Tuesday, December 16, 2003

Rights & Reason: Price Controls and Cosmetic Surgery

In a Washington Post op-ed today, Jonathan Oberlander and Jim Jaffe argue the President’s Medicare bill will inevitably lead to price controls on drugs. Only they won’t be called price controls. This is not a new scheme, but rather an extension of how Medicare currently treats physicians and hospitals:
When Medicare was enacted in 1965, it barred the federal government from "exercising any supervision of control over the practice of medicine."

Partly to deter a physicians strike, doctors were promised that they'd be paid at the usual and customary rates that insurers such as Blue Shield had set over the years.

Hospitals got an even sweeter deal -- reimbursement that paid them essentially whatever their costs were, with a bonus on top.

In addition, Medicare spared both hospitals and physicians direct federal administration, instead allowing them to choose private administrative intermediaries that would pay their bills.

Since there was little reason why anyone offered a blank check would reject it, providers were fairly relaxed about provisions that locked them into the program over time. Now it is difficult and expensive for doctors to drop their affiliation, and nearly impossible for most hospitals to do so.

Will things go differently with drugs? Time will tell, but it seems unlikely. The government has habitually responded to budget stresses by changing the reimbursement mechanism and lowering payments. Whatever one thinks of government efficiency, this practice has worked well. Over the past two decades, physician and hospital payments have been regularly cut.

Because hospitals spent more, they were the first to get the bad news. In 1983 Congress enacted the Prospective Payment System. Instead of paying hospitals retrospectively for whatever they charged, Medicare imposed a system of administered pricing that allowed the federal government to set payment rates. Payments quickly declined precipitously.

A few years later the Medicare Fee Schedule for physicians was introduced. It was a terribly elaborate scheme that was based on measures of the complexity, time and resources involved in physicians' services. Its advertised purpose was to establish a fair and scientific basis for Medicare payments to physicians.

But ultimately it divorced doctors from their historical and customary fees. As with hospitals, Medicare imposed a system of administered pricing on doctors. By this time, of course, many physicians were dependent on their Medicare patient base and simply couldn't afford to walk away from the program, despite the lower reimbursement rates.
As CAC has explained at great length, antitrust policy is now a key tool in the Bush administration’s efforts to keep health care costs down by force. Any physicians that attempt to negotiate higher prices with private HMOs—a move that would begin to liberate physicians from below-market Medicare reimbursements—are labeled “anticompetitive” monopolists by the FTC. Republicans justify this naked attack on free market principles by arguing antitrust isn’t really regulation, merely an effort to ensure the market isn’t controlled by a single group of players. The fact that physicians generate the wealth that makes modern medicine possible is a contextual argument routinely dropped by the antitrust apologists. Since federal policy is concerned solely with the distribution of resources, not their production, the government is forced to eliminate any consideration for the economic rights of physicians.

The central contradiction of government healthcare policy is the inability to reconcile price controls with antitrust’s stated objective of improving consumer welfare. As Virginia Postrel notes in response to the Oberlander-Jaffe article, price controls tend to distort some parts of the market while leaving other, less essential areas untouched:
More insidious is a pattern my brother and sister-in-law, a family practice physician and an anesthesiolgist, observe in their area. The best general surgeons are going into cosmetic surgery, and they're luring the best anesthesiolgists into at least part-time cosmetic work. The dermatologists are telling patients with rashes to go elsewhere. Patients expect to pay for cosmetic work themselves, at market prices. They expect someone else to pay for health-related treatments, at lower prices. The result is predictable: the degradation of health care even as cosmetic care improves.

Applied to pharmaceuticals, this pattern would give us more skin care and baldness drugs, fewer treatments for complex diseases. We'll be good looking but sick. I'm all for cosmetic improvements, but that's not a tradeoff most of us would choose.
Another distortion occurs with uninsured patients and hospitals. All hospitals establish list prices for their services. Insurance companies, however, rarely pay that list price. Instead they negotiate a discount rate with the hospital, such as 7%, which applies to all prices. Earlier this year, the FTC went after a group of hospitals in Maine that jointly negotiated their discount rate with insurers. Each hospital still set its own list prices, but they agreed to only offer insurers a particular discount rate. The FTC said this was “anticompetitive” because it denied insurers the benefit of price competition. What the FTC left out was the fact that higher discount rates merely shift cost burdens to uninsured patients, who generally are poorer than their insured counterparts. Remember, the FTC does not consider whether price levels are rationally related to a producer’s operating costs; antitrust policy demands lower consumer prices regardless of context.

Thus, the FTC was not protecting all consumers, only those favored by existing public policy, meaning patients insured by HMOs. Such favoritism is rampant in antitrust, because all government interventions in the marketplace involve granting one group special favors at the expense of someone else. The healthcare issue also demonstrates a related regulatory principle: When regulation fails, the government reasons, it must be the fault of the market, not the policy. That’s why Medicare price controls were implemented in the first place, because government leaders would not admit the Medicare policy itself was responsible for higher costs.

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