Price-fixing leads to unintended consequences
March 08, 2015
Medicare sets the prices that it will pay providers for specific procedures. These prices consider locality (i.e. procedures performed in certain zip codes will be paid more than in other zip codes, even though the same procedures were performed) and some other factors (e.g. whether the provider is a teaching hospital). For the most part, Medicare pays different providers in the same locality the same price for the same procedure. On one hand, this makes some sense -- why should the same procedure be paid different amounts just because they are performed at different locations? On the other hand, in what other industry are prices set the way that Medicare sets them in health care? Can you imagine being able to go up to any hotel and demanding the same price as the hotel down the street? Even in the airline industry (where customers have largely the same experience), airfares can vary significantly. In large part, Medicare can get away with setting prices because it is the nation's largest payer.
So, what happens when Medicare sets a price for a specific procedure too low? Duke Medicine reported an interesting finding: the frequency of that particular procedure dropped, but the frequency of a more expensive procedure went up. From the article, it's unclear if Medicare's price reduction caused the frequency of the other procedure to rise, but the time periods overlap very nicely. Additionally, the other procedure lacks evidence to demonstrate that it is superior. Therefore, it seems likely that when reimbursement for the original procedure was cut, providers looked around for alternatives and found one that they like more.
Whenever a market has its price set for external reasons, distortions occur. Medicare could additionally regulate a price decrease for the other procedure, but chances are that providers will find another alternative, or not enough people will get the right procedure. In a more classically functioning market, consumers would be exposed to a greater part of the financial cost, they would also know the price of the procedure ahead of time, and they could choose which provider to go to. We might be headed a little closer towards that model (with patients being exposed to higher deductibles and co-insurance) and we might experience plenty of short-term pain (in the absence of meaningful pricing information) before the market becomes healthier.