The problem starts with the Center for Medicare and Medicaid Services (CMS), the federal agency that sets prices for the medical services of Medicare patients. CMS is really a giant central-planning agency. It sets hundreds of thousands of prices. What are the odds that it sets all the right prices? Zero. In fact, with central planning, an organization like CMS cannot ever know what the right price is.
An obvious solution to this problem is to have a free market in healthcare--with no Medicare. But since that is unlikely to happen soon, incremental changes can be made to move closer to a free market. Despite the socialized system of CMS, it's possible to approximate free-market prices with "balance billing." In its purest form, doctors would be able to charge whatever they want for their services, and patients would pay the difference between that price and the amount Medicare pays. Today, doctors who accept Medicare reimbursement are not allowed to charge anything more.
With balance billing, many fees would certainly increase--at least for those seniors who are willing and able to pay them. But it would also stem, and even reverse, the exit of doctors from Medicare. And that's not all. As any health economist can tell you, one of the biggest problems with our healthcare system, one that existed even before ObamaCare, is that the majority of what people spend on healthcare is "other people's money." One reason we know so little about prices is that few of us actually pay the price of medical care. Instead, we pay nothing, a small co-payment, or a small percent of the price. The main thing I learned in my two years as the senior economist for health care policy with President Reagan's Council of Economic Advisers is that health care costs so darn much because we pay so darn little for it. Why hesitate to say yes to a $500 test your doctor wants to order if you know that you will pay only $50 for it?