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Medicaid Cannot Be Kept in Its Current Form

Medicaid is in serious financial trouble. Absent major changes, the growth in Medicaid spending threatens to eviscerate the funding available for other vital state priorities. That's one reason why Florida got a federal waiver to try a new approach: a pilot project using managed competition in five counties.

Money wasn't the only concern, however. Just as bad as its fiscal condition is Medicaid's well-deserved reputation as a low quality health care plan. In some regions, at least one-third of all practicing physicians refuse to accept Medicaid patients — and more than 60 percent will not accept new Medicaid patients.

As a result, Medicaid beneficiaries wind up in emergency rooms at twice the rate of the uninsured and four times that of patients with private insurance. Worse, Medicaid is also routinely abused by providers, with many instances of outright fraud.

Despite these problems, some well meaning people still want to preserve Medicaid in its current form. We can see this in the relentless attacks on Florida's Medicaid Reform Demonstration, a bold experiment now in its second full year of operation.

The latest criticism — from the Legislature's Office of Program Policy Analysis and Government Accountability — is an example of premature evaluation. The first data suitable for analysis of costs and the quality of patient care is not expected until next January.

Before this reform, there was virtually no data being kept on the quality of patient care, provider satisfaction, or other important factors. And the cost data consisted of a scary trend toward unsustainable expenses that would have wrecked the state budget.

Meanwhile, other critics have focused on erroneous reports alleging that more than 25% of Medicaid providers had dropped out of the reform plans. Because this was so different from the data I had seen, I checked out this claim. It was utter nonsense.

Here's what really happened: After the reform was implemented, Florida Medicaid began monitoring HMO provider networks more closely to evaluate their adequacy. The state is now conducting monthly checks to ensure that the providers whom the HMOs list are still accepting Medicaid patients.

This process initially produced some "cleansing" of the provider lists. The reporters obtained information about this process, compared the old lists to newly audited lists, and then concluded that 25% of the physicians had dropped out of the reform.

But the "loss" was actually just a recalculation to ensure that the data on provider participation would be valid. The latest data I have indicates that only about 3% of the providers have elected not to participate in reform.

Meanwhile, critics have largely overlooked improvements. My research indicates, for instance, that the various reform plans made 12 co-pay reductions and 112 benefit expansions.

Given traditional Medicaid's unsustainable fiscal trend and substandard care, critics of reform would do well to offer a viable alternative that slows the spending increases and improves the quality of care. Yet when it comes to offering alternatives to Florida's ambitious reform, the critics have been silent because they have nothing much to offer except more of the same.

Florida Medicaid Reform in Second Year

Health Reform 101: Get Rid of Price Controls

Economists do not like price controls. Whether they are liberal Democrats, conservative Republicans or anything in between they recognize the counterproductive nature of attempting to set prices bureaucratically or legally. Unfortunately, price controls are rampant in the U.S. health system. Medicare has price control schemes for paying hospitals and doctors. Medicaid does the same thing all the particular method varies from state to state. Unfortunately, many private insurers copy Medicare’s payment schemes or at least use them as a starting point in determining appropriate medical fees. This system represents an enormous impediment to the efficient, low cost delivery of health care in America.

How much do price controls sandbag us? Suppose supply and demand schedules have slopes of one and negative one and the market price and quantity was $100 and 100 units. The net benefit of the market is $10,000 split evenly between consumers and providers. Now presume the government imposes a price control of $80. The deadweight loss of the price control, assuming the above slopes and intercepts, is $400. So there is a 4% deadweight loss from the control. If the price was controlled at $60 then the deadweight loss becomes $1,600. Any reform to make health care more affordable must start by eliminating price controls in the U.S.

More Government Run Health Care Fairness

In my other life I am a finance professor in a business school. Most of my colleagues are socialists. No surprise, after all: Where are these people to go now that their collective utopias around the world have pretty much collapsed?

I put these folks in two groups. The first are economic illiterates who actually think they can dramatically redistribute income and regulate the economy without any deadweight loss. The second group understands that dramatic income redistribution will significantly shrink the size of the economy but think that is OK. All that matters is that we are equal and if we have to be equally poor to accomplish it is worth the price.

Maybe the UK Health Service is run by people who think in that way. See below:Debbie Hirst’s…breast cancer had metastasized, and the health service would not provide her with Avastin, a drug that is widely used in the United States and Europe to keep such cancers at bay. So, with her oncologist’s support, she decided last year to try to pay the $120,000 cost herself, while continuing with the rest of her publicly financed treatment. By December, she had raised $20,000 and was preparing to sell her house to raise more. But then the government, which had tacitly allowed such arrangements before, put its foot down. Mrs. Hirst heard the news from her doctor. "He looked at me and said: 'I'm so sorry, Debbie. I’ve had my wrists slapped from the people upstairs, and I can no longer offer you that service,'"Mrs. Hirst said in an interview. "I said, 'Where does that leave me?' He said, 'If you pay for Avastin, you’ll have to pay for everything'" — in other words, for all her cancer treatment, far more than she could afford.

Officials said that allowing Mrs. Hirst and others like her to pay for extra drugs to supplement government care would violate the philosophy of the health service by giving richer patients an unfair advantage over poorer ones.

Canadian Medicine: It Is Great If You Are Healthy!

The political model for government run health care is quite simple. Solve the “cost problem” by establishing a global budget that the state will pay for in a given time period. Front load the plan so the vast majority of covered lives who are healthy get at least some access with their “I’m Covered” card. Then ration the remaining amount of services to the small number of very sick in any year. Most people are happy with the plan since they are fairly healthy and vote maximizing politicians only need 51% to be satisfied. Even a chunk of the sick that have trouble getting treated don’t complain because it’s “free”. A great deal for politicians and a really bad deal for the sick. See http://www.freemarketcure.com/brainsurgery.php for more details.

