It would take three steps to make Medicare more competitive: First, patients must have good information about prices and quality of physicians; second, they must have an incentive to act on that information; and, third, providers must act as price-takers and must not be able to collude to set prices for their services. A great deal has been written about consumer information in health-care markets, much of it focusing on how to present information in a way that patients understand and trust. Presenting good information on price and quality would, unquestionably, be a challenge to a Medicare indemnity program. But isn't information a challenge in today's price-controlled world as well? I would argue that the answer is yes.
Some might say that consumers don't need good information in today's price-controlled world because 99 percent of charges allowed by Medicare are taken on assignment. Consequently, even if patients had some cost-sharing in their Medicare insurance policies, they would pay the same out-of-pocket prices regardless of their choices of providers. This argument is wrong for several reasons. First, it applies only to the price of each service, not the price of the set of services comprising the treatment for a given condition. Some providers might treat the condition more intensively than others, leading to more coinsurance or copayments for the patient. More important is that controlled prices can hide differences in quality among physicians. We analyzed how price controls work in a market where physicians are monopolists and their services vary in two dimensions - quantity and quality. As a reference point, we began by fixing quality.
The monopolist would produce too little of the good and sell it at a profit. A regulatory agency, however, could control the monopolist's price at the competitive level, leading to the socially optimal outcome. Now let quality vary as well. Because the regulator has only one instrument (price) to hit two targets (quality and quantity), it is forced to make tradeoffs. Specifically, if the regulator forces the monopolist to cut price in order to increase quantity, quality will fall. For example, doctors may cut their visit lengths and boost the number of visits or other billable services such as laboratory tests. If price is cut to the level where quantity is just right, quality will be too low.
Now imagine that different physicians face different demand and cost conditions. Then, at the "right" price for quantity, quality may be much too low for physician A, somewhat too low for B, and so forth. The patient may know that he or she will pay the same outof- pocket price to both physicians (because they both accept assignment), but the quality of care may vary significantly. In fact, the price controls will cause quality to vary among physicians. This means that the current regulatory approach without good information on quality is just as flawed, and possibly more so, than a Medicare indemnity system without good information.
Information on quality matters to patients, even in today's Medicare program, with its flawed (or nonexistent) price signals. On March 3, 2006, the New York Times reported an extraordinary news story about Medicare patients. Several years ago, Medicare approved a popular but risky surgical procedure for patients with advanced emphysema. Many experts predicted that tens of thousands of patients would sign up for the operation, which can cost more than USD 50,000, including months of rehabilitation. Instead, after seeing the results of a clinical trial that showed no lengthening of life for most patients and a surgical mortality of nearly 10 percent, patients and the doctors who referred them to surgeons stayed away in droves. From January 2004 through September 2005, only 458 Medicare patients filed claims for the surgery, at a total cost of less than USD 10.5 million to Medicare.
The significance of this news story is that Medicare patients will pay attention to information on quality. Even though many of them could have signed up for the surgical procedure without any out-of-pocket cost-sharing, few did so. Of the three steps toward a competitive market, the second - creating incentives to act on information - is the easiest to implement, since indemnities would have the same value to beneficiaries as cash (provided that the unused portion could be cashed in). In fact, the creation of Medicare indemnities might lead to a "virtuous cycle," in which less and less antitrust enforcement would be needed to maintain competition. (Medicare supplementary insurance would also have to be eliminated so Medicare patients would pay the full market price of Medicare Part B services.)
The third step - ensuring that providers do not have market power - requires strong enforcement of the antitrust laws. Antitrust enforcement can also be seen as a signal that such behavior will not be tolerated, so it acts as a deterrent by attaching a legal risk to anticompetitive acts.
Haas-Wilson mentioned several instances in which antitrust enforcement has been brought to bear against physicians. In one case, the U.S. Federal Trade Commission charged a physicians' independent practice association (IPA) in Jacksonville, Florida, with conspiring to fix the prices its members charged to third-party payers. An IPA is an association of independent physicians formed for the purpose of integrating the clinical practices of its members. The FTC alleged, however, that the main purpose of the Jacksonville IPA was to facilitate price agreements among its members without their practices being integrated. The physicians agreed to dissolve the IPA, not to deal collectively with third-party payers, and not to fix prices. In another case, the FTC charged a corporation of ten surgeons in Broward County, Florida, with conspiring to fix fees they charged at trauma centers in two local hospitals. This case also resulted in an agreement to dissolve the physicians' corporation. The FTC generally has a good record in its efforts to stop illegal price-fixing by physicians. Let's rely on antitrust enforcement rather than flawed regulatory approaches that merely suppress physicians' monopoly power. As an interim step while the problem of physician market power is being addressed, beneficiaries might be able to purchase medical care through the networks of large private insurers, and even of Medicare itself, if they want. This would allow them to take advantage of these insurers' purchasing power to obtain more competitive prices.
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1. The real Medicare reform lies in the use of indemnities
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