Medicare and the Profit Motive

This post forms part of a series, published at Balkinization, commenting on a pathbreaking new book in legal history.

Meticulously researched and a genuine pleasure to read, Nicholas Parrillo’s book, Against the Profit Motive: The Salary Revolution in American Government, 1780-1948, offers the definitive account of a forgotten—but critically important—“revolution” in American governance. We once allowed government officers to accept fees and bounties for performing their official duties. As the vices of those payment methods became more apparent, however, they were discarded in favor of salaries.

Yet, in framing his narrative as a progression from a world of piecemeal payment to “the absence of the profit motive in American government” (p. 362), Parrillo is both too optimistic that we’ve worked fees out of our system and too modest about the modern-day relevance of his book. As he fully appreciates, fees and bounties persisted into the early twentieth century not because policymakers were oblivious to their downsides. They persisted because they were useful. Fees—Parrillo calls them facilitative payments—encouraged government officials to offer good service. Bounties increased the ardor of officials charged with enforcing laws against a resistant public.

Useful as facilitative payments and bounties are, it would be odd if salaries had displaced them altogether. And of course they haven’t. What struck me most about Against the Profit Motive was how the debates that Parrillo recovers—debates about how best to use money to properly align the incentives of street-level officers with broader policy goals—remain so urgent today.

One parallel in particular caught my attention. In discussing facilitative payments, Parrillo focuses on the central role that examining physicians played in the system for dispensing pensions to Civil War veterans. To qualify for a pension, a soldier typically had to secure a physician’s report documenting some kind of service-connected disability. The government paid the private physicians (they weren’t federal officers) a fee for each veteran they examined.

Predictably, veterans learned to avoid the strictest examining physicians. To attract veterans and earn fees, physicians had to cultivate reputations for generosity. The result was a fiscally unsustainable program that lavished taxpayer money on veterans, many with dubious disability claims. In the 1890s, nearly half of all federal spending went to veterans’ pensions.

Substitute “Medicare” for “veterans’ pensions” and you get pretty much the same story. With Medicare, too, we have a massive federal social-welfare program that depends on private physicians for its implementation. By deciding which treatments are medically necessary for qualifying individuals, physicians effectively decide which treatments the government will pay for. Medicare’s physicians receive fees keyed to the costs of those treatments, spurring the provision of excessive care of dubious medical value. The result is a massive and unsustainable program that, today, consumes roughly 15% of the federal budget.

Apart from the nifty historical resonance, what, if anything, does experience with Civil War pensions teach us about Medicare? A few things, I think. First, as Parrillo explains, “facilitative payments in the 1800s became instruments … to shift outcomes systematically in favor of service recipients” (p. 21). Those payments serve the same instrumental role in Medicare. The fee-driven system encourages physicians to cater to beneficiaries—mainly the elderly, who form a potent voting block—by providing them with lots and lots of medical care. Fees also bolster Medicare’s legitimacy by soothing fears that government bureaucrats will try to infuse medical judgment with grubby concerns over money. Again, fees are useful. That’s why eliminating the fee incentive in Medicare could prove alienating to beneficiaries, much as shifting examining physicians to salaries felt like a betrayal to veterans.

Second, the federal government had to put examining physicians on salary to bring the pensions system under control. Although that’s not a tenable option for Medicare, successful reform nonetheless depends on adjusting physicians’ financial incentives in a comparably direct way. All too often, however, reform proposals don’t scrupulously attend to physician incentives. The most prominent Medicare reform on the table, for example, calls for giving beneficiaries “premium-support credits” that they could use to buy coverage either from traditional Medicare or a private insurer. The hope is that insurers, to attract more beneficiaries, would compete with each other to drive down costs. There’s little evidence, however, that insurers can effectively deploy contractual tools to reshape how physicians practice medicine—and plenty of reasons (explored in depth here) to worry that they can’t. If neither traditional Medicare nor private insurers can reshape physician incentives, competition between them won’t drive down costs.

Third, the pensions example may offer reason for optimism about Medicare’s future. As Parrillo explains, the prospect of U.S. involvement in World War I spurred Congress to refashion the pensions system to make it “capable of saying no to service recipients in a way that acknowledged (if crudely) rival mass claims to public resources” (p. 23). Support for veterans hadn’t waned, but competing demands finally overcame political resistance. The same will probably hold true for Medicare. Already, the Affordable Care Act has encouraged the development of integrated medical systems that—partly by putting physicians on salary—hold promise for changing how physicians practice medicine. Those efforts are likely to accelerate as Medicare spending continues to grow.

Putting the specifics of Medicare to one side, the broader point is that Beyond the Profit Motive is a vibrant demonstration of the old adage that history doesn’t repeat itself, but it does rhyme. In rediscovering a revolution in our past, Parrillo may also teach us something about revolutions that are to come.


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