Cutting Costs in Medicare

The cost of the proposed health care reform is enormous. Proponents tell us that part of the cost will be covered by increased taxes, and the rest will come from cutting costs of current programs by making them more efficient. The U.S. Budget Director calculates that the potential savings could be as much as $750 billion a year. If true, that would cover about half of the estimated cost of the health care plan.

Why does he say this? Researchers at Dartmouth College have been studying Medicare spending patterns and found wide variations in costs. They have also concluded that these variations in spending have no relation to the final health of the patient. So if spending less gives you essentially the same health outcome of spending more, why not spend less? In other words, why not require everyone across the nation to spend at the same rate as the lowest-spending areas? Once you accept the assumption, the conclusion seems sound. This would reduce the total cost of Medicare by one-third without any harm to the patient.

So is there anything wrong with this assumption? Yes, implicit in this assumption is that doctors are treating Medicare patients and other patients the same way. As John Goodman of the National Center for Policy Analysis points out, this is not true. For example, Texas is fifth from the top in Medicare spending per capita, but it is seventh from the bottom in per capita spending for the state’s population as a whole. California is eleventh from the top in Medicare spending, but eighth from the bottom in overall spending.

What is most likely going on here is “cost shifting.” When Medicare underpays, doctors and hospitals find other ways to make up the difference. Essentially what they do is overcharge non-Medicare patients. This is the reason researchers found lower Medicare costs in some areas compared to others.

The so-called “savings” on Medicare are not really possible, because the lower costs merely exist because non-Medicare patients subsidize Medicare more in some locations than others. I’m Kerby Anderson, and that’s my point of view.