Reflections on the Insanity of the Medicare Payment System

Over at the John Goodman Health Policy Blog, Dr. Goodman and Prof. Reinhardt (amongst others) are debating how Medicare pays people.  Here's my take: It is insane.

Suppose that in 1965, the federal government observed that great advances were taking place in aircraft design and manufacturing. In order to ensure that Americans were able to take advantage of this, the government legislated “Aircare.”

Flash forward to 2010: “Aircare” pays for our ariplane tickets. It pays the airlines themselves under “Aircare Part A” and the pilots and co-pilots under “Aircare Part B”. It pays claims under Aircare Part A by a “Prospective Payment System” based on “Distance-Related Groups” (DRGs). The DRGS are calculated for non-labor and labor (adjusted for cost-of-living) costs. Etc., etc.

The pilots and co-pilots are payed under Aircare Part B’s Relative Value-Based Payment System (RVBPS), which consults with expert panels of pilots to determine the relative values of the hundreds of tasks that the pilot and co-pilot must execute. It then assigns relative values to each, e.g. 2.15 units for making the pre-flight announcement, 3.74 units for checking that the fuel tanks are full, etc., etc.

But there is no Expedia or Priceline or anywhere else where someone can find out what it costs to fly from San Francisco to Chicago. Suppose we wanted to transform air travel to a consumer-driven system.

Airline passengers would be terrified of managing this system on their own, because of the complexity. Put to a vote, a vast majority would shirk, and choose to maintain the status quo, because it is “too complex” for individuals to figure out how to pay the pilot, the co-pilot, the cabin crew, the cleaning crew, the jet fuel, the depreciation, the overhead, etc., on their own.

Prof. Reinhardt would note that the RWJ Foundation had executed a study of “bundled payments” for airline travel and the results will be informative as the government tries to reform Aircare.

Dr. Goodman, Linda Gorman, Devon Herrick, and I would say that the government should give every senior an Aircare voucher and it would take the airlines a few hours to figure out how to charge a single price for an airline ticket.