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All levels of government face growing pressures to restrain spending. One downside to the rapid growth in tax-financed health spending that I have documented in several prior posts is the vulnerability of the health system to measures taken to curb government spending. But the degree of such vulnerability varies dramatically across different components of the health sector.
More than four-fifths of home healthcare, for example, is bankrolled through government-run programs such as Medicare, Medicaid, military healthcare, or other federal, state, or local health programs (figure 3.7c). Likewise, nearly three-fifths of spending for health facilities, including nursing homes and hospitals, is covered through such programs.
In contrast, outpatient care such as physician and clinical services, prescription drugs, and durable medical equipment (e.g., wheelchairs) are relatively less vulnerable. Even so, more than one third of expenses for such services are paid through government-sponsored programs. Strictly speaking, not every dime paid through such programs comes out of the pockets of taxpayers. Medicare, for example, is partially financed through premiums paid by elderly or disabled beneficiaries. Even though Medicare is partially financed through such “private” revenues and is technically administered through private health insurance companies that actually pay the claims, the program itself is government-run since it is government bureaucrats who determine the payment rates for various services or providers.
While we cannot be certain who the winners and losers might be in the battle ahead for finding Medicare and Medicaid savings, one thing for certain is that politics rather than market forces will increasingly determine how much providers are paid in the years ahead. Under current law, Medicare is slated to cut physician fees by 29.5 percent in January 2012. However, on 12 prior occasions that such statutorily required cuts in Medicare payments to physicians were supposed to be executed, fierce lobbying by physicians persuaded Congress to vote for a temporary reprieve. Reportedly, in advance of the debate over healthcare reform, the Democratic leaders in Congress had promised the American Medical Association (AMA) the permanent elimination of these looming cuts (the so-called “doc fix”) in exchange for their support of the bill.
No one is served well by the sort of rent-seeking behavior that inevitably arises when government elects to displace market forces with political decisions. Ironically, notwithstanding AMA support of both House and Senate reform bills, physicians never got the permanent doc fix they were promised. But more importantly, the public does not benefit from a process in which political considerations, such as campaign contributions, supplant market forces in determining the prices for goods and services. As just one example, physician specialists are paid substantially more on an hourly basis than primary care physicians, leading to a bias in favor of hospital-based and procedural services. In Medicare, this bias persists in part because the advisory panel that helps determine Medicare payment rates is stacked in favor of such specialists. And because the program is the single largest payer within the physician market, most private insurers peg their payment levels to some percentage of prevailing Medicare rates, thereby propagating that same bias throughout the medical care system.
Ironically, many of the problems in our current healthcare system that lead to demands for public policy fixes—the underpayment of primary care providers, overpayment for certain specialty procedures, excessive payments for medical supplies—actually originate in government-run health programs. Expecting things to get better by expanding the reach of government in medicine appears to be a triumph of hope over experience.
Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 3.7c and Excel spreadsheet on government share of health spending by service for data, sources, and methods.
American Health Economy Illustrated
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