Arnold Kling  

Health Care and Socialist Calculation

PRINT
Deficit Reduction and Tax Poli... Posing the Macroeconomic Quest...

Uwe E. Reinhardt writes,


Soviet label notwithstanding, the relative fee structure underlying the Medicare fee schedules imposed in 1992 -- the so-called "resource-based relative value scale" -- has by now been widely adopted by many private health insurers in the United States as the basis for negotiating fees with physicians. The scale values procedures relative to a base unit that is given a monetary value by Congress and adjusted every year.

Pricing a medical service can be thought of as two problems. First, come up with the measurable unit of output. Second, set a price for that service. What I believe Reinhardt is saying is that insurance companies have copied Medicare's method for defining the measurable unit of output. That does not necessarily mean that insurance companies are just as socialist as Medicare. The ability to negotiate different prices still gives insurance companies a degree of freedom that Medicare does not have. At least if I understand correctly what is going on.

In any event the socialist calculation problem is something that I worry about a great deal in the case of medical services. The insurance company is the socialist planner in this case. How does it know how much the consumer values a given medical service at the margin? How does it know the opportunity cost of the medical service?

I can see the problem being solved more easily in the context of a competitive market in HMO's. Each HMO guesses what combination of medical services at what price will maximize profits, in the same way that an automobile company guesses what combination of features at what price will maximize profits. No one solves the problem perfectly, but they keep groping for better answers.

In my mind, each HMO can produce its services using whatever combination of inputs it chooses. It can have physicians trained in medical schools, or it can train doctors internally. All forms of practice regulation and licensing have disappeared, and HMO's compete in part on the basis of reputation. Some medical services will be bungled, but that happens a lot in today's system, also.



Comments and Sharing





COMMENTS (8 to date)
Mike Rulle writes:

I agree with your last paragraph. But in a country which requires licensing for barbers, we know that can never happen. Lets face it, we have gotten so use to "Government knows best", or "guilds know best", it would take an extraordinarily persuasive set of politicians to propose such ideas. But they would first need to be self persuaded. What are the odds of that?

Steve Korpi writes:

I do some accounting work for a small medical billing and collections company that provides services for about a dozen MDs in private practice. The pricing for all physician services is based on the the medicare fee schedule marked up anywhere from 150 to 300 percent depending on the specialty. Insurance companies always reimburse less than the billed price but the amount of discount varies a surprising amount from insurance company to insurance company.

Do the physicians know the amount billed for various procedures? The coders who submit the bills for payment don't think they do.

Do the physicians know which insurance companies are more generous than others? Doubtful since not one MD has ever asked to see a report of reimbursements by insurance company.

Incidentally, for one medical group, medicare represents over 40% of procedures performed but only 15% of revenue. I wonder how much longer this group will continue to accept medicare patients.

steve writes:

"In my mind, each HMO can produce its services using whatever combination of inputs it chooses. It can have physicians trained in medical schools, or it can train doctors internally."

All first world countries use physicians trained in medicals schools. Most physicians now work in groups. We dont care much about a license, per se, but we want some assurance that they have been properly trained.

Before the current RVU system, costs were going up much faster, as show in this older CBO study.

http://www.cbo.gov/ftpdocs/74xx/doc7453/2006-08.pdf

"Do the physicians know the amount billed for various procedures? The coders who submit the bills for payment don't think they do."

I do. Most of the older docs in my group also know.

"Do the physicians know which insurance companies are more generous than others?"

Most docs are acutely aware of this, so you may have an unusual group. Older docs also miss the good old days when Medicare did not set fees. Back then, they, just like private insurers, paid usual and customary fees. IOW, they paid you whatever you asked for as long as it was not too far off from the norm.

Steve


mm57 writes:

the whole relative value paradigm is based on comparable worth theory (or ideology?)- ie that some bureaucrat sitting in a distant office can determine the value of what you do & is able to compare that to the worth of other, very different, tasks. If you read the initial work it is laughable. Some of the judgements were very questionable- eye surgery is just as hard as thoracic surgery (one patient can walk home afterwards, the other goes to the intensive care unit). It required "crosslinks" to reference other medical subspecialties- some of the crosslinked procedures where not previously reimbursed by medicare. The RVU system has not held down costs of itself- costs are held down by refusing to increase reimbursements at anything near the inflation rate.

jaredstaples writes:

I have to agree with Steve. Healthcare providers are very much aware of what the various insurance companies reimburse. Many of us could drop Medicare / Medicaid, reduce our workload by 50% and see a negligible decrease in our income. We keep seeing these patients because we feel an obligation.

We don't ask our accountants to see the fee schedules because we have easy access to that information in our practice management software.

John Fembup writes:

Steve Korpi also said this

"Insurance companies always reimburse less than the billed price but the amount of discount varies a surprising amount from insurance company to insurance company."

It puzzles me why doctors let this happen. Insurance companies who gain better discounts are able to set lower premiums, and write more business. More business means those companies have more members and supply more patients. And those patients are the very ones whose reimbursements will be least - because of the deeper discounts.

Wouldn't a better strategy be to keep discounts about the same for all insurers so that it becomes a matter of indifference which company insures one's patients?

I think insurer's ability (or, inability) to secure differential discounts is an important reason for insurance market consolidation. Some happens by merger or acquisition, and some happens when an insurer simply withdraws from a market or locale because it cannot remain price-competitive. So gradually we see fewer and larger insurance companies in each locale. Can that possibly improve the docs' negotiating position?

Is this just some version of the tragedy of the commons?

Yeah, the usual excuse for agreeing to deeper discounts for insurer X over insurer Y is that X has more patients than Y. Seems to me that will only guarantee declining reimbursements - even beyond everything else that's going on.

jaredstaples writes:

John, one of the major reasons for the scenario is the McCarran/Ferguson antitrust exemption for healthcare insurers.

This exemption allows insurance companies to make back door deals among themselves about who gets to be dominant in what areas, what procedures they will cover, and what fees will be offered. It is a very anti-competitive feature put in place by the federal government.

When doctors get together to make a group stand regarding reimbursement they are subject to prosecution for price-fixing, collusion and anti-trust violations.

The healthcare system is much more broken than most people realize.

John Fembup writes:

jaredstaples says

"This exemption allows insurance companies to make back door deals among themselves about who gets to be dominant in what areas, what procedures they will cover, and what fees will be offered. It is a very anti-competitive feature put in place by the federal government."

That is an entirely different issue from the one I raised - but also interesting.

McCarran-Ferguson is essentially a deal struck by the feds with the states, in which the feds agreed to permit the states to regulate the business of insurance (From the Federal point of view, the feds agreed to exempt the business of insurance from federal control under the commerce clause . . . damned decent of the feds, dontcha think?). Aside from that limited exemption, insurance companies remain subject to state and U.S. law e.g. the Sherman and Clayton Acts, and others.

Of course McCarran-Ferguson is anti-competitive. For one thing, McCarran-Ferguson is the reason you or I can't buy an insurance policy issued in another state from where we live. You can buy fertilizer in another state - but not insurance. That places all of us at the mercy of our legislatures that can enact whatever insurance mandates they choose and we have no choice but to pay for them.

But in response to your suggestion above - - McCarran-Ferguson certainly does NOT "allow" back-door deals and schemes as you suggest. Such activities violate federal and state laws, irrespective of McCarran-Ferguson.

Comments for this entry have been closed
Return to top