Arnold Kling  

Medicare is Part of the Problem

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One of my essays on health care.

suppose that the goal of health care reform is to reduce our health care budget to the level that would prevail if our per capita health care spending were the same as in France. That would mean our total health care budget would be $900 billion. If we leave Medicare at $300 billion, our non-Medicare spending would have to be cut from $1600 billion to $600 billion, a 67 percent reduction.

...Many people claim that the American health care system wastes money compared with other countries’ health care systems. However, what this exercise shows is that waste in the American health care system is not confined to that part of health spending that is privately financed. Resources are not managed any better under Medicare than under private health insurance.

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COMMENTS (4 to date)
T.R. Elliott writes:

Medicare is an enormous problem. Hence my annoyance at BushCos (a) focus on social security while (b) making medicare worse. Social security is a bad dream. Medicare is night of the living dead come true.

As far as the comparison between medicare, private US, and france, I would have preferred a simple per-capita comparison between the three.

ErikR writes:

What is the $1600B "non-Medicare" money going to? Is that mostly Medicare? You imply it does NOT include any non-government financed health-care spending, correct?

ErikR writes:

Ooops, I meant " that mostly Medicaid"?

Victor writes:

Do you have any thoughts on the method of payment used by Medicare and its effect on the entire system?

The federal government has established a very complicated set of procedure codes and reimbursement rules, primarily to help 'control' Medicare costs. Because of the size of Medicare, relatively speaking, and the complexity of the system, it is my impression that private insurance now structures many of its contracts in ways not dissimilar to Medicare. Further and perhaps most destructive, this results in private contracts being implicitly based off of, IMO, insane "relative value unit" sorts of arguments.

A concrete illustration: just off the top of my head, my impression is that laser eye surgery (not subject to RVU price calculation) is now cheaper than a healthy 40 year old getting a routine colonoscopy (which is subject to RVU price calculations). Well-education, well-trained professional providing the first technology-intensive service are incented to reduce costs; similar well-educated, well-trained professionals providing the second technology-intensive service are not. Instead, we see fights over licensing, certification, and economic rents.

Other countries might be able to get away with RVU calculations better than we do; for better and worse, the American health care industry (hospitals and physicians) is relatively free to try to milk the payment system. And this spills over into private insurance both because they are going to be susceptible to the same RVU logic and subsequent pressures, but also because even if they recognize this problem, they aren't likely to be strong enough to make a dent in it.

This is speculation on my part. I'd like good and solid information on Medicare pricing and contracting, as well as private industry. So this is a genuine question. Is government a 900 pound gorilla in a china shop even now, without becoming a 1900 pound gorilla by absorbing the entire private insurance industry via "single payer"?

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