Latest posts by Michael Hamilton (see all)
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Medical pricing in the United States is controlled by the Centers for Medicare and Medicaid Services (CMS), a federal agency with a budget equal to the production of the 16th largest economy in the world. This agency fixes prices using the recommendations of the Relative Value Scale Update Committee (RUC), a 31-member committee formed almost 30 years ago.
The ripple effect of these price controls causes Americans to spend on health care an amount equal to the gross domestic product (GDP) of Germany, Europe’s largest economy and the fourth-largest economy in the world.
Nevertheless, in the 2000s, self-described patient advocates blamed free-market policies (which were never tried) for the broken health care system that prompted Congress and President Barack Obama to sign the Affordable Care Act in 2010. These same voices now say replacing ObamaCare with free-market policies would make health care and insurance even less affordable.
The fact is that market forces are not to blame for America’s broken health care system any more than two plus two equals five. Let’s break down the math.
The CMS is essentially the taxpayer-funded health insurer of almost one-third of Americans on Medicare or Medicaid. The CMS sets baseline medical prices by determining the reimbursement rates paid to health care providers who treat Medicare and Medicaid patients. Private insurers then use these rates as a baseline for setting their own reimbursement rates.
The CMS’ 2017 budget is $1.01 trillion, a little less than the GDP of Indonesia, the 16th largest economy in the world, according to projections by the International Monetary Fund (IMF). For reference, IMF projects the entire economic output of Russia will be $1.56 trillion in 2017. Russia has the 11th largest economy and the second most powerful military in the world — 15,000 tanks, a massive nuclear arsenal and 144 million people.
Surely the CMS will use its trillion tax dollars — about $8,000 per U.S. household — to provide most Americans with high-quality health care in 2017, right? Not even close. The CMS will spend its budget on roughly one-third of Americans, 132 million enrollees. However, because Medicare and Medicaid prove to be only partial insurance coverage, many patients choose to purchase private supplemental insurance policies to cover the gaps in this coverage.
Adding the CMS population’s costs to the rest of the country’s health-care-related expenditures, Americans spend $3.35 trillion dollars on health care and insurance each year. This puts total U.S. health care expenditures on par with the GDP of Germany, the largest economy in Europe. Were “U.S. Health Care Expenditures” a nation, it would have the 5th largest economy in the world.
So, who drives all this spending? Government advocates console us that Medicaid spending parallels that of the nation’s overall spending on health care. This is an understatement — and a misleading one. The fact is, CMS spending drives all other spending. Many people do not realize that Medicare reimbursement rates are the baseline against which almost all private insurers set their rates. If Medicare payment rates go up, private insurance company rates go up a proportional amount.
Now, who sets Medicare rates — and by extension, health care prices for the entire country? Medicare rates are strongly influenced by a small group of people at the American Medical Association known as the Relative Value Scale Update Committee. As of 2010, the CMS had accepted 94% of the recommendations the RUC had offered the federal agency since 1991, Kaiser Health News reported.
Thus, as the RUC sets reimbursement rates for Medicare, and Medicare is the price baseline for private insurers, it is fair to say a 31-member panel centrally plans medical prices for the entirety of the U.S. health care system, or the rough equivalent of the fourth largest economy in the world.
But, sure, blame the free market.
[Originally Published at Investor’s Business Daily]