2005 July 26 Tuesday
Medicare Rewards Hospitals For Poor Care And Excessive Treatment

Medicare rewards high costs and incompetence.

Under Medicare's rules, each time a patient comes back for another treatment, a hospital qualifies for an additional payment. In effect, Palm Beach Gardens was paid a bonus for its mistakes.

Medicare's handling of Palm Beach Gardens is an extreme example of a pervasive problem that costs the federal insurance program billions of dollars a year while rewarding doctors, hospitals and health plans for bad medicine. In Medicare's upside-down reimbursement system, hospitals and doctors who order unnecessary tests, provide poor care or even injure patients often receive higher payments than those who provide efficient, high-quality medicine.

"It's the exact opposite of what you would expect," said Mary Brainerd, chief executive officer of HealthPartners, a nonprofit health plan based in Bloomington, Minn. Her Medicare HMO ranked among the top 10 in the nation last year for quality but was paid thousands of dollars less per patient by Medicare than lower-performing plans.

"The way Medicare is set up," Brainerd said, "it actually punishes you for being good."

As Medicare approaches its 40th anniversary on Saturday, much of the debate about the nation's largest health insurance program revolves around whether it will remain solvent for aging baby boomers. Yet another critical question is often overlooked: whether taxpayers and patients get their money's worth from the $300 billion Medicare spends each year -- now about 15 percent of federal spending and projected to grow to nearly a quarter of the budget in a decade.

Read the whole article.

Medicare does little to try to monitor quality of service delivered.

Medicare has difficulty controlling waste because of deficiencies in the way it monitors and enforces quality standards. Its oversight system is fragmented, underfunded and marred by conflicts of interest, records and interviews show. For every $1,000 that it pays to hospitals and doctors, it invests just $1 or $2 to oversee and improve patient care.

Part of Medicare's budget should go toward funding the devleopment of cheaper treatments. Another part of Medicare's budget should go toward tracking and comparing quality of care at different medical institutions. Also, more Medicare outlays should funnel through HMOs that are rewarded for higher quality and more cost effective service.

The United States also needs to reduce the percentage of medical costs paid for by insurance plans. Tax advantaged medical savings accounts would introduce much more accountability by making the payers and the receivers of medical services the same people. Imagine you had a medical insurance plan with a $5000 per year deductible (I have such a plan) and you had, say, at least $20,000 in your medical savings account with which to pay for medical insurance and for all medical expenses that might come up in the course of a few years. Even if you lost your job and went through a major illness for a couple of years you'd still be able to pay all your medical expenses. Since you'd be spending your own money you'd look much harder for lower priced services and services more assured to allow quick recovery times. In short, you'd shop around the way plastic surgery customers do now. Medical savings accounts with large deductibles are one way to bring more competition to medicine.

A lot of medical procedures have costs that run into the tens and hundreds of thousands of dollars. One way to bring competition to the provision of such services would be to make the tax advantaged nature of medical savings accounts greater for people who put more money into their accounts and buy higher deductible insurance policies. So, for example, a person who agrees to put $50,000.00 into their medical savings account and buy medical insurance with a $20,000.00 per year deductible should get a bigger tax break than someone who puts in only $10,000.00 and buys medical insurance with a $5000.00 per year deductible. People should get a tax advantage for paying larger portions of their own medical expenses.

Currently much of the medical industry is a massive uncompetitive racket. Medical care providers actively lobby Congress to defeat attempts by Medicare to run competitions for provision of major types of services. The article cites some examples of pilot projects which Congress killed after their initial success. But the cost of medical care in general and specifically the cost of medical care paid for by taxpayers has become so great that the same racketeering business as usual has got to come to an end. We need competition and publically available performance data on doctors and hospitals.

Share |      By Randall Parker at 2005 July 26 02:53 PM  Economics Health

crush41 said at July 26, 2005 3:43 PM:

it actually punishes you for being good.

It is championed by the left, so that should come as no surprise. Name me one leftist fiscal policy that does not punish you for being good or reward you for being foolish!

Invisible Scientist said at July 26, 2005 3:57 PM:

It appears that one reason medical care in general is so expensive in the United States is because entrance to medical schools is very restricted, in the sense that the medical schools have decided among themselves, to train a lot less doctors than there are qualified applicants to medical programs. This way they keep the salaries of doctors very high. In many countries, doctors, even top notch specialist surgeons and research doctors, get only a small fraction of the salary of American doctors. Thus medical schools are colluding in a mafia style price fixing strategy, by producing very few doctors. As a result, in the future, as the quality of the medical procedures in Third World coutries (like India, for example)is increases, a lot more Americans will travel there for surgery and other treatments.

