How Price Controls Contribute to High Medicare Bills

The New York Times
tells the
story of a man with insurance coverage who, after a
three-hour neck surgery, was billed $117,000 by
an “assistant surgeon“ he had
never met. This was on top of the $190,000 worth of bills he
expected to receive for the procedure.

What’s happening here is a familiar story of unintended
consequences. Medical price controls and billing systems that were
put in place in hopes of controlling health care costs and spending
have instead created opportunities and incentives for providers to
innovate—not in the way they practice medicine, but in the way they
bill for services.

The basic issue here is that when you cap prices on services,
you end up creating a system in which providers have a huge
incentives to bill for more services. As Brookings health policy
scholar Dr. Darshak Sanghavi tells the Times, “The notion
is you can make end runs around price controls by increasing the
number of things you do and bill for.”

Indeed, pricing systems end up creating opportunities for
consultants and middlemen to help doctors figure out how to
maximize their billing:

To counter that trend [of declining salaries for neurosurgeons],
some spinal surgeons have turned to consultants — including a Long
Island company called Business Dynamics RCM and a subsidiary, the
Business of Spine — that offer advice on how to increase revenue
through “innovative” coding, claim generation and collection
services.

The main story in the article is about someone covered by
private insurance, but the pricing systems built into Medicare
remain a factor. As the article notes, the same procedure would
have been subject capped billing if performed under Medicare; the
assistant would only have been allowed to bill equal to 16 percent
of the primary surgeon’s fee.

The implication, as in a number of recent articles on high
medical bills, is Medicare’s pricing systems offer a potential
solution to this sort of billing fiasco. But Medicare’s rates,
which are typically lower than private insurance and which have
been lowered recently, are arguably the problem; providers look to
make up for lower public-insurance payments by billing the
privately insured.

The history of experiments with clever payment schemes is
revealing. When federal officials tried to control
the growth of Medicare inpatient hospital spending in the early
1980s with a new payment scheme, hospitals changed the way they
provided services—and outpatient medical practices boomed. Over the
last few years, electronic medical records have been installed in
hospitals in hopes of generating efficiencies and savings; instead,
they have been sold to providers as tools to extract money from
Medicare by
exploiting the billing system. State-level
universal payment schemes in the 1970s and 1980s proved
confusing to the legislators who passed them, and exploitable by
the big hospitals that had an incentive to maximize their billing.
There’s always a loophole.