Medicare, Where Soviet Economic Thinking Lives On

The Wall Street Journal recently published a major article (subscription required) on the topic of how medical reimbursement rates are set by Medicare.  A similar article was also published on the same day by the Center for Public Integrity.  These articles were immediately followed by posts on a host of medical blog discussing both the article and the RUC itself.  Blogs featuring RUC commentary and analysis include Health Care Renewal, DBs Medical Rants, GoozNews, Managed Care Matters, Running a Hospital, and the venerable Retired Doc’s Thoughts.   While I have the greatest respect and admiration for the Wall Street Journal, the Center for Public Integrity and my blogging colleagues, focusing on the political intrigue and bias inherent in the RUC  is beside the point.  It’s a bit like complaining that heroin being sold by drug gangs hasn’t been inspected by the FDA.  It’s the product itself – Medicare’s price fixing – that’s toxic.  Even using the best possible process to create it won’t make it any less dangerous to the public.  GoozNews and Dr. Gaulte over at the Retired Doc’s Blog begin to make this point, but it’s worth exploring in greater detail.

As we’ve explained previously on this blog, the process of setting the prices that Medicare will pay for things is strange and convoluted.  The basic idea underlying the entire system is that someone, somewhere will decide how many “units” of “work” goes into generating a healthcare service.  This number is then multiplied by a set dollar amount to determine the price Medicare (and therefore all other insurers) will pay.  Theoretically these units are completely interchangeable between doctors and specialties.  If a given heart operation ‘A’ is 30 units of “work” and a less invasive intervention ‘B’ is 2 units, operation A is worth 15 times more.  Medicare says it is.

Now if the RUC process that determines the amount of work used to set these prices is truly scientific and accurate and you’re a cardiologist who can offer one or the other of these procedures to your patients, which one would you prefer?  (For the sake of argument, let’s assume that you have no shortage of patients and that these two alternatives are more-or-less therapeutically equivalent.  Since there is generally a relative scarcity of physicians in the U.S., this is not too much of a stretch.)  If you’re a rational cardiologist, the real answer is that it doesn’t matter.  Since A takes 15 times more work than B but pays 15 times more, it’s just as much work to earn your money by doing one operation A as it is to do 15 procedure Bs.  There is no compelling reason to recommend the expensive operation.  If you do, it’s probably because the actual “work” involved was quantified incorrectly in the first place.   After all, if procedure B was really 1/100^th the amount of work as operation A, you’d be nuts to ever recommend A to anybody.  If you did you’d be doing more work for less money.

On the other hand if this Rube Goldberg process is not economically accurate, there will be all sorts of non-medical incentives to recommend one procedure over another simply because they are priced incorrectly.  Since that our elected and appointed Leaders in government care continually accusing doctors of pushing certain expensive procedures over other less expensive ones, they are tacitly admitting that the RBRVS mechanism is broken.  Still worse, they are implicitly admitting that it has been defective from the time of its very creation almost twenty years ago.

Mechanically defective or not, it’s important that we understand that Medicare’s reimbursement system is specifically designed to equate “work” with “price”, because this has very important implications for the type of healthcare system that it inherently imposes on our nation.  Let’s consider some of these:

The first and most important implication is that our elected leaders have deliberately (or who knows – maybe they didn’t know any better), severed any connection between the price of any medical good or service, and the value that it delivers to patients or anybody else.  It is perfectly conceivable that you could have a simple, easy, painless cure for cancer that would be priced far lower than a complex, painful and less effective alternative treatment.  But under Medicare, if it’s less work, it will be priced lower.

