The Medicare Illusion

by Reihan Salam

Many Americans fear that Obamacare will one day turn into a full-blown single-payer system, and if recent statements by President Obama are anything to go by, they are right to do so. But of course the United States already has a single-payer system called Medicare. Though Medicare only covers about a fifth of the population, it has had an enormous and profoundly negative effect on the medical care received by all Americans. This is a controversial opinion. Medicare is very popular, particularly among its beneficiaries. If Americans understood exactly how Medicare distorts our health sector, that would surely change. As David Goldhill explains in a review of Atul Gawande’s latest book, the blame lies with Medicare’s rigid price controls:

Some Americans look longingly at foreign single-payer systems and wonder why America can’t use this seemingly simple and lower-cost alternative to pay for our care. But Medicare is a single-payer system, although one that has never had the political support to restrict demand that exists in other countries. Nor is it likely to. Instead, Medicare relies on the fiction that it can control spending by paying low prices even while leaving demand unchecked; the Affordable Care Act continues this wishful thinking. Sadly, low reimbursement rates drive valuable care (such as primary care) out of business while encouraging ever higher volumes of higher-priced, and often unnecessary, treatments. The low prices paid may look good to the voting public, but the reality of the economic incentives they unleash is ugly.

Essentially, low reimbursement means that it makes little economic sense for medical providers to offer patients personal attention from trained professionals, as their time is worth more than Medicare is willing to pay. In contrast, the cost of concrete treatments, including surgical procedures, can be driven down in roughly the same way you increase the productivity of a factory. With enough volume, a medical provider can get the cost of a treatment below Medicare’s reimbursement rate, in which case you’ve hit the jackpot. The result, not shockingly, is that patients get more and more treatments, including treatments they don’t necessarily need, while personal attention grows scarce.

Some, including the president and his allies, believe that all we need is a better, smarter, more comprehensive system of price controls. Goldhill illustrates why perfect price controls are an illusion, and why moving towards a more personalized and humane approach to medical care will require moving to a more consumer-oriented system. I highly recommend Goldhill’s review essay and his indispensable 2013 book, Catastrophic Care.

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