• Medicare fee schedule basics

    To those who don’t yet understand how Medicare pays physicians, I recommend Robert Berenson’s brief paper on pricing distortions in the Medicare physician fee schedule. It’s an easy read. Though nothing in it was new to me, the following passage motivated me to write this post:

    The [Medicare physician fee schedule]  is based on a long list of codes that describe thousands of discrete activities that physicians provide. The Centers for Medicare and Medicaid Services (CMS) assigns relative value units (RVUs) to each service by determining the amount of physician work, practice expenses, and malpractice liability costs associated with each service. The values given to these resource components are adjusted for geographic variations in input prices, and the total relative value is multiplied by a standard dollar amount, called the conversion factor, to arrive at the final fee. Fees may be further adjusted for other factors, such as pro vider location in an underserved area.

    What could possibly go wrong? (Don’t answer that.)

    What is absolutely astounding about this price-setting mechanism is that it’s all about the doctors’ resources and leaves out the very things patients might care about. The whole 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.

    This is not a novel observation, nor am I suggesting changing the Medicare fee schedule would be simple or politically feasible. I write this only to make it crystal clear to the uninitiated that there are deep problems in how Medicare compensates physicians. The first step toward recognizing it is to understand what’s left out of the formula. In a word, the patient is left out. It’s rather astonishing.

    • And yet, you still hear–usually a Democrat–say something to the effect of “But we’ve tried market-based health care.”

    • Set price at marginal cost and everything works out, so says microeconomics. Of course, that assumes that patients can accurately evaluate the benefits of treatments.

    • Patients are terrible at evaluating what something’s worth, *especially* when the outward effects of a medication, e.g. an ARB, are not immediately obvious. At the pharmacy, when they pick up their pills and pay a $40 copay, they’re shocked. “What’s this made out of? Gold?” (I can’t tell you how many times I heard this exact phrase in the nine years I spent as a technician and then pharmacy intern.)

      The problem is that the patient is valuing the pill at what they think the marginal cost of the tablet is, rather than understanding that the pill is a means to some end, and valuing the end itself rather than the means of getting there.

      I don’t really see why what a patient values a given procedure at should matter. The information asymmetry between the doctor and patient is so great that a patient’s judgement about the value of a given treatment is meaningless. Not to mention that people are irrational actors. To go back to my pharmacy example: demand for cosmetic treatments is often less elastic than it is for treatments that will keep a person alive.

    • Rian your objections to consumer control are true of a lot of things, even things that can kill. A new car might be much safer than what some people drive but they might prefer to keep the old oil burning bomb and not fix the brakes so that they can have more cable channels. It is not only medicine that are forgoing those cosmetics. The motor cycle kills but is not banded etc. These call for educating and convincing the public.

    • I don’t disagree that that’s what the ideal/libertarian solution would be, however effectively doing this is like trying to herd cats or get water to flow uphill.

    • I understand the position of doctors with Medicare, but I think there are many people who are raised awareness in health care is a priority for the pain they suffer daily.

      Jay Leno

    • “These call for educating and convincing the public.”

      Which leads to one of my concerns about the utility of “market mechanisms”. In about 25 years as a doc, more as a corpsman before that, I have had maybe 5 or 6 patients ask what their care would cost. It would take a sea change in behavior to accomplish what some people want. Add in the basic information asymmetries, most patients are older, many are under emotional distress, and it makes market reforms difficult to institute, no matter how desirable they might seem. Possible? Maybe, but difficult.


    • Steve, I do not disagree with what you said but we do have one thing going for us in this regard. For most in the past total health care spending was a small part of GDP and so maybe it was not worth the emotional pain to bring up or even think about price but at 20% of GDP maybe that changes.

      I think that the old arrangements in health care with insulation from payment made sense with medical spending under 7% of all spending but not now. I think that the USA needs change with health care at 20% of GDP but I also think that with spending rising in the socialized medical care country that they need or will need change soon also.

    • you’ve failed to point out what’s wrong with this that isn’t also a problem with private health insurance, which also pays doctors for services rendered, using the same codes at that.