More Good News In Florida

One aspect of making markets function better is free entry and exit of capital. Of course, we may expect that existing firms will work real hard to reduce competition. Naturally, the reason for this is to protect consumers from terrible things like WalMart’s low prices and low cost classes from the University of Phoenix. This is equally true in health care where physicians and doctors want free enterprise but don’t want to tell consumers what their fees are for various procedures. An old barrier of entry trick in health care is “certificate of need” which prevents new building of competing hospitals and other medical facilities. Good news on this in Florida:Gov. Charlie Crist wants to eliminate Certificates of Need (CON) for hospitals, and the Buzz is there's a mention of such a move buried in one of his budget recommendations. "One of the things I'd like to do is relax that process so that we get more health care providers to more Floridians in a more timely fashion," Crist said.

Good News From Florida!

Governor Crist has appointed former Representative Holly Benson to head the agency that overseas Medicaid in Florida. Holly worked hard on shepherding Medicaid Reform through the legislature and is strong believer in free markets in health care. 

Competition In Drugs = Better Consumer Deal

While I opposed the creation of a Medicare drug benefit (I wanted Medicare to become a risk-adjusted premium support plan) at least we can take some solace in how it was designed.

The plan is a premium support plan with private insurers vigorously competing to enroll beneficiaries. It looks like this competition is having the desired effect. From the CPI the rate of inflation in 2007 was just 1.4%. There are other factors in play as well but if we are going to create new entitlement plans the model of premium support, competition and consumer choice beats price controls and regulations any day of the week. Hopefully, this will be the stake in the heart for allowing Medicare to “negotiate” drug prices.

This graph , by the way, shows the decline of inflation in prescription drugs and medical supplies.

The Ultimate Insurance Mandate

When the issue of mandated insurance arises the question quickly moves on to how to enforce it. Democrats have offered ideas on varying levels with Senator Obama advocating mandatory coverage for children while Senator Clinton has essentially advocated universal coverage. This is just another step towards “Medicaid For All” with an overly generous benefits package (on paper) being combined with insufficient subsidies to support it along with little mechanism to control unnecessary utilization. The result will be more cost shifting to existing private plans and outright rationing of care. This is lousy health care but good politics as proponents can claim they have increased coverage for a minimal amount of funding. They will also argue that greedy insurers and physicians are responsible for those who will be unable to access care even though they are covered. Senator Clinton tipped her hand on enforcement in the debate the other night. From the New York Times:

Senator Hillary Rodham Clinton inched closer Sunday to explaining how she would enforce her proposal that everyone have health insurance, but declined to specify — as she has throughout the campaign — how she would penalize those who refuse.Mrs. Clinton, who did not answer Senator Barack Obama’s question on the topic in a debate last Thursday, was pressed repeatedly to do so Sunday by George Stephanopoulos on the ABC program “This Week.” When Mr. Stephanopoulos asked a third time whether she would garnish people’s wages, Mrs. Clinton responded, “George, we will have an enforcement mechanism, whether it’s that or it’s some other mechanism through the tax system or automatic enrollments.”

Where Do DRGs Come From?

When government gets involved in things there tends to be the development of lots of alphabet soup descriptors for various aspects of what is being taxed, subsidized or regulated. This is true especially in medicine.

One of the more interesting abbreviations in medicine is DRG. This stand for Diagnosis Related Group. DRGs replaced a cost-plus reimbursement system for hospital procedures in 1983. Health spending in the U.S. exploded after the passage of Medicare in 1965. It occurred to those running the program that paying hospitals for their costs might actually give them an incentive to have lots of costs. So, to solve the problem, a “prospective payment” system using DRGs was developed.

The idea was simple. If you pay people to have costs, you get lots of costs. If you pay a hospital a fixed amount of money per patient, in theory they will have an incentive to provide services in a more economical manner. DRGs are determined by the medical condition of the patient, the procedure(s) for treatment, and the patient's age and sex. In addition, the possibility of complications is addressed in DRGs. The system was developed by Robert Fetter and John Thompson of Yale University (proving, once again, that many of the world’s stupidest ideas come from American Universities). In theory, the DRG for a bypass or an artery clean is set equal to the marginal cost of the procedure. Thus, we achieve the economically efficient outcome of Price = Marginal Cost.

Of course, it doesn’t work like that in the real world. The lack of real competition among hospitals means that many hospitals have no idea what the marginal cost of a procedure is at a point in time. Those that do have a huge incentive to provide procedures where Price > Marginal Cost and minimize those where Price < Marginal Cost. Of course, this won’t happen if Medicare sets the DRG rate exactly equal to that hospitals marginal cost.

You can see where this is headed. The bureaucrats at CMS (the bureaucracy that oversees Medicare and Medicaid) cannot possible calculate correct DRG rates. So the vast majority of the time Price does not equal Marginal Cost, rendering the whole system vastly inefficient. In Northeast Ohio, everybody from the Cleveland Clinic (which pioneered bypass surgery) to numerous community hospitals are trying to do heart surgery and procedures. Want to bet Price > Marginal Cost? In Northwest Ohio, it is almost impossible to get treated for Thyroid conditions at hospitals. Want to bet Price < Marginal Cost? In addition, many private plans copy DRG rates rather than negotiating with hospitals. Any reform of health care needs to start with the elimination of this alphabet price control system and its replacement with a real marketplace.