Megan McArdle states the obvious

So obvious that Obama and his crowd hope you won’t notice.

The only way the public option saves money is by using fiat to slash reimbursement rates to some variation on Medicare reimbursements: Medicare +5%, +10%, or whatever rate they finally settle on. Otherwise, it’s unlikely that the thing will even compete on an even basis with private insurers, who have a lot more experience managing billing, claims experience, and negotiations with providers.

The problem is, Medicare doesn’t pay the average cost of providing services in many cases–in some cases, it doesn’t even pay the marginal cost of providing services. . . . But moral calumny aside, the thing about patients whose insurance doesn’t cover the average cost of treating them is that they cannot be 100% of your patient pool. Someone has to cover the cost of that MRI machine. If the public option does manage to crowd out other insurance–as it might well do, with the ability to dictate price controls–then suddenly, the public option won’t be cheap any more. Hello, fiscal crisis.

That’s the financial problem. Here’s the political problem: if you insert a strong public option, the providers will revolt.

Well, if you can dictate bankers’ and car executives’ salaries, why not doctors’?


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6 responses to “Megan McArdle states the obvious

  1. HG

    Total earnings for physicians in the US can’t be more than about $200 billion a year (800,000 doctors at a generous assumption of $250k each) or around 1.5% of GDP.

    Truly, much of the cost savings from reducing physician pay has already happened (google physician pay and you will find your family doc has seen his earnings stagnate over the past 20 years in the so-called “knowledge economy” due to very effective price “negotiations” by Health & Human Services), the savings have simply been offset by more physicians (more health care) per population.

    I bet a review of the membership records of Greenwich CC (or any less exalted suburb’s clubs) would show: a noticeable decline in physicians among the membership population, a shift toward more specialists among the remaining doctors, and an absence of younger doctors able to join.

    Until recently, we have been able to continue to attract young people into the medical profession through lingering prestige and idealism, although recently you can see a marked shift of candidates to other professions and toward medical jobs that receive lower pay but require less up-front investment of time and money.

    Still, we can probably temporarily reduce physician wages by about 30% through Health Care Reform since most docs are “stuck” in the profession and unlikely to leave. 30% is about the limit since this would bring the family practitioner down to the wages of a physician assistant (PA) or physical therapist at which point it would make sense to switch to these less demanding jobs, even at the cost of giving up the Greenwich CC application.

    Probably another 0.5% of GDP could be saved from the drug companies.

    Another 0.5% could be saved through layoffs of hospital administrative staff and holding down nurse wages, although a portion of this savings will be lost to more government workers to administer Health Care Reform.

    Still, we have only closed less than 1.5 points of the 6-7 point gap (% of GDP) between the US and, say, the UK. Which means we will have to adopt many of the lower standards of care currently used in the UK (no Avastin for breast cancer; accept more cervical cancer by administering fewer pap tests; more waiting time for procedures, etc).

    In fact, the cuts will have to go well beyond this, because the demographics in the UK won’t allow them to sustain even their lower standards of care in the face of a bigger population of old people.

    The single biggest savings will come from reducing the number of patient days in intensive care units (which allows doc & nurse layoffs, not just wage cuts, plus lower device costs, etc). Since it is very hard to kick people out of intensive care once they are in, the fact is that we will have panels or some other mechanism to decide whether you can go to intensive care.

  2. Anonymous

    tort reform?

  3. Anonymous

    Would guess doctors in US, esp surgical subspecialists, cardiologists and oncologists, earn 2-3+X their colleagues in other countries
    In any smaller city in US (like Cleveland or StLouis or SanAntonio), most affluent guys in town are usu doctors, car dealer owners and realtors

    Suspect procedure-oriented doctors generate a disproportionate fraction of hc spending in fees for self and costs in terms of devices used and hospital/surgical costs (and lots of support nurses, etc are $100+K/yr earners); often, procedure rates are proportional to population of specialized doctors in an area, not population of patients

    Operating profit margins of pharma and med device cos. are among richest of any industry w/dubious additive value of incremental R&D and more costly new tech in extending a few mths of life (w/dubious quality) in a 70yo with heart dz or cancer; society only incurs greater hc and pension costs in a less economically productive elder who will die at roughly 75yo anyway

    IIRC top 10% of least healthy Americans (usu lower socio-economics and don’t pay taxes) are responsible for ~70-80% of US hc spending

    Top 1% of taxpayers pay ~50% of all taxes yet probably consume <<5% of nation's hc costs

  4. HG

    Anon, I think your point about procedure-oriented doctors is correct. I think your point about affluent doctors, car dealer owners and realtors is backward looking. The 60 year old doctor you see at the club is likely making half what he made in his peak earnings year which was likely in the late 80s and has accumulated wealth that his successor will never see.

    The over / under on “roughly 75” probably becomes intensely more interesting the closer you are to age 75, but cash flows don’t lie. Whether it is the government or a private entity, someone is going to cut you off from health care at some point.

  5. Cos Cobber

    Good conversation.

    Aren’t general practioners seeing more patients than ever? If my premise on volume is correct, why hasn’t the volume allowed them to keep pace with their relative higher incomes of the peak (1980s)? Would i) defensive medicine, ii) increased paperwork (insurance and government) and iii) more complicated/higher service, all to be to blame?

    Tort reform should help some. My baseless guess is that tort reform trims 1% from GDP…leaving a a significant GDP gap in place.

  6. HG

    Cos, I think you are right that general practitioners have been asked to see more patients and spend less time with them in order to, at best, remain at the same earnings level.

    What is interesting to me is that both the Left and the Right to some extent dismiss the possibility that our high level of healthcare spending buys better health. The Left believes the money is squandered on profits, paperwork and unnecessary tests. The Right usually asserts that the US has better healthcare but occasionally drifts into the ‘waste’ argument…i.e., medical malpractice claims. Occam’s razor suggests the most likely explanation for high health care spending in the US is better health care.