Medicare pricing drives high health-care costs

On Behalf of | Jan 2, 2014 | Uncategorized

For virtually every procedure and service — from routine colonoscopies to brain surgery and hospice care — Medicare comes up with a dollar figure that the government considers a fair price. But economists are finding that, largely because of the program’s vast scale, Medicare prices substantially shape what all Americans pay for health care.
“Our results suggest that Medicare’s decisions are far more influential than you may imagine,” said Joshua Gottlieb, an economist at the University of British Columbia. His research shows that a $1 change in the price that Medicare pays yields a $1.30 change in what private insurers pay. What happens if the government gets those prices wrong? In the past year, a Washington Post investigation has shown that Medicare prices are sometimes based on faulty premises, offer perverse incentives for unnecessary care and provide widely varying amounts for equivalent drugs.
“It’s a very big problem — Medicare pays too much for a lot of stuff it buys,” said Bruce Vladeck, who headed Medicare under President Bill Clinton. “If you had better pricing policy, a whole lot of hysteria about long-term insolvency of Medicare would go away.”
“Medicare is a wonderful program, but behaviorally, because of the price-fixing, it’s a mess,” said Tom Scully, who was Medicare chief during the George W. Bush administration and is now a partner in a private-equity firm that invests in health care.
Economists believe that the Medicare prices are even more important than that massive scale suggests, because in the absence of a traditional market for medical services, the Medicare prices form the foundation for private insurers, as well.
That is partly because Medicare is such a huge player in the market, accounting for more than a fifth of the money spent on personal health care. But there is a second, possibly more important impetus: Because of the complexity of modern medicine, setting prices is an arduous, time-consuming task. Insurers save money by letting Medicare do the work.

Read more about this in the Washington Post at

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