NCPA - National Center for Policy Analysis

The Problem with Medicare

November 27, 2003

Medicare recipients are gaining a new prescription drug benefit, but that will not solve the underlying problems of the system, says Regina E. Herzlinger of the Manhattan Institute. Medicare is set up like a command economy, such as the old Soviet Union, with prices and investment decisions dictated by government. This creates inefficient health care for seniors (and, because of the size and power of Medicare, the health care of every other American). It is bureaucratic and resistant to medical innovations, but because it has no competitors in the marketplace, seniors have no alternative.

Medicare overprices cardiology services, for example, and this has caused an oversupply of cardiac centers. Yet innovations that reduce costs and improve outcomes for cardiac patients are discouraged.

  • Duke University's Medical Center improved the health of victims of congestive heart failure and vastly reduced costly hospitalizations by integrating into one team the many different providers required for appropriate care, saving $8,600 per person.
  • But because Medicare pays for hospital-based care (there is no standard-payment code for integrated care), the more Duke's innovations improved health and lowered costs, the more money the center lost.
  • For example, Medicare waited a full year to cover the implantable defibrillators that caused a 31 percent reduction in deaths, when compared to patients treated only with drugs.
  • These high-tech, $25,000 devices can prolong lives for up to seven years.
  • Without Medicare's coverage, some of those who could not afford to pay out of pocket surely died prematurely.

And if Medicare sets inadequate prices, providers lose money. Its price for implanting the drug-eluting stents that prevent reclogging of an artery, for example, eliminates hospital profits. Providers who offer the implant do it as a charitable act.

Source: Regina E. Herzlinger, "Back in the USSR" WAll Street Journal, November 26, 2003.

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