When I retired, Medicare became my primary health insurance, fully covered by American taxpayers (and federal debt-holders), while Anthem/Blue Cross became my secondary health insurance, fully covered by the University of California. I will never have to spend a nickel of my Social Security benefits or inflation-adjusted defined retirement income on my health insurance.
But the entitlement system got worse for American taxpayers because my expensive prescription drugs were fully covered by Medicare or my private university-funded health insurane. When I changed my cholesterol drug from Lipitor (because it caused muscle pains) to Crestor, my out-of-pocket payment rose, to my surprise, from nothing for Lipitor
to $90 for a three-month supply for Crestor. Taxpayers and my insurance company were stuck with a greater increase in the drug’s cost than I was, since a three-month’s supply of Crestor costs nearly $700. I covered a mere 13 percent of the total. Another anti-inflammatory drug (which is only slightly more effective than ibuprofen) costs $70 a month, fully covered by taxpayers and insurance.
No wonder the federal government spent $70 billion in 2010 on prescription drugs under Medicare and billions more under Medicaid, and expects to spend nearly $1 trillion on Medicare prescription drugs from 2011 to 2019.
Last summer, my primary care doctor ordered a battery of blood tests for a slight urological problem. I made my usual $20 copay for the initial visit, which was surely a minor portion of the total cost. But, of course, I was never told what the charge would be. The doctor sent me to a urologist who ordered more blood tests. He also ordered a more invasive procedure, X-rays and a sonogram for the whole of the abdominal cavity. When the sonogram revealed a potential kidney stone of uncertain size, he ordered more X-rays and an abdominal scan.
Amazingly, throughout my wandering the halls of the health care system, I never made a single payment, not even a meager copay after my initial $20 payment. Moreover, not a single person — receptionist, nurse, technician or doctor — ever mentioned a price for anything. All they ever discussed were test options,
which one doctor admitted were unlikely to uncover a serious health problem (since no problem had been found in two investigations over the past 15 years). Without prices to guide me, I made the same choice everyone makes: Bring on the tests!
When I asked the urologist why he and others never mentioned prices, he lamented how bad the absence of prices made the system but also confessed he couldn’t give me prices because he didn’t know what they would be. His office would “make up” the charges and Medicare would make up the reimbursements. He also admitted that doctors game the system by charging more than they expect to be reimbursed, because Medicare plays a similar game, knowing doctors game the system. Medicare generally reimburses doctors less than requested, no matter how close their charges are to their true costs.
Health economists have long recognized that a major flaw in the health care market is that buyers (patients) have limited knowledge of what is good for them. Doctors (supposedly all the time) know much more, which makes for the so-called problem of “asymmetric information.” Most buyers rely on their doctor’s guidance. The almost total absence of transparent prices leaves health care buyers far more ignorant than they need be.
Ironically, I might not have gone through as many tests and procedures if the Medicare and insurance systems had not lowered the reimbursements provided doctors by 5 percent between 1997 and 2005. The Congressional Budget Office found that during that period total Medicare payments to doctors rose 35 percent. As New York Times columnist David Brooks noted, “Doctors made up in volume what they lost in reimbursement levels.”
Economists have long known that if prices are below costs, or nonexistent, buyers will exploit the system. This is especially true when buyers think they have paid for their benefits through their past taxes. But Medicare, like Social Security, is one huge Ponzi scheme. When the elderly paid their Medicare taxes from the late 1960s to retirement, their payments were not saved for them to draw down in retirement. No, their tax payments paid the health care costs of the then-retired generation — many of whom paid little in Medicare taxes. Today’s elderly, me included, are consuming health care resources paid for by our children and grandchildren who work and pay Medicare taxes.
Indeed, according to the Urban Institute, today’s elderly will, on average, consume almost three times as much in health care resources as they paid in Medicare taxes. Thus, no one should be surprised that Medicare expenditures will double to $1 trillion over the next eight years. A partial solution is relatively straightforward: Add prices that force buyers to cover some of the costs, requiring them to weight the relative benefits of the services they consume.
Benefits should be curbed for the people who don’t need them, or who are using them for no higher social end than to increase the frequency of dining out or to buy more expensive cars more frequently — or, as in my family’s case, to cover privileged college educations and to protect substantial bequests to their children and grand children.
Richard McKenzie is a senior fellow with the National Center for Policy Analysis.