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Thursday, August 18, 2011

Are Tea Partiers Actually Correct to Believe that Medicare Isn't a Governmental Program?

It is common place to make fun of Tea Party types for not understanding that Medicare is a governmental program. Everyone knows about that guy who told Representative Bob Inglis to “keep your government hands off my Medicare!” There is more systematic evidence that many recipients of Medicare do not believe that they receive any “government social program.”

In an odd way, however, might those Tea Partiers be correct? I know it sounds crazy, but maybe there is a sense in which Medicare is not a governmental program: Maybe it is instead just a program funded by the government but pervasively influenced by private healthcare providers who loot the fisc constrained only by very weak bureaucratic oversight. What’s worse, it could be that this private domination of Medicare is reinforced by an ideology of privatism, in which beneficiaries see their Medicare benefits as nothing more than their “return” on their payroll tax “premium.” Any effort to change the benefits is seen as governmental confiscation of the fruits of the elderly beneficiary’s thrift and hardwork.

If my gloomy suspicions are correct, then one of the Left’s frequent defenses of Medicare – that Medicare has low administrative costs – is precisely what’s wrong with the program. What Medicare needs is higher administrative costs – aka bureaucrats – who can rein in the private interests that now control the program.

I admit that all of these dark thoughts are merely my own perverse speculation. I am no health law expert: It might be that CMS holds tighter reins over physicians’ and hospitals’ lobbying for ever more generous reimbursement than I imagine. (I have suggested to law students that they take a look at how HCPCS codes are determined at CMS’s public meetings – who shows up and who prevails – but the students were too intimidated by the sheer unintelligibility of the whole process to take me up on the project).

Here, however, are some reasons for entertaining this hypothesis that Medicare is looted by private providers.

First, consider the record. Hospitals tenaciously fought to preserve a fee-for-service system that creates obvious incentives for unnecessary tests and procedures with accompanying ballooning costs. Reagan defeated them with prospective payment systems (“PPS”) in 1983, and PPS was extended to outpatient services in 2000. In theory, PPS reduces incentives to over-treat and over-test by compensating based on the overall care (“diagnostic related groups” for hospitals, “ambulatory payment classifications” for outpatient care). In practice, however, Medicare costs have steadily climbed by 9% annually between 2001 and 2009 despite these reforms. It might be that providers make up in volume of services what they lose when ceilings are set for APCs: Order more tests, and it does not matter that CMS imposes a tight ceiling on the test’s cost. Or it might be that the process by which reimbursement is set for bundled services, APCs, DRGs, etc, is simply inflated because the only people at the table are the doctors, hospitals, and AARP when CMS defines those reimbursement codes. Whatever the reason, our healthcare costs seem immune to cost-control measures in ways that private provider domination of the administrative and legislative would handily explain.

Second, to an untutored observer, the providers sure look like they wield a lot of clout, both politically and economically. They seem to price-gouge when they are not carefully monitored by insurance. But they also seem to have a lot of pull even when CMS tries to rein them in. The pharmaceutical companies seemed to roll everyone in 2005 with the new Part D. General news accounts attribute vast power to the physicians and hospitals in both contributions and general influence. And who sits opposite the providers at the table when CMS sets the HCPCS codes? Do private insurers push back against the providers’ demands for higher reimbursements from the feds, on the ground that the private reimbursement rates are based on the federal HCPCS codes? If so, how effective is this push-back?

Third, recent efforts to rein in costs with impartial commissions of experts seem to be drowned in catcalls before they are barely on stage. Proposals to strengthen MedPac as a sort of Federal Reserve of Medicare seem to have gone nowhere. Obama’s efforts to invest IPAB with some authority to recommend cost-savings measures have been ferociously attacked by Republicans, who compare it to the IRS even though IPAB’s charge is to reduce the amount that government spends. The U.S. Code is riddled with special congressional rules for specific treatments and even specific hospitals, suggesting that medical providers have the clout to secure pork worthy of an Alaskan Senator.

The root of this private provider domination, perhaps, is the conceptualization of Medicare as a form of “insurance” funded by the beneficiaries’ “premiums” in the form of payroll taxes. This description might induce beneficiaries into believing that their benefits come from their personal savings accumulated from years of past payroll taxes. The demonstrable facts are different: Medicare beneficiaries now receive much more in payout than they ever invested. But the ideology is that Medicare is an "entitlement" based on contributions to a fund. When they yell, “get your government hands off my Medicare!” Tea Partiers are not being fools: They are actually just correctly stating the reigning ideology that distinguishes sharply between entitlements allegedly based on based contributions and “welfare” or “the dole.” They might even be more prescient than their critics who might be deluded into thinking that federal officials have the capacity to control providers’ demands for ever-higher reimbursement.

If my suspicions are correct, then defenses of single-payer systems that rely on comparisons of the United States with regimes that have more robust bureaucracies like, say, Canada are off the mark, because the latter have the statist power to put the kibosh on providers that the United States lacks. Ironically, our budgets are so bloated because our state is so weak.

Posted by Rick Hills on August 18, 2011 at 08:35 AM | Permalink


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Very interesting rehabilitation of a widely mocked attitude. So is Medicare a "new new property" (as suggested in this post: http://www.concurringopinions.com/archives/2011/04/medicare-as-the-new-new-property.html)?

Maybe the state has effectively offered the following bargain:

1) We'll globalize the economy, and precarize your income.
2) But we will at least guarantee an income to you, and health care, if you can make it to 65.

