David R. Henderson  

Medicare, Food Stamps, and Rationing

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Law, Legislation, and Medicare... Medicare Rules: Bring 'Em On...

Bryan raises a good question:

Is it "government rationing of food" if you can't buy cigarettes with food stamps?

The answer is no. What makes health care different is the current system of price controls imposed by, wait for it, Ronald Reagan.

Just before I became the health economist with Reagan's Council of Economic Advisers, the final steps were being taken to implement DRGs for paying hospitals under Medicare. DRG stands for Diagnosis Related Groups. The idea was to get out of cost-based reimbursement, which gave an incentive to have high costs, and replace it with a system of prices. That made sense. But what made it a system of price controls was that the government, along with DRGs, made it illegal for hospitals to charge even a penny more than the price the government came up with.

Then, a year or two after I left the Council, the Reagan administration took the next step of imposing price controls on doctors under Medicare. Doctors were no longer allowed to do what was variously called "extra bill" or "balance bill." They couldn't charge even a penny more than Medicare paid. That's what made it a system of price controls. Moreover, under later regulations, if a doctor takes even one Medicare patient, then he has to charge Medicare rates to all his Medicare patients even if those patients would rather ensure access by paying the whole bill (Medicare plus a doctor's additional charge) out of their own pocket. It is this system of price controls that is causing many doctors to take no Medicare patients.

Incidentally, the system of price controls for doctors was designed by William Hsiao, a Harvard economist, and explicitly based on the labor theory of value.

So Byran's and Robin Hanson's proposal is a good one--as long as it is accompanied by removal of price controls.


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COMMENTS (5 to date)
Robin Hanson writes:

If Medicare doesn't cover a treatment at all, there would be no price control on that treatment, and hence no constraint on what docs could charge folks for that treatment. Do you mean to say that docs who take Medicare are not allowed to do treatments that Medicare doesn't cover?

Greg writes:

Do you have data on how many physicians refuse Medicare patients? I frequently hear that "many physicians refuse to treat Medicare patients because the payment is too low" but have never seen any data on the numbers.

Ideally, this would be data on physicians who take new commercially insured patients but not Medicare patients (because some physicians have "closed practices" that do not accept any new patients). It would also be interesting to see these data by specialty (if there are many plastic surgeons in LA who do not treat Medicare patients, this does not seem like a public policy crisis).

David R. Henderson writes:

@Robin Hanson,
Good question. No, I don't mean that. Your question and Bryan's later post have caused me to rethink. I'll do another post once I have.

mick writes:

Rationing is prohibiting the purchase of a commodity. For instance, saying that you cannot purchase X+1 amount of health care is rationing. Having to pay Y dollars for X+1 care is not rationing.

Jeff McCombs writes:

This discussion is a waste of time. Consumers ration their use of all products available to them in the market place, balancing marginal benefit against marginal cost. Some people of equal income buy expensive wine, others do not, because this product provides a different level of benefit across consumers. Health care is no different in this regard. Expensive treatments may provide significant benefit to some patients and may be of very low benefit to others with the same disease. The difference is that patients need physicians and other health professionals to clarify the cost-benefit trade-off and that patient's benefit from insurance against the cost of the random need for health care over time. Once insurance removes the cost from the clinical decisions made by patients and their doctor/advisor, the treatment decision becomes simple....we all buy expensive wine.

So, how do we ration health care given that the rationing decision is NOT a simple covered/not covered policy? We have to either incentivize patients [no insurance] or physician-advisors to balance marginal benefits with marginal cost. We have models of these systems through out the health care system which have performed very well in terms of cost and quality. They are called HMOs. So why are we debating how to ration health care from Washington?

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