Economic Incentives and the Medicare Buy-In

The prospect of expanding Medicare in place of a public option has led to discussion of how this is likely to be received. Matthew Yglesias writes:

Medicare doesn’t pay hospitals and doctors as much as private insurance does. Hospitals and doctors don’t like that. They want to get paid more. Which is understandable. In addition to my main job here at CAPAF, I also write columns regularly for The Daily Beast and The American Prospect Online. I won’t go into specifics, but one of these fine online journalism outfits pays me 67% more per column than the other. Naturally, I wish the stingier publication would reimburse me at the higher rate. But they don’t see it that way.

To some degree this analogy as valid, but for health care the comparison is more complicated than comparing the rates of pay between different publications.  Reimbursement for health care charges is more complicated than getting paid for writing and hopefully Yglesias doesn’t have to worry about whether he will be paid at all. While Yglesias primarily writes about hospitals and cost shifting in his post, I’ll comment regarding the situation I know first hand–physician billing.

Private insurances generally pay more than Medicare so theoretically I should prefer that we do not expand Medicare. However, Medicare has some things going for it which make me happy to see more on Medicare. If a patient is on Medicare I pretty much know I’ll get paid. (The most common real world exception is when it turns out the patient is really enrolled in a private Medicare HMO I don’t participate with.)

With private plans there are far more reasons why I might not get paid, such as pre-existing conditions, deductibles which might be thousands of dollars, patients losing coverage, or unexpected rules on what is covered. (At least Medicare posts all their rules on line, limiting surprises).

With some plans I might get paid more, but it also costs more overhead for billing and obtaining authorizations. It is  far less expensive to deal with Medicare. I simply send in an electronic claim and receive a check in three weeks. With private plans, sometimes it is this easy, and sometimes they throw a bunch of roadblocks in the way of getting paid.

While Medicare does pay less, looking at things purely from the perspective of my own economic benefits I still like the idea of more people having Medicare. Sure, at times this will mean I’ll receive less pay if a patient changes from a private plan to Medicare, but generally it will not be all that much less. Many other times it will be patients who currently have no insurance or have an insurance plan which winds up not paying all that well. My bet is that I’ll still come out ahead (although a public option which pays 5% more than Medicare would be preferable assuming it paid as reliably as Medicare).

Ezra Klein reports that hospitals are gearing up to oppose the Medicare buy-in.

Medicare pays less for services than private insurers do, or than the public plan would. To consumers, that’s called “getting a better deal.” To hospitals, it’s called “making less money.” A hospital’s total operating budget is always based on its total revenue. They add the income from patients with private insurance, Medicare, and Medicaid, add in the whatever pittance they get for uninsured patients, and use that pool of money to offset their total operating expenses. That, in the simplest form, is the business model.

That model works as long as all three major streams of revenue stay constant. But changing some of their current private patients who are billed at $4,000 per day to Medicare patients who are charged $3,000 per day scares them. Where does the money come from? A health-care wonk will optimistically tell you it comes from more efficiencies. An industry cynic will tell you it comes from increasing volume. For some hospitals, it comes from nowhere, and they’re suddenly in financial trouble.

Comparing hospital charges is also far more complicated than this example. The amounts that a hospital charges are irrelevant. Medicare pays hospitals based upon a Diagnostic Related Group (DRG) system. A fixed amount is paid based upon the DRG which the diagnosis is assigned to. For example, Medicare will pay the same amount for a patient admitted with Congestive Heart Failure regardless of whether they are in the hospital for two days or five days and regardless of all those scary prices for each individual item you might see if you look at the hospital bill.

Actually it does get far more complicated than this as other factors will also influence the total payment, but Medicare payment is not based upon charges per day or charges for individual items. This might not change the fact that hospitals would prefer to have more patients with private insurance as opposed to Medicare, but it is such a common mistake in the discussion of health care reimbursement that I thought I would address it here.

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