Worse than I Imagined (Part II): Medicare

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.




Comments (11)

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  1. Gabriel Odom says:

    I’ve had health insurance most of my life. But recently, my employment status and income has forced me to live without insurance. When I came down with the flu a month ago, I knew I needed to stay on budget, so I tried a CVS Minute Clinic. I was pleased with the results. All I needed was an antibiotic prescription, but I ended up paying about $130 for the visit and the medication.
    During the visit, the Nurse Practitioner asked me if I’d like a Strep Test for an additional $35. I gambled against the odds that I had strep through – I knew how I felt at the time, and I was fairly certain all I had was the flu and an ear infection. I said no.
    This got me thinking: How many times in the past have I said yes to some unnecessary test or another just because I wasn’t paying for it? I think that I would have been a much more responsible steward of someone else’s money if I was forced to pay even just 10% of the costs. Suddenly, I’m not sure I really need that MRI or those extra X-rays – one or two will be fine.

  2. Pam says:

    Those Minute Clinics are wonderful. The prices are posted on an electronic sign and at the CVS I shop at, there is even a maximum price posted per visit/procedure. Then my prescription is electronically sent to the pharmacist 20 feet away. I wish all health care was this transparent.

  3. Mulligan says:

    I wonder when wal-mart is going to move into the convenience care market. They’ve already got CVS in their crosshairs about prices.

  4. EB says:

    Richard, I appreciate your candidacy. I have somewhat the same situation with my former employer providing a mostly paid for retiree plan in the form of am Medicare Advantage model. However the employer did establish some common sense and necessary changes over the past few years in order to assure its sustainability. With adding separate deductibles for RX and other expenses and then imposing 20% coinsurance up to the max out of pocket limit, the participant sees the provider charges and the allowable charges–at least after the fact. The budgetable out of pocket expenses the participant bears is a reasonable trade off for a modest contribution. I can only hope the implementation of Obamacare will not trash what has been a workable approach for our thousands of retirees since Medicare Advantage became legal and prior to that utilizing Medicare Supplements. Perhaps the University will have to make similar adjustments in order to keep your plan afloat–although their revenue stream through tuition increases may defer such actiopn.

  5. Janet O'Neal says:

    My daughter owns a physical theraphy clinic and under the new Obama Care she may have to go out of busines. Her company has to cut 33.3 of her profit and that is about what she makes. She is thinking of everything she may be able to do in order not to let anyone go. She can cut back on the time she allows for each visit so she can take on more patiences’, but she has taken pride in the fact that she gives plenty of time to treat peoples’ body as well as their soul. As a believer she wants to do the right thing but isn’t sure she can make a living at this rate.
    Thanks President Obama, this is the problem you have created but I will still pray for you and trust that your soul can change.

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