Reform under the Radar: What Medicare Needs to Do to Control Costs

Below, a very welcome contribution from Shannon Brownlee,  author of Overtreated: Why Too Much Medicine Is Making Us Sicker and Poorer (2007),  an outstanding report on why ‘more care’ often is not ‘better care’.   An award-winning journalist and Schwartz Senior Fellow at the New America Foundation, Brownlee has written extensively about health care for the many publications including the Atlantic Monthly, the New York Times, and the Washington Post.

As I’ve suggested in the past, Medicare reform could be a stepping stone to national health reform. Ideally, we would do both simultaneously. In this post, Brownlee puts her finger on what is wrong with the way Medicare has traditionally tried to cut costs.  In future HealthBeat posts, we’ll talk more about specific proposals for cutting Medicare waste.


While Barack, Hillary, and Paul Krugman slug it out over the individual mandate, it’s worth pausing for a second to wonder why nobody is saying much about controlling health care costs. Yes, covering everybody is the right thing to do, it’s the moral thing to do, but it isn’t the only thing to do. Theoretically, it shouldn’t even be the hardest thing to do, because at its core, covering everybody is mostly a matter of being willing to come up with the money.  In reality, of course, coming up with the money is a political nightmare.

Controlling costs, on the other hand, is a much deeper problem, but oddly enough it may be easier to achieve politically at the federal level than universal coverage. That’s because cost containment can begin with Medicare, which has been instituting cost control measures under the radar for years. Its efforts have resulted in a lot of bitching and moaning from the hospital industry and doctors, but not a lot of political fallout.

So why aren’t Medicare’s cost control measures working? Because CMS has focused most of its efforts to limit spending on controlling prices. This strategy arises out of the mistaken belief that if they could just rein in the price per unit of care, the price of each CT scan and each office visit, they could control spending overall. This would be a dandy strategy in any other industry, but in health care it hasn’t worked out. And it hasn’t worked out because in health care, the real driver of cost is volume. Costs go up when the amount of care doctors and hospitals deliver to each patient goes up. And because the amount of care delivered doesn’t have all that much to do with the amount of care that patients actually need, whenever Medicare slashes the price it will pay, hospitals and individual physicians can always find ways to deliver more stuff in order to maintain their revenue stream.   

They do so in a variety of ways. When Medicare and other payers cut
physician reimbursements, the docs turn to ancillary services – MRI
scanners, in-office blood tests, EKGs, you name it. Physician business
magazines are filled with how-to articles telling doctors about all the
ways they can boost their incomes, and ancillary services are now a
huge driver of Medicare spending. On the hospital side, when Medicare
reduces payments for one set of services, hospitals try to attract
patients to the services with higher margins – which these days are
imaging tests like CT scans, cardiac catheterization, and DaVinci
surgical robots.  That’s why every hospital in the country wants a
64-slice volumizing CT scanner and a stable of interventional
cardiologists. And that means that patients are getting a lot of care
that  has nothing to do with what they actually need – or might want if
they knew how useless, not to mention potentially harmful, much of it

Medicare has begun to understand that it needs to start rewarding
efficiency. And by efficiency I don’t mean how many patients a
hospital’s radiology department can run through that 64-slice CT
scanner per hour, or how few envelopes the billing department uses to
get the bills mailed out. I mean the true measure of efficiency, which
is health outcomes and patient satisfaction for the lowest cost. This
is what “pay for value” really means in health care.  In a world where
payers reward this sort of efficiency, the volume of useless, wasteful,
harmful care goes down and the value to the patient goes up. Medicare
has already begun to figure this out, and it is already implementing
pilot programs that reward group practices that can demonstrate the
delivery of high quality care with lower volume.  Amazingly enough,
nobody is running around screaming about socialized medicine, and even
Rudy Giuliani would be hard pressed to argue against rewarding

13 thoughts on “Reform under the Radar: What Medicare Needs to Do to Control Costs

  1. Thank you, Shannon Brownlee. It’s long past due that this aspect of the healthcare reform debate starts to get the attention that it deserves. Medicare has been a single payer system serving the elderly for 42 years now, yet all it seems to know how to do is write checks whether value for money is delivered or not.

  2. CMS only focuses on price by legislative mandate. And when it tries to limit coverage for less useful services through national coverage decisions, it is subject to intense lobbying pressure from industry, patient groups, Wall Street (often in the guise of individual investors posing as patients, especially for new, high-tech goods) and Capitol Hill. I see no evidence yet that Americans are willing to empower CMS or anyone else to dictate (scientifically, of course) what the HC system should pay for.

