Medicare fee schedule basics, ctd.

Yesterday I wrote this,

The whole [Medicare fee schedule] arrangement conflates costs with price. For instance, where is the consideration for the value of procedures to patients, to their quality or length of life? Where is the input that corresponds to how much patients want certain kinds of care? How much would patients pay for the services rendered? That’s a question of price which relates to value not to cost.

Based on comments to the post it seems that some are thinking the only way to work some measure of consumer value into the fee schedule is to have individuals shop directly for care. If that’s politically feasible for Medicare at all, it is only so at the low end of health care costs. Even standard “high deductible” plans would only put the consumer at risk for a small percentage of overall health costs.

But there are other approaches. One that I’ve endorsed is a competitive pricing system that includes private (Medicare Advantage) plans and traditional Medicare among the bidders (more here). Under such a system, consumers shop for plans not care. However, the plans, in turn, have an incentive to contract for care that consumers want and at the best prices, so as to keep premiums low and value (to consumers) high. In practice, many plans may piggy-back off Medicare’s fee schedule, but they need not. Meanwhile, traditional Medicare would also have an incentive to reform, under the pressure of competition from private plans.

Don’t like that idea? There’s another, and it can be (and should be) combined with the above, but it need not: include in price setting some measure of efficacy like quality-adjusted life years (QALY). That is, if Medicare can’t be reformed to include consumer values directly (perhaps on the assumption that consumers can’t be sufficiently informed to make efficient decisions, which is not implausible), then the price-setting system could at least build in some reasonable, rational approximation to what an informed consumer might do. A related idea was described by David Leonhardt and followed up by Peter Orszag a few weeks ago.

None of this is perfect. But neither is the current price-setting system. Currently, it is only about physician cost and has nothing–literally nothing–to do with what consumers do or should want. The consequence is that Medicare pays for things of low value as much as it pays for things of high value. Prices should reflect those differences. They don’t.

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