We either pay for government-sponsored health care services up front, with Medicare and Medicaid cost-reimbursement payment methodologies to providers, or we pay for it on the back side, in the form of higher insurance premiums.
In following Arthur B. Laffer’s theory on the “Health Care Wedge” in Wednesday’s Wall Street Journal, I found myself raising an eyebrow in pleasant surprise. Although I’m not certain I agree with much of the gentleman’s political opinion, his assessment that the high retail price of health care services is inconsistent with their actual cost is accurate enough.
The eyebrow went up upon reading his initial assessment, stating that “consumers are receiving quality medical care at little direct cost to themselves. This creates runaway costs that have to be addressed.” Well, that’s pretty basic Macro 101 stuff, and hard to dispute.
"The health-care wedge," he explains, "is an economic term that reflects the difference between what health-care costs the specific provider and what the patient actually pays." He says that "health-care reform should be based on policies that diminish the health-care wedge rather than increase it.”
Well, that was actually a bit confusing, but he showed some acumen in even recognizing that health care costs and health care prices are not really the same thing. In fact, the ridiculous pricing that is dropping jaws all over America is wildly divergent from the actual per-patient cost of services.
Nor do I necessarily agree that his continuation, that “Mr. Obama’s reform principles—a public health-insurance option, mandated minimum coverage, mandated coverage of pre-existing conditions, and required purchase of health insurance—only increase the size of the wedge and thus health-care costs.
Moreover I suggest that a public option, provided that it pay at least the cost per patient for any given service, will not increase the size of the wedge. Mandated minimum coverage, provided that it pay at least the cost per patient for any given service, will not increase the size of the wedge, either. Nor will mandated coverage for pre-existing conditions, or required purchase of health insurance, so long as every coverage option provides for payment to providers consistent with the per-patient cost of services.
When Medicare was introduced, it paid facilities on a cost-reimbursement basis; doctors agreed to support the program only after they were granted provisions reimbursing them at their usual and customary fees. It was recognized that if payments fell below cost-reimbursement, it would drive everyone else’s rates up, in order to make up the difference. So when Medicaid was introduced, and paid providers at levels ridiculously below cost, did the Health Care Finance Administration get jealous or something? The current Medicare DRG payment methodology replaced cost-reimbursement in a misguided effort to "control rising costs", so that now Medicare payments to provider fall well below the per-patient cost of services too.
When the government does this (when we do this to ourselves, through the duly elected) we “hump-harumph” about it, and write a blog! When private industry does this, we of course call it fraud. In the insurance industry, they called it an HMO.
The theory was: if the federal government can negotiate with providers, convincing them to accept payment levels below cost-reimbursement, why can’t private sector HMO’s attract large regional employers to a low-ball premium structure, then negotiate similar below-cost rate structures with competing hospitals? If the employee groups are large enough, losing their historical market share could devastate smaller hospitals operating on razor-thin margins.
And so it was that HMO’s and PPO’s joined the ranks of the government payers, in setting reimbursement below costs per patient. As the number of traditional UCR payers dwindled in a market stacked with payers simply slashing “allowable” amounts to whatever they felt they could get away with, the squeeze was put on commercial insurance companies and those with no coverage at all, but who were forced into the position of being unwilling health care consumers by some medical emergency.
Whether we call it a “wedge”, or cost-shifting, or felony fraud, the effect is pretty much the same. When the government forces providers to give away services to the deserving few, then asks those who still pay retail for health care services to pay the costs of providing services to everyone who’s getting services for free, somebody is going to get ground up in the machinery.
The only fix is to require cost-reimbursement as a payment methodology for all carriers, including Medicare and Medicaid. Oh, we might add some severe civil or criminal penalties for private-sector for-profit companies that sell a health care coverage plan that pays less than cost-reimbursement. Only the government is actually allowed to steal from us while we watch it happen.
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