Should Medicare pay for patient expenses the way automobile insurers pay for car-repair bills?

Medicare's current method of paying physicians sets fees for more than 8,000 separate procedures and services, totaling over $60 billion annually. With Medicare's formulas underpaying for some services and overpaying for others, this complex system is an inefficient use of resources that discourages the use of primary care in favor of more expensive specialty services. Provided with virtually unlimited medical services at low or no cost, patients today have little incentive to choose their care wisely.

In How to Fix Medicare: Let's Pay Patients, Not Physicians, health economist Roger Feldman argues that a radical shift in Medicare policy is not only possible but imperative. Under Feldman's "medical indemnity" proposal, Medicare would pay each patient a fixed amount of money, reserving larger subsidies for sicker people. Patients, in turn, would select their own medical services from providers who would set their own competitive rates. A medical indemnity system would do away with the distortion in patients' incentives wrought by conventional Medicare coverage. Given a fixed amount of money to spend on medical care, patients would have strong incentives to shop for the combination of services, providers, and prices that most closely meet their needs.

Medical indemnities have already been tested successfully in the Medicaid program for some patients needing long-term care services. Feldman's indemnity system protects patients whose conditions are much costlier than average while avoiding the proliferation of costly individual indemnities.

Implemented wisely, medical indemnities would expand consumer choice, improve program efficiency, and simplify the Medicare program.

Roger Feldman is the Blue Cross Professor of Health Insurance and professor of economics at the University of Minnesota.