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Commentary

Fix Medicare, Not Its Prices
Michael Cannon, Cato Institute, 10-10-06

Michael Cannon argues that the real source of Medicare's woes is its attempt to micromanage prices and services for thousands of private physicians, leading to enormous waste and inefficiency.

The Medicare bureaucracy is somehow supposed to divine the correct prices for more than 7,000 distinct physician services in each of Medicare's 89 physician–payment regions (yep, some 623,000 separate prices). And—unlike market prices—these price controls don't automatically adjust to reflect the value of goods and services. As a result, quality suffers.

In fact, Medicare pays low–quality physicians the same amount it pays high–quality ones—and sometimes pays them more. Several studies by John Wennberg and his colleagues at Dartmouth Medical School suggest that the quality of care in Medicare is well below what it could be—and that quality is lowest in areas where Medicare spends the most.

Should Medicare pay physicians on the basis of quality? Well, there's no reason to think that Medicare's bureaucracy will be any better at defining "quality" than it is at setting prices...

It is tempting to think that Medicare's payment system exists to benefit physicians who know how to play the game. But few physicians enjoy having their practices thrown into turmoil by payment changes utterly unrelated to the value they provide.

A more plausible explanation is that Medicare's pricing system exists to serve Washington's political class. Politicians can use the perennial threat of payment cuts to shake down wealthy physicians for political contributions. Organizations that lobby on behalf of physicians—like the AMA and the AAFP—rake in membership fees as well. It is little wonder that, according to the watchdog group Political Money Line, the health-care industry spends more on political contributions and lobbying than any other.

This is madness. The government has no business setting prices for physicians' services. Until Congress lets the market set those prices, Medicare will continue to purchase sub–standard care and encourage shakedowns that benefit no one but politicians and lobbyists.



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