Randall Parker said at July 26, 2005 4:51 PM:


You have it backwards. Read the full text of the article. Areas with larger numbers of doctors have higher medical costs, not lower. Why? Because the doctors generate work for themselves. "Come back and see me again next month" and "I really think surgery is necessary".

Stephen said at July 26, 2005 5:09 PM:

Invisible, there's some counter evidence that having too many doctors actually leads to over-servicing (and therefore increased costs) as doctors wring out as much as they can from the system. On the other hand, there's also a theory that that shouldn't be seen as a cost but as an investment that will pay-off in the long term (the idea being that all it takes is for a few over-servicings to actually detect something potentially serious at an early stage before the big money needs to be spent on the operating table).

As for your last point, I agree that over the next few years we'll see an international market develop for surgical procedures, and the step after that being everyday consultations via video with a doctor in a 3rd world country. I think that'll be a good thing - though some will hate the idea of exporting jobs (hey, doctors are workers too you know...)

Invisible Scientist said at July 26, 2005 5:35 PM:

If the doctors are making more money in those regions where there are more of them relative to the rest of the country, it is probably because there is STILL not enought of them in comparison to how much money the region of the country where they are working. For instance, in the Berkeley area, there are FAR more doctors than in Arizona, (and many of these doctors were educated at the top 10 medical schools and these Bay Area doctors are also often research scientists who are also serving the regular citizens part time), but at the same time the average income of the residents of this part of the country, happen to have 3 or 4 times the average income in the nation, and as a result, they are likely to afford to get medical treatment much more often, and even on a pre-emptive basis. This is one reason a lot of doctors have moved to the Bay Area in the first place, and still they are making more money than the average doctor in the nation despite the fact that there is a higher density of doctors per square mile in the Bay Area, because this is a rich region of the country.

Whence this does not change the basic fact that the law of supply of demand will make it impossible for the doctors to charge high fees if there were enough of them in the nation, clearly we do not have enough of them to generate enough competition.

I do not see how doctors can systematically make surgery more necessary if there are too many of them: before I had sinus surgery in 1996, the doctor tried every possibility to avoid surgery, and made clear that it is difficult to get surgery approved by the insurance company which is watching everything like a hawk. Even the CAT-Scan was approved because the doctor strongly insisted that it was necessary at that time, and he made it clear to me that about 1 % or 2 % of the patients need this kind of sinus surgery.

In any case, if you increase the number of doctors to a high enough percentage of the population, then there will be enough competition to drive the prices down.

In any case, see the movie "The Island"... This is about the dark side of the medical industry...

Dan said at July 27, 2005 11:03 AM:

Overheard in a restaurant line recently, "I had a heart exam last week. Is anything wrong? Nah, My doctor had a boat payment due."

John S Bolton said at July 27, 2005 12:01 PM:

This is a serious problem area; the alternatives increase the aggression in society, or threaten a reversal of medical technology or life expectancy. The left and the moderate right can walk us into dictatorship, just by neglecting to respond to the dysfunctionalities of the medical system. Socialized medicine is not only a seizure of practices without compensation; it would result in the reversal of the progress of medical procedures throughout the world. Today, an advance in medical technology is one of the worst threats to the net taxpayer. Not that it must be so in each case, but it is for the most part that way. Military contracting has similar problems, though. Investigation for fraud can do a lot. The plundering by shysters has to be brought under control. They cannot be allowed to determine what medicine should be. Eliminate lawyers from malpractice and medical negligence proceedings of any kind, by federal statute, preeempting all state law. There must be no opportunity for the shyster to control the medical system.

Jody said at July 28, 2005 12:55 PM:

Actually, tax advantaged health savings accounts HSAs already exist. (I may be misreading the post. To me it looks like Randall is advocating for the introduction of HSAs as opposed to the expanded use of HSAs. As such the following may be useless to Randall, but hopefully the other readers will find the brief discussion useful).

HSAs work kinda like a 401K in that you shelter the income going in and have to pay taxes when taking the money out (and face penalties for taking out the money before 60 or so).

However, if you take the money out for medical expenses (such as paying a deductible or purchasing pills), then there's no penalty and no taxes.

Currently, there's lots of hurdles to starting a health savings account (most significantly you can't join one if you or your spouse work at a company that offers a traditional health insurance plan - this is the only reason I'm not currently enrolled in a HSA). The bottom line, however, is that we're almost there, we just need to fix some regulatory issues.

More info on HSAs are available here.

Randall Parker said at July 28, 2005 1:57 PM:


I am aware that HSAs came in back in 2001 or 2002 (I think April or May 2001 slipped in as part of Bush's first tax cut bill). I'm also aware that there are assorted limits on them. I didn't want to take space in an already long diatribe to get into all the nuances of health savings accounts. I just wanted to get across the point that HSAs can make a big difference by making the medical marketplace more like a marketplace. HSAs could also change labor mobility and reduce the percentage of the uninsured.