Of course, that interpretation would make more sense if we eliminated the "dedicated taxes that finance Medicare" in "favor of funding Medicare through general tax revenues," a proposal considered here:

Finally, I do agree with your points that the state bargains weakly in the US (except, perhaps, for the VA). The ratemaking can amount to RUC-rolling, as I noted here:

But the "private sector"* does a far worse job, in part because antitrust in the area is a policy at war with itself. Both providers and insurers consolidate to gain the upper hand against the other. Joe White’s "Markets and Medical Care: The United States, 1993–2005," offers a skeptical take on the cost-containing power of a market structure evolving toward bilateral monopoly or oligopoly:

“One might wonder why consolidation among insurers did not allow them to resist the providers’ demand for increased payments. The simple answer is that there were two concentrated parts of the market and one fragmented part. The insurers had to choose between fighting a full-pitched battle with the providers or exploiting their own market power vis-à-vis the employers. Raising premiums to employers was a lot easier. In theory, employers could have demanded restrictive networks (at lower prices). But since everyone had agreed that employees did not like restrictive networks, and providers (especially hospitals) were not willing to discount much to get into such networks, there were not many available for purchase. Individual employers could not invent such a product; they could only shop around and find the relatively best deal by customizing other contract terms, such as cost sharing.”

Here's a bit more on the hospital/insurer balance of power: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1788132

*I think it's probably better to identify it as the "more profit-driven" sector. It's hard to neatly distinguish private and public actors in health care, as in defense, communications, finance, and energy. I'd say that each of those sectors also features "program[s] funded by the government but pervasively influenced by private healthcare providers who loot the fisc constrained only by very weak bureaucratic oversight." I question why liberals and conservatives alike are so focused on health care costs, when defense and finance are at least as problematic.

Posted by: Frank Pasquale | Aug 18, 2011 10:50:49 PM

Oops--in the penultimate sentence, I meant to take out "healthcare," to generalize the point about capture.

Posted by: Frank Pasquale | Aug 18, 2011 10:53:30 PM

Thanks, Frank, for the thoughtful comment as well as the reference to Interfluidity's defense of the Tea Partier's concept of Medicare as the "new, new property". I especially like Interfluidity's statement that
What the Tea Partiers are accurately if not artfully expressing is that Medicare feels a lot like a property right. Our most important property rights are often claims on people or institutions. This includes all financial wealth — dollar bills, stocks and bonds, pensions and 401-K plans, every form of insurance we buy for ourselves or others provide for us. Medicare and Social Security are, from users’ perspective, property, no different from a privately funded health or pension plan. Why should users think of them as “government benefits” any more than they think of interest payments on a Treasury bond that way?
The conflict between the Left and the Tea Party over the status of Medicare and Social Security is a great example of what I call "baseline Hell" -- a place of endless anguished screaming to no purpose, because each side refuses to define and defend their peculiar baseline of entitlement. The Left does not deny that citizens can be entitled to governmental benefits as a kind of property: They just want to extend that sort of property protection to benefits like TANF, SNAP (aka "food stamps"), WIC, and other means-tested programs. They mock the Tea Partiers for their "hypocrisy" in attacking those means-tested programs but nevertheless defending their own benefits from Social Security's OASDI program and Medicare. The Tea Partiers, however, have a story for why these "entitlement" programs are different from means-tested program -- a story rooted in a crude quid pro quo of FICA for benefits.

Which story of property is the "correct" one? The Tea Party story leaves a lot to be desired, rhetorically speaking: It lacks support from judicial authority (see Flemming v. Nestor, 363 U.S. 603 (1960), denying that entitlements to OASDI and Medicare are property rights), and their proffered quid pro quo seems too asymmetrical to be the foundation for a powerful moral case of entitlement, given that the FICA and the benefits are not carefully calibrated with each other. On the other hand, the moral basis of the "property" defended by the Left is also not carefully explained and justified: Is it any basic need for material goods? Or such need qualified by some duty to make best efforts to avoid poverty? What's the scope of that duty?

So one has two groups shouting at each other without really engaging on the question that divides them -- the definition of moral entitlement that distinguishes ordinary changes of governmental policy from confiscations of "property." This state of affairs is quintessentially baseline Hell, avoidable only by an express articulation and defense of one's particular choice of baseline.

Posted by: Rick Hills | Aug 19, 2011 6:52:38 AM

By the way, the Ayres and Cramton piece that Frank cites suggests to me that many academics might not appreciate the truly private character of Medicare. After noting that Medicare's auction rules, which provide asymmetrical benefits to bidding providers, make no sense from the point of view of general welfare, Ayres and Cramton speculate as to why the rules have not been changed despite experts' telling CMS that they are silly. Here is their hypothesis:

We suspect the problem is that CMS initially did not realize that auction expertise was required, and once they spent millions of dollars developing the failed approach, they stuck with it rather than admit that mistakes were made. This bureaucratic inertia is seen not just in government but in all organizational decision making.

Well, maybe CMS is afflicted by inertia. But maybe it could also be that the only important private interests that deal with the CMS have an interest in keeping things the way they are. (A bevy of economists and computer experts signing a letter to CMS, by the way, do not count in Washington as an "important private interest").

Posted by: Rick Hills | Aug 19, 2011 7:33:02 AM

Of possible interest: some primary care docs are challenging the power of the specialists in the rate-setting process:


"The complaint, spearheaded by Paul Fischer MD with DC-based lead counsel Kathleen Behan, alleges that the doctors have been harmed by the Medicare payment structure developed through the agencies’ reliance on the American Medical Association’s Relative Value Scale Update Committee (RUC). The suit also claims that the agencies have functionally treated the RUC as a federal advisory committee. But they have not required the RUC to adhere to the Federal Advisory Committee Act’s (FACA) stringent management and reporting rules – e.g., balanced representation, transparent proceedings, and scientifically valid analytical methodologies – that keep the proceedings in the public interest."

Posted by: Frank | Aug 25, 2011 5:39:11 PM

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