Thinking about the risky surgical procedure for emphysema described in the 2006 New York Times article, let's imagine that some patients who qualified for the procedure had been given a Medicare indemnity worth a fraction of its USD 50,000 cost, as well as good information about the costs and benefits of alternative treatments for emphysema. Would any of them have chosen the surgery? If Medicare patients with back pain - a condition for which expensive surgical treatment of questionable value is available - were given an indemnity equal to a fraction of the cost of back surgery and good information about the costs and benefits of alternative treatments, would they continue to use questionable surgical procedures at staggering rates?
There is one way to discover the answers to these questions without making major changes in the Medicare payment system prior to knowing whether changes are advisable: Medicare can conduct a demonstration of indemnity payments for Part B physicians' services. The demonstration would test several critical design features of an indemnity system: what medical conditions should be covered; how the indemnity should be set; how risk should be managed; whether beneficiaries should be paid to participate in the demonstration; and whether the indemnity should be restricted. Here, I will offer practical suggestions for incorporating them into the demonstration.
The choice of medical conditions to include in a demonstration of indemnities could be based on several factors. One could select conditions for which there are "traditional" but expensive treatments of questionable value. Patients with conditions of this type (for example, lower back pain) might choose medical management over surgery if they had to pay for surgery out of their own pockets. In fact, they might not choose traditional medical care at all, but instead opt for alternative or nontraditional therapies, such as chiropractic care. Another criterion for choosing a condition is that Medicare Part B spending for it should be substantial. This might be decided by setting a minimum percentage of total Part B spending for inclusion of a condition in the demonstration.
I pointed out that conditions allowing for a large amount of personal discretion over how to spend the indemnity are likely to be difficult to verify. Healthy people might claim to have these conditions because they value for other reasons the items, such as chiropractic care, that comprise the nontraditional treatment. To test for this problem in the demonstration, Medicare might select some conditions with severe verification problems (back pain is a good candidate), and some where verification is not a serious issue, such as cancer. Comparisons could also be made of trends in the rates of claims for discretionary and nondiscretionary conditions in experimental and control sites. It would be valuable to include, in addition, some conditions for which moderately priced and efficacious treatments are available, along with chronic conditions to test the use of indemnities paid over various time periods, such as annually. What would Medicare patients with these conditions choose if they were given indemnities?
In 1983, Gianfrancesco proposed setting the indemnity by trial and error, starting at the modal expenditure associated with a given category of service under traditional insurance. Since that time, insurers, including Medicare, have become much more adept at using administrative data to calculate the average costs of insured groups. Consequently, trial and error would no longer be required to set the Medicare indemnity payments. A more relevant problem is where to set the indemnity with reference to the average cost of care under traditional insurance. I have argued that this cost probably overstates the efficient indemnity, because some of the traditional cost is "gold-plated." For Medicare to attack this problem head-on, however, might raise objections that the indemnity demonstration is simply a disguised attempt to cut doctors' fees. Instead, as a starting point, Medicare could set the indemnity payment at the traditional level and observe how much beneficiaries were cashing in, on average. There is no efficiency loss when this occurs (because cash transfers are efficient), but Congress might decide that such an arrangement is inequitable.
I recommended that the indemnity payments be adjusted for local variation in medical-care prices, perhaps making use of the Medicare Geographic Practice Cost Indexes as a starting point. Since the current GPCIs might not be accurate enough to measure the cost of services that would be used under an indemnity plan, consideration should be given to including the cost of alternative medicine and home care in the geographic adjustment formula. Physicians' capacity could be another geographic source of variation. In areas where capacity is high relative to the sum of Medicare and private demand, the indemnity payment could be reduced somewhat, yet still cover the full cost of care. These factors suggest that demonstration sites could be selected based on variation in local market conditions, including input prices and the "tightness" of local supply and demand. Techniques for setting the indemnity payments could be tested in "tight" versus "loose" local markets.
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