for many years.
  • Second, many people believe that Medicare is using monopsony (single buyer) power to push provide fees below market levels. However, economic theory predicts that monopsony not only results in lower input prices, it also results in less output. In this case, that means less medical care.

Saving and Goodman believe there are at least nine important policy changes that can circumvent these two problems and free the marketplace in the process.  They include:

  • Retail outlets.
  • Telephone and e-mail services.
  • Concierge doctors.
  • Billing by time, rather than task.
  • Paramedical personnel, such as nurses and physician assistants.
  • Bundling services.
  • Medical tourism.
  • Selective relaxation of price controls.
  • Health care stamps, similar to how food stamps are used.

In each of these cases the principle is the same: let markets do what only markets can do well.  Essentially we let the market replace the gigantic Medicare regulatory apparatus.

Source: Thomas Saving and John Goodman, "A Better Way to Approach Medicare's Impossible Task," Health Affairs Blog, November 15th, 2011.

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