NCPA - National Center for Policy Analysis

Medicare's Price Fix

October 20, 2015

Many private insurers base their levels of reimbursement to providers on rates set by Medicare. Although analysts disagree about whether the link leads to lower or higher private payments, Medicare's administrative pricing system clearly cannot replicate a well-functioning competitive market.

  • Reductions in Medicare payments to physicians are associated with decreases in private prices and worse access to physicians' services for Medicare patients.
  • Medicare's process for setting prices is dominated by the medical specialty societies that receive a large share of Medicare revenues.
  • Medicare prices are based on small and nonrandom samples of physicians, and the results of the samples are cherry-picked.
  • Competitive bidding on bundles of services or on the calculations that determine actual fees is a promising alternative to the current price-setting approach.

Medicare does not rely on a competitive market to generate physician prices through the choices of millions of consumers and producers operating independently. Since 1992, Medicare has set prices using the Resource-Based Relative Value Scale (RBRVS), which calculates the estimated amount of work and practice expense involved in delivering specific services. The original purpose of the RBRVS was to bring physician prices more into line with the costs of providing services.

Medicare's administrative prices are insensitive to supply and demand and would not be optimal unless Medicare somehow produced a fee schedule that exactly replicated the results achieved by a perfectly competitive market. A movement away from administrative prices should:

  • Allow fee-for-service providers to submit bids on the calculations that determine actual fees.
  • Move accountable care organizations away from fee-for-service payment and toward a blend of fee-for-service and capped payments, coupled with competitive bidding on the fee schedule calculations.
  • Incorporate more beneficiary cost-sharing, which would require providers to charge some out-of-pocket costs.

Source: Roger Feldman et al., "Medicare's Role in Determining Prices through the Health Care System," Mercatus Center, October 8, 2015.


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