Still, I'm glad you spoke up on this. The addded information helps.

BTW, what do you think of the practicality of structuring HSAs so that there is greater incentive for getting insurance with higher deductibles? Ideally I'd love to see people get deductibles so high that they only file claims for major medical and where 90% of people never file claims on medical insurance policies in a given year.

Jody said at July 28, 2005 7:03 PM:

On "incentivizing" high deductible insurance:

I'm a big believer in the power of the market though I'm not a lasseiz fairest. In other words whenever the government can set up conditions for a market, I'm all for it.

In this case, shifting the health care sector towards the use of high deductibles will have the following market related effects that I don't frequently see discussed: a) the number of health care purchasers will increase, b) the set of purchasers and consumers will become more coincident.

a) will limit the monosopistic effects that stifle innovation; b) will lead to the more efficient allocation of medical resources.

Then there's the other beneficial effects that are more frequently discussed like the fact that less money ought to be spent on health care which should be beneficial for the economy as a whole. Further, it could also improve the health/competitiveness of American businesses as health care is taking up an increasingly large portion of budgets.

Bottom line, it sounds like the good plan to me because it will tend to make the health care system act more like a market (the same goal you allude to in your criticism of the medical industry as a "massive uncompetitive racket").

M.Robinson said at July 29, 2005 5:47 AM:

We in britain seem to have a discussion on what the NHS should become, whether it should be privatised or remain under the control of the Public. I for one would not like to have the NHS being privatised, although I am in agreement with the privatisation of BT, Bgas etc.With the NHS an individual has a right to treatment and the doctors are paid a salary, and as such are employed by the state. If we had doctors working on the US system, we would most probably be unable to afford medical care.

Those who work have to pay for their prescriptions at reasonable rates, but are seen by their doctors without charge.

Jay Z said at July 29, 2005 4:04 PM:

A government program that rewards waste and inefficiency? That's unheard of!

M.Robinson said at July 30, 2005 5:39 AM:

A program that entitles the vulnerable in society to medical treatment. The ambulance drivers in Britain do not ask the patient for their insurance cards!

I have the option of staying in the NHS or opting for private, I thus have a choice.

Randall Parker said at July 30, 2005 7:57 AM:


In the US hospitals are required to treat anyone brought to an emergency ward.

As for your touting the NHS as superior: The NHS has much lower 5 year survival rates for almost all forms of cancer as compared to the US. In Canada half the provinces have lower cancer survival rates than all American states. BC is better than only half of American states. The rest of the Canadian provinces are mixed in with the worst half of American states in terms of outcomes. Socialized medicine doesn't look so hot from where I sit.

"Prescriptions at reasonable rates" in Canada are price controlled. The Canadians basically freeload off of the American drug buyers and we provide drug companies most of the revenue for their drug development efforts. The rest of the world similarly freeloads off of American drug buyers. If America had price controls like Canada and many European countries then much fewer drugs would be developed and more people would die.

M.Robinson said at August 1, 2005 8:08 AM:

There is the diffence between surviving and having quality of life. I never assumed the NHS to be perfect but it provides care irrespective of social and economic class.

['US hospitals are required to treat anyone brought to an emergency ward'.....]

Does this entitle them treatment for say a major operation, that the individual may require without having any insurance.
You seem to assume that all drug companies are based in the US, I am sure quite a few of them are also based in Europe.
I believe it is essential that companies recoupe their investment and make a decent profit on their products , but some drug companies are commiting daylight robbery.

Randall Parker said at August 1, 2005 8:30 AM:

M. Robinson,

You miss the point on the NHS versus the US: The US medical system produces better outcomes on average. The US system even produces better outcomes for the lower classes. Look, there's a huge research literature comparing health care systems. Your system sucks. It might be more equal. But bottom line is that it fails to save as large a fraction of sick people as our system.

But you have been brainwashed into believing your system is morally superior. Amazing. How can it produce worse average outcomes and do so with the power of state coercion and be morally superior?

You keep telling me things I assume that I do not believe. All drug companies are based in the US? Where'd I suggest that?

I have posted on how drug companies have migrated from Europe to the US. It used to be the majority of drug companies were in Britain and Europe. Now the majority are in the US and the shift continues. Why? They are following the money. If our drug prices were as low as yours then pharmaceutical companies would develop fewer drugs and you'd have fewer drugs to use. We subsidize your drug use. We do this for the whole world. Our system is not morally inferior. Yours is.

M.Robinson said at August 3, 2005 5:15 AM:

So the US government is allowing drug companies to ripoff the average American. I would not call this 'morally superior'. This is nothing less than Drug cartels being in cahoots with lawmakers. The Prescription cost per individual item in britain is currently at 6.50 (approx $10.00) for those who are working, and for those out of work it is free.

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