From a Wall Street Journal editorial on a possible 2% cut to Medicare providers as part of the debt reduction deal:
Congress would decree that U.S. medicine must provide the same level of services to patients but do so for 98 cents on the current government dollar. And that dollar is already below actual costs. For the same hospital services, private insurers on average pay $1.49 today, according to Medicare data on relative public and commercial rates. A doctor to whom Medicare pays $1 would receive $1.25 from a private carrier for delivering the same care. The rest of the economy does not work like this.
The fiscal distortions of such central planning are even worse. All politicians—but these days especially Democrats—like to pretend they'll pay providers somewhat less in the future, despite knowing that is unlikely to happen in practice. Medicare's prospective payments are low enough that further reductions may jeopardize access to care and in many cases threaten the viability of hospitals and physician practices. So the main effect of these "cuts" is merely to move future spending off the federal balance sheet.
The Journal's health care editorial writer, Joseph Rago, won the Pulitzer Prize this year, but I think the Journal is off the mark on this one. Regarding the claim that "the rest of the economy does not work like this," in fact, in the rest of the economy, companies tell their suppliers they need to cut costs by 2% (or some other percent) to meet corporate budgets all the time. And, whether they like it or not, that's what these Medicare providers are — suppliers of services of which the government is a major purchaser, with all the negotiating power that entails. All over the private economy, there are businesses trying to figure out how to provide the same level of customer service for 98 cents that they used to pay $1 to provide, either by improved technology or by outsourcing or by re-engineering. In the airline industry, Southwest figured out to have the flight attendants help clean the airplanes. Jet Blue got rid of the call centers and had everyone book their ticket online. As a result their costs per passenger mile were lower than the other airlines. There's some of that savings that has already been captured in health care, but there's a lot yet to be done; witness John Abrams's anecdote about the exam gloves dispenser at Mass General. If some Wall Street Journal editorial writer is going to send up a hue and cry every time someone tries to wring 2% of cost out of the system, it just delays those savings.
The Journal compares the Medicare reimbursement rate to that of private insurance, which makes it look low. But it doesn't mention the Medicaid reimbursement rate, which makes the Medicare reimbursement rates look high.
As for the "actual costs" claim, that's a red herring. The big "costs" in health care are the labor of doctors. And there are lots and lots of doctors and hospital executives and drug company executives whose revenue is largely drawn from Medicare and Medicaid who are drawing salaries in the millions of dollars a year or at least $200,000 to $600,000 a year range. Meanwhile, medical schools are turning away lots of highly qualified and highly motivated applicants. Why should lower-earning Americans be taxed by the government to keep Medicare reimbursement rates at the level where the doctors and hospital executives are driving BMWs and Mercedes? It's a reverse-Robin Hood. The doctors and hospital executives are complaining about their reimbursement rates all the way to the bank. It'd be one thing if we had a balanced budget. But health care costs are part of the reason that the federal debt is approaching 100% of GDP.
What's more, the providers just aren't credible when it comes to defining actual costs, especially when they bill insurance companies $50 or more for a bag of IV solution you can buy for $7 or $8 online. The insurance companies bargain that down, of course, but the hospitals come in with inflated bills to defend against the inevitable negotiating down of the costs by the insurance companies.
There are actually lots of places in the economy where costs go down. Apparel costs have gone down as labor moves offshore to China. Costs of computing power have gone down. There are even some areas of health care where costs have gone down. I can understand the Journal's discomfort with Medicare squeezing providers, because it looks like government price controls. But the logic of the argument that one can't cut 2% out of Medicare costs on the provider side also wrecks the argument against consumer-driven health care a la Paul Ryan's premium support plan. If even a 2% cut is going to "jeopardize access to care and in many cases threaten the viability of hospitals and physician practices," how, then, would private, market competition curb health care costs? On some level, the Journal editorial sounds like the "Mediscare" commercials that the AFSCME union, which represents a lot of health care workers, aired during the Gingrich Congress's attempt to curb the growth rate of Medicare. It's interest group politics by those living well from taxpayer money, whether it's AFSCME or it's the doctors, drug, and hospital groups for which the Journal seems to be speaking.