What’s the difference between price and value?  Well, as a consumer, you would gladly have paid more for the simple treatment.  As far as you’re concerned, it has greater value.  In a market economy the extra cash you would have paid would have generated profit for those producing this treatment.  The extra profit would serve to discourage production of the labor-intensive, less effective and more painful alternative, encourage providers everywhere to offer the less expensive alternative, and ultimately produce competition and innovation that will lower its price over time.  Medicare’s approach does none of this.  Not only is it a fatal flaw of the system, it’s also why it’s necessary to launch all kinds of expensive bureaucratic efforts to determine “cost effectiveness” and mandate that some types of treatments be used instead of others.  Oscar Wilde once said that: “A cynic is a man who knows the price of everything but the value of nothing.”  By this measure, our elected Leaders have managed to create the world’s most cynical healthcare systems.

The second implication of Medicare’s design is that the prices themselves are only as good as the estimates of the amount of work involved.  Unfortunately, anyone with any clinical experience can see that many of those estimates are idiotic.  Although much of the blame for this can be placed fairly and squarely on the shoulders of the RUC, doing it right is an complex, expensive and even impossible task under any circumstances.  As the Wall St. Journal article points out, procedures and the techniques for performing them change quickly.  Moreover, the techniques used for “quantifying” the work involved are primitive at best, and often highly subjective.  But as we’ve seen, if these estimates are wrong the system falls apart.  Not only does it become arbitrary, but positively harmful.  It becomes a price-fixing system that is virtually guaranteed to mis-allocate scarce medical resources.

Many years ago in the 20^th century, the Soviet Union built its economy around the decisions made by a council of economic leaders in the Kremlin.  It was known as a “command” economy, because whatever they commanded with respect to the price and production of all of the goods and services produced in the country became a matter of law.  They might, for example, decide that there should be 50,000 tractors produced per month, and that each tractor would be sold into the market at a price of 5,000 rubles.  If they got either the pricing or the number of tractors wrong, the result was a mess.  Make the price too high, and no one would buy all of those tractors.  They’d sit around and rust.  Make the price too low, and the tractor factory would go broke.  And they had to do this every year, for every product and service produced in the entire country.  Thousands upon thousands of them.  The idea was to create prices and quotas that would best meet the needs of the people, and clear the markets, as interpreted by the supreme council of economic leaders.

Younger readers might well scoff that this system was ever implemented, much less mindlessly followed for some seventy years.  In retrospect it seems hopelessly naïve.  How could any group of experts possibly update prices and production for thousands upon thousands of goods and services quickly enough to account for changes in supply, demand, technology, population, local variables and a host of other factors?  The reality is that they couldn’t, and the resulting waste and inefficiency was breathtaking.  In time, it was enough to quite literally tear the country to pieces.

But the practice of command economy principles never did really die off completely.  It lives on in certain backwards corners of the world.  North Korea.  Cuba.  And Medicare.  To be fair, Medicare isn’t a complete example of state planning in action because it doesn’t mandate levels of production.  Instead it simply dictates, (either directly or indirectly through the price-setting lead that it gives to private insurers) the specific prices that healthcare providers will be paid for their goods and services.  But any kid running a lemonade stand could tell you, it’s hardly necessary to dictate production if you’re a buyer who is dictating price; the market will do the rest.  Set prices low enough, and vendors will avoid that product like the plague. Set prices high enough, and you’ll be swimming in the stuff.

All of this leads one to ask. “Why?”  Why on God’s green Earth would our Republican and Democratic governments deliberately choose to institute and preserve a price-fixing system that is virtually guaranteed to waste time and money, and thereby jeopardize the lives and health of all Americans?  And why would our political Leaders pass an entire healthcare reform bill that turns the rest of the medical world upside down, but preserve this particular means of pricing?  The only plausible explanation is the same one that justifies the use of these same economic tools in places like China, Cuba, North Korea and the old Soviet Union: the desire to exercise raw, unadulterated political power over this particular portion of the economy.  The RUC is just one small symptom of the real disorder.

Our country is better than that.  Or it should be.  After all, avoiding this sort of thing is the primary reason that we spent untold billions of dollars, and more than a few lives, fighting the Cold War.

Note 1 Return to Article