Saturday, December 12, 2009

Why the American Hospital Association and the American Medical Association Oppose Lowering the Age Requirement for Medicare

As health care reform continues it's steady decent into oblivion under the watchful eye of a swarm of lobbyists, let me offer a few comments on a recent news article announcing that the American Medical Association and the American Hospital Association will oppose the expansion of Medicare as an alternative to the proposed “public option.” As reported by David Espo on December 11: "The American Hospital Association and American Medical Association have both criticized the proposed Medicare expansion since it was announced Tuesday night, saying the program pays health care providers less than private insurance companies, and warning against increasing the number of patients."

Although I personally stand to benefit from the proposed lowering of the program's age requirement from 65 to 55, I really can’t defend an expensive government program infested with fraud and grossly over-budget: even if it is popular among those who benefit from it. But I would like to point out that the opposition voiced by the AHA and AMA is exactly what you’d expect from any artificial monopoly.

Artificial monopolies thrive, not because they provide higher quality products and/or services at a lower price than their competitors, but because they convince government to disable competition. It’s a lot easier and less expensive to dispatch an army of well-paid lobbyists to Washington than it is to compete head-to-head. That’s also why the quality of health care in the United States has been in decline while the price continues to rise.

In the case of hospitals and physicians, competition has been long disabled by an extraordinarily convoluted and opaque pricing system. The cornerstone of this system is called price-discrimination, whereby sellers conveniently set their prices based on the buyers’ ability to pay. In the health care industry it’s based the size of the risk-pool. (Keep in mind that price-discrimination only works under conditions where buyers cannot simply refuse to buy these products and services: think cancer treatment!) Hence, under a price-discriminatory system, providers charge different prices to different buyers and buyer groups. If your private health insurance policy has a large enough risk pool, it can force the sellers to charge less. Of course, providers always prefer to negotiate with small risk-groups, and their lobbying efforts invariably reflect that preference. If you are not part of a group you’ll pay to the teeth!

Private insurance companies are currently regulated by state governments; which obviously limits the size of buyer groups. But under this bizarre pricing structure, no one really knows what that final price will be until long after the product or service has been provided. (Go ahead, call around town and ask how it costs to get an MRI!) Imagine going to your auto repair shop and asking how much a new muffler will cost, and the mechanic responds by saying: “Well the price depends on the size of the risk pool that backs up your auto insurance. We currently charge 37 different prices. We’ll replace your muffler and then figure out that price and send it to your insurance company, then they’ll decide how much they’ll pay, then you’ll get a bill for the difference.” After you get through laughing your ass off, you’d probably decide to fix that muffler yourself, or simply drive a noisy vehicle.

So what’s the story with Medicare? Well, it’s a single-payer system (and a so-called "public option") which means that it draws on a national market and has enough bargaining power to negotiate a lower price from providers. It also forces providers to charge a set fee that clearly reflects what Medicare will pay for that product of service. It’s a lot like going to your auto repair shop where the prices are posted on the wall and on their website, and everyone pays the same price. This kind of a pricing structure actually forces providers to compete based on quality and price. Of course, if you are a provider you’d prefer to be paid more per-buyer than less-per buyer, which is why many successful providers simply refuse to take on any Medicare patients. As the number of providers that refuse to participate in Medicare increases, it gets more difficult for elderly patients to find willing providers. When they do find one, they'll probably spend several hours in the waiting room! However, there is one class of providers that thrive on Medicare; that is, dishonest providers that charge the program for unnecessary products and services or for products and services that they never provided. And the government's inability to monitor the system, attracts dishonest providers.

So what’s the solution here? Well, I would argue that the health care industry ought to operate under the same legal pricing constraints as other industries. Most other countries have outlawed price-discrimination and therefore force providers to post their prices. Of course, that won’t happen in the United States because The American Hospital Association and the American Medical Association would descend on Washington like a swarm of locusts.

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