Public Payers News

NCPA Urges Policymakers Promote Medicare Price Sensitivity

By Jacqueline DiChiara

- If policymakers fail to advance price sensitivity among beneficiaries, Medicare spending will only escalate, confirms a new study from Devon M. Herrick, PhD, Health Economist and Senior Fellow with the National Center for Policy Analysis (NCPA).

Medicare Medicaid

Current annual per capita Medicare spending exceeds $12,000; in 1970, this number was significantly lower at nearly $400, confirms Herrick. Within the next ten years or so, this number is projected to increase from $12,000 to nearly $19,000.

“To affect consumer demand sufficiently to slow Medicare spending, policymakers must find ways to promote price sensitivity among beneficiaries long after they have met their deductibles,” states Herrick. “To reduce health expenditures from the supply side, policymakers have to find ways to promote competition among providers caring for seniors. In addition, health plans and providers must be rewarded when they come up with cost-saving programs that provide high-quality care at a lower cost,” he adds.

Patients pay 11 percent of medical bills “out-of-pocket,” says Herrick. A third party pays for the remaining 89 percent, he maintains. According to economic theory backed up via academic research from the Rand Health Insurance Experiment conducted during the 70’s and 80’s – RAND refers to such research as “the most important health insurance study ever conducted – Herrick says third-party arrangements promote less price sensitivity than if healthcare consumers paid for the entirety of their medical expenses.

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  • “Economic studies – and common sense – confirm health care patients act more like consumers when they bear more of the costs for their medical care,” confirms Herrick. “Much of what is wrong with the U.S. health care system is due to funding by third-party payers – that is, someone other than the patient footing the bill for health care services. Perverse incentives – incentives that reward consumption over conservation – are created when most medical expenses are paid for by third-party health insurance companies.”

    Says Herrick, Medicare pays physicians a little over 80 percent of what private payers reimburse. Hospitals, on the other hand, are paid about 72 percent. There are simply too many Medicare beneficiaries, he says, for the majority of both physicians and hospitals to simply turn their backs on.

    “Historically, a fundamental problem with efforts to contain Medicare expenditures is that they followed a top-down model. Policymakers have tried to hold down spending with price controls and caps on the fees doctors and hospital earn, rather than empowering seniors to police their own consumption,” says Herrick. Medicare pays physicians and hospitals about one-third less than what private insurers pay for identical services, he says.

    “Doctors’ professional medical societies have historically discouraged price competition. To some degree physicians could avoid competing with each other on price because medical licensure is a competitive barrier to entry,” Herrick states. “Nowadays, most physicians have signed agreements with preferred provider organizations (PPO) and large insurers that affiliate them with a variety of provider networks. Fees are not negotiated with patients’ demand curve in mind. Rather, fees are a function of the respective market power of area insurers compared to that of area physician groups,” he maintains.

    Medicare must inspire its workers to prefund more retiree medical funds, says Herrick. Additionally, senior citizens must be able to make energized decisions with the concurrent offering of suitable incentives available, he adds. Medicare must effectively initiate future efforts to ensure beneficiaries execute greater levels of price-sensitivity in regard to their deductibles, he adds.

    Despite politicians’ “rosy” outlook, healthcare spending will swallow up a substantial portion of the economy, Herrick maintains. “The long-term solvency of Medicare is the most serious domestic policy problem this country faces in the 21st century,” says Herrick.