There is a straightforward way to keep Medicare financially solvent without reducing benefits, changing the retirement age, or raising taxes. Medicare should pay standard rates for each service to all health care providers and let them compete to see who can provide the best combination of cost and quality for that price. The payments should be enough to allow high quality and efficient health care providers to earn a modest profit but should not include special provisions for favored organizations or locations. Right now the rates vary to unjustifiable degrees and patients are not even aware of it.

Here is an example to demonstrate what is currently wrong. In Medicare’s diagnostic classification system, the most frequently occurring inpatient payment is for hip and knee replacement surgery on uncomplicated (otherwise well) patients. There are separate diagnostic categories with higher payment rates for complicated patients. In 2011 Medicare paid for 427,207 of these procedures and the average payment was $14,324. That adds up to over $6 billion. The best paid hospital in the country was the Baylor Surgical Hospital in Fort Worth, Texas which received $38,686 per surgery. The worst paid was Saint John Hospital in Broken Arrow, Oklahoma which received $9,130. Baylor got more than two and a half times the national average and more than four times the price Saint John Hospital would have received for the same service to the same patient. Here in North Carolina, UNC Hospital was paid the most, $20,610 while the North Carolina Specialty Hospital in Durham was paid the least, only $11,058. In the Piedmont Triad, the payments were $18,656 to NC Baptist Hospital, $14,045 to Forsyth Hospital, $13,758 to Moses Cone Hospital, $12,726 to High Point Hospital, and $12,412 to Randolph Hospital. The same pattern exists for other diagnoses and similar variances exist for medical practices.   Readers who want to explore the data in detail can find it at the CMS.gov website or Email me and I will send the link to you.

The hospitals that are paid more do not get better results for their patients. Nor do they have better patient satisfaction. Supposedly the payment variances are because of factors like regional wage differences and costs incurred in educating specialty physicians. That may sound reasonable but the net effect is that Medicare subsidizes high costs at expensive hospitals and penalizes those with lower costs – the exact opposite of a free market economy. The political clout of local congressional delegations has been a huge factor at times, with special rates being set for certain cities or states. Medicare’s proper role is to purchase good health care for beneficiaries regardless of where the patient lives or which health care provider they choose. If we taxpayers are to subsidize medical education (and I believe that we should) then money should be appropriated for that purpose and separate contracts should be established to fund the medical education that taxpayers are purchasing. Educational grants should not be hidden in Medicare.

Medicare pays extraordinarily high prices to a few organizations which often use the surplus to acquire other hospitals or medical practices at the expense of taxpayers and consumers. Then they raise the prices. The UNC system, which also gets preferential rates from the state’s troubled Medicaid system, has used its taxpayer subsidized profits to gain control of large medical practices and other hospitals. With the increased negotiating leverage of the UNC system, prices can then be raised to insurance companies and benefit plans. Private insurance markets, just like Medicare, pay more in large cities and to large hospital systems. The idea that large size brings economies of scale is mostly a myth in health care. If the myth were true, the biggest hospitals would have the lowest costs. They don’t. But they do get paid more just for being big. The American ideal of a free market in health care where high quality and low cost are rewarded can work if we will design our payment system to work that way.

If Medicare rates are set and periodically adjusted to levels that allow good quality hospitals and doctors to make a modest profit, the best hospitals and physicians will thrive. Poor performers will fail financially or be taken over by someone else. That is how competitive marketplaces work. Healthcare resources will be more evenly distributed across the country if payment rates are standardized. We will soon discover that it is less expensive and more convenient to deliver high quality care outside of the bureaucracies of huge medical centers. If payment rates for doctors were the same in extremely rural areas of North Carolina as they are in Raleigh, there would be plenty of doctors in the mountains and down east. The need for the federal agency that operates rural clinics would likely disappear.

A free and competitive market will bring more community based health care, less centralization around large medical centers, better quality, better accessibility and lower cost. It will also bring powerful opposition from the organizations now being paid the most.