  3. In regards to cancer, there was the potential to save millions of dollars and hundreds of thousands of cancer patient lives each year with the change in politics of cancer medicine by the introduction of the Medicare Modernization Act of 2003 (MMA).
    What was needed was to remove the profit incentive from the choice of cancer treatments, which were financial incentives for infusion therapy over oral therapy or non-chemotherapy, and financial incentives for choosing some drugs over others.
    The MMA changed how the CMS paid for doctor-administered drugs to a system based on doctors’ costs for the drugs from one based on average wholesale price.
    Under the new bill, medical oncologists would be reimbursed for providing evaluation and management services, making referrals for diagnostic testing, radiation therapy, surgery and other procedures as necessary, and offer any other support needed to reduce patient morbidity and extend patient survival.
    It offered patients benefits they did not have before, mainly coverage for oral chemotherapy drugs. The fact that medical oncologists received no reimbursement for providing oral-dose therapy to patients had been the principal barrier to the availability of oral-dose protocol.
    The advent of MMA ultimately meant that medical oncology needed to change its identity, prior to the chemotherapy concession. However, private payors still go along with it, seemingly to nullify the needed changes.

  4. “CMS has focused most of its efforts to limit spending on controlling prices … This would be a dandy strategy in any other industry.”
    Nope. It would be a terrible strategy in any industry. That’s why price controls failed so miserably with gasoline in the 1970s.
    “In health care it hasn’t worked out. And it hasn’t worked out because in health care, the real driver of cost is volume.”
    Nope. The strategy hasn’t worked out in health care because it ignores basic economic principles. Price controls produce one thing: shortages.
    In fact, CMS price controls are at the root of the PCP shortage and the decreasing access to care that rural patients endure.

  5. Thanks for your comments. (I’ll also ask Shannon if she wants to weigh in.)
    As Kenneth Arrow, the father of healthcare economists, and many economists who followed have pointed out: the health care market is different from other markets because the consumer doesn’t have the same power.
    If I’m shopping for a flat-screen TV and I think they’re still too expensive, I can say “I’ll wait until prices come down.”
    I can’t say that if I need a cancer drug.
    If I’m shopping for a refrigerator, I can read Consumer Reports to find out which provides the best value for the money.
    If I have a brain tumor, even if I’m a doctor, and this is my specailty, reading all of the medical journals in the world will not tell me what would be the best treament for my brain tumor. There are two many variables. And no two human bodies are alike.
    This is why, when doctors become very sick, they themselves often have a very hard time deciding which route to take. (See Carl Schneider’s fine book: The Practice of Autonomy.)
    Finally, health care is the only market where the buyer relies on the seller to put the buyer’s interest first. The seller (the physician) has vowed to do this.
    Thus, the buyer relies on the seller’s expert opinion to a much greater degree than he would in any other market–and accepts what the seller charges. This is a market where “caveat emptor” cannot apply.
    But someone needs to watch out for the patient–and that’s why you need government involvement to make health care affordable.
    Gregory–that’s very interesting. Why do you think private payers haven’t gone along? Because they can pass the cost along in the form of higher premiums, co-pays, etc? Because they don’t want to find themselves on the evening news with a cancer patient who wanted infusion therapy and is now dying (as she would be even if she had the infusion therapy)??
    Merrill–I’m more optimistic than you are that Medicare will begin to decide what it will cover based on scientific evidence. They don’t have much choice–otherwise they are going to run out of money.
    I agree that Americans aren’t going to be enthusiastic about this. But they won’t get to vote–anymore than they got to vote on hikes in Medicare premiums, co-pays and deductibles.
    Of course Congress will get to vote–and will be subject to all of the pressure from manufacturers (and some speecialists) who make money on over-priced treatments that are less effective.. .
    But I’m impressed that both Edwards and HRC are explicit about insisting on independent comparative effectiveness research to decide these questions. (I think Obama is too–not sure).
    If the next administration makes an issue out of this, I think they would win–especially given the financial problems Medicare faces. The alternative it to slash phsycian’s fees across the board, while will mean that more and more docs will refuse to take Medicare patients.
    The next administration just needs to make it very, very clear that new products that have not gone through head-to-head comparisons with older products can be hazardous to our health.
    Barry and Rick– I agree.

