October 6, 2012

Medicare Is Too Good a Deal

I have had two experiences this week that suggest that the government is providing too much subsidy for Medicare. In one case, I received my 2013 plan materials from my Medicare Advantage plan. In the other, I had a medical episode that required extensive testing with high-technology equipment, and consultation with professional medical staff, for which I paid $20.

Under my Medicare Advantage plan, the amounts I pay for various services will actually be reduced. The maximum “out-of-pocket” amount that I will pay for all hospital and doctor services during the year is $3900 – a reduction of $1000 from this year’s $4900. For visits to my primary care physician, I now have a copayment of $5.00. Next year they will be free – no copayment. The cost of visits to specialists will be reduced from $35 to $20, and numerous other medical services will have a similar reduction.

In the other episode, I had to visit a hospital for a barium swallow test after a pill I swallowed went into my lungs rather than my esophagus. The test required a speech therapist to feed me various foods and watch the course of the foods through my throat on a very expensive looking x-ray machine. She will later write a report that will be sent to my specialist doctor. The process took 40 minutes, used expensive equipment, and included a detailed conversation with the speech therapist about what I could do to avoid further episodes. The hospital charge for the test was $180, there was an insurance discount (required by Medicare) of $80, the hospital billed Medicare for $80, and I paid $20.

These prices are ridiculous because I can easily afford to pay more.  It may be reasonable to provide highly discounted prices to low-income persons who really don’t have money to pay for medical care (many of whom would be on Medicaid), but any reasonably affluent person could afford to pay more than I paid above for important medical services. The problem is not just that I am getting away with a cheap price; it is that other people are subsidizing that price through their taxes. With a one trillion dollar annual deficit, in order to save me $1000 in my annual medical costs, the government will be forced to borrow money from China.

Subsidization by the government of such routine medical expenditures as doctor visits or lab tests subverts the purpose of insurance, which should be to protect against the costs of major medical events. Earlier in the year, I had a knee replacement operation, in which I spent three nights in the hospital. The hospital billed the government $108,000; Medicare disallowed $96,000, but paid $12,000 for the services provided to me. The initial bill obviously overstates the hospital’s costs, but the net amount seemed reasonable, if not a little bit less than what I had expected. The savings to me were substantial and an appropriate subject for insurance.

The price reductions imposed by Medicare also have unfortunate economic consequences. The marginal cost of a visit to my primary care physician is now zero. Now, anyone with a sniffle can go to the doctor for free, while previously, the minimal expenditure of five dollars would have dissuaded many people from bothering to go. I suspect there will be a substantial increase of patients in  doctors’ waiting rooms. This, of course, imposes a noneconomic cost in terms of waiting time that is probably the equivalent of the five dollar fee. But the fee is much more efficient as a market clearing mechanism.

There has been political discussion about means testing Medicare, with even President Obama supporting the concept. However, these discussions seem to have focused on increasing premiums for wealthier Americans. I suspect there would be more impact on Medicare expenditures if we means tested payments by the individual for medical services. A more affluent person might not be dissuaded from a doctor visit by a $20 co-pay, but might decide that $100 co-pay makes the visit not worth the expense. Whichever way it goes, there ultimately should be some form of means-testing.

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