  6. Some of these things are happening already (not with medicare of course). I once recieved a nice letter from Anthem Blue Cross for being the number one prescriber of generic medications in the state! (couldnt feed my family with it though). The other incentives required me to fill out a different piece of paperwork for each insurance company with infor from many of the different patients, the reward was less than what it cost me to research the information. All in all this is a very important topic, I practiced like this, minimal tests, cheaper, older well known medications. Currently there are no rewards for it (except a sense of satisfaction knowing it was the right thing). Billions could be saved, and precious resources reserved for later, often more important use. There will likely be no meaningful reform without some rationing, tough pill to swallow for society that likes to get what it wants, when it wants it.

  7. Private health plans, even though they look to Medicare to guide reimbursement for pricey treatments, are taking a less-restrictive position than the governement in paying for controversial cancer drugs.
    Some reasons expressed are that private health insurers tend to side with the cancer doctor trade groups, which favor a more aggressive treatment approach. The Medicare change did not trigger a new review of the prescription protocols of private payers.
    Other reasons are that private payers fear a backlash from employers concerned about the ire of workers and doctors. Some health plans tweaked their policies to restrict payment, though not as drastic as Medicare did.
    The pharmaceuticals and cancer trade groups largely support allowing doctors to treat patients more aggressively. I think with the backlash from the anemia drug controversy, you may see some tightening up of policies.
    However, maybe not. For-profit incentives are very pervasive, and private payers can easily past the cost along in the form of higher premiums, co-pays, etc..

  8. Gregory–
    It’s good to know that Medicare, at least, is willing to stand up to the trade groups.
    This is one advantage of public sector health care. It can’t endorse open-ended health care spending. While Medicare can raise premiums and co-pays to some degree, it must make sure that Medicare remains affordable.
    A private insurer doesn’t have to worry if a segment of the population cannot afford its insurance, as long as there are enough wealthy people who can–and will–pay whatever the insurer (and the drug companies) decide to charge.
    Medicare, on the other hand, is a mandated public program (everyone has to pay Medicare tax), and as Paul Starr points out: “The secret power of the mandate is that it is as much a mandate on government as it is on individuals. It is a mandate on government to make coverage available and affordable. For it would be patently unacceptable to demand that people have coverage and then provide no practical way for many people to get it.”

  9. “The health care market is different from other markets because the consumer doesn’t have the same power.”
    The asymmetrical info/power argument sounds compelling. But I think the RAND-HIE project showed it to be invalid. Maggie, I know you’re familiar with that project. How do you explain its findings? (here’s a link for any reader who might be unfamiliar with the HIE)

  10. Prof. Mahar,
    I’m baaaack!
    In a previous thread,
    you and Niko stated that availability drives usage which drives cost.
    Medicare has a budget problem. Too much money
    is being spent.
    Therefore, use logic to
    reduce cost. If availability drives usage which drives cost, then Medicare must reduce usage by reducing availability.
    The best use of Medicare money, then, would be to buy and shut down as many hospitals and clinics as possible. The best use would be to provide bonuses to MD to leave medicine.
    Or, start practicing involuntary euthanasia. New Zealand has, and is getting “good” results.
    “Some people feel that as the New Zealand population ages there may be indirect pressure to agree to euthanasia. Patients who feel they are using scarce medical resources or that they are a burden to their families, may feel pressured to request euthanasia.”
    we get,
    “A duty to die is more likely when continuing to live will impose significant burdens–emotional burdens, extensive caregiving, destruction of life plans, and yes, financial hardship–on your family and loved ones. This is the fundamental insight underlying a duty to die.
    A duty to die becomes greater as you grow older. As we age, we will be giving up less by giving up our lives . . . To have reached the age of say, seventy-five or eighty years without being ready to die is itself a moral failing, the sign of a life out of touch with life’s basic realities.
    Bioethicist Battin has also supported the concept of an eventual duty to die for those living in rich countries, not just to spare burdening our loved ones but to promote world egalitarianism. Thus, she wrote in a book chapter called “Global Life Expectancies and the Duty to Die” that the time may come when we will have the moral obligation to “conserve health care resources by forgoing treatment or directly ending [our] life” toward promoting “health prospects and life expectancies” that are more equal around the globe.”
    Ready for hemlock?

  11. Your post does not take into account the other incentive for over-providing care – the Tort tax. Fear of Malpractice results in extra-tests, procedures and office visits which generally do not render better care to the patient but rather to the patient’s chart. The Tort Tax is the Elephant in the Room.