logo

Helping People Find the Best Medicare Insurance
A fee-only financial advisor

1-877-236-7710

Contact us by e-mail

 
Managing Medicare's Costs

Why Medicare supplemental coverage is so expensive (1 of 3)

With new ideas for redesigning Medicare appearing almost monthly, some people may wonder whether the many proposals have anything in common. As it turns out, most of them would increase out-of-pocket costs for seniors with fee-for-service supplemental coverage.

Some of the suggestions would trim benefits or add surcharges for certain Medigap policyholders. Others would shift fee-for-service costs from sicker to healthier seniors, e.g., the proposal for a unified Part A and Part B deductible combined with an out-of-pocket limit.

If almost any of the current proposals becomes law, it will mean that the people who already pay the most for their health care will start paying substantially more. That may seem reasonable because fee-for-service insurance is partly responsible for Medicare’s hefty cost increases over the past 20 years.

An analysis published last month looked at 14 years of Medicare data for more than 100,000 beneficiaries and found that people with fee-for-service supplemental insurance were responsible for cost increases which averaged a full percentage point more each year than were people with no supplemental coverage.

The authors’ conclusion: it is sensible to require that premiums for supplemental coverage “reflect, as closely as possible, the full cost of the policies, including the added cost to the Medicare program.” Yet such a change would be unfair to the many seniors, large numbers of them with low-to-moderate incomes, whose only viable options are fee-for-service supplemental plans.

Some experts think the problem is not comprehensive supplemental coverage but fee-for-service medicine, which creates incentives for doctors and hospitals to provide more and more services. Until recently, however, physicians have rarely been criticized for overutilization even though they’ve been compensated on a per-service basis since the days of ancient Babylonia.

Despite its flaws, fee-for-service by itself does not cause overuse, but it does when it is paired with comprehensive insurance. In fact, the less comprehensive fee-for-service plans sometimes discourage people from going to their doctors so that they will avoid co-payments.

Neither is there much indication that fee-for-service pricing creates overuse in other professions. Hairstylists, accountants, plumbers, computer repairmen, and psychiatrists all charge by the service based on their expertise and the time required, usually at an hourly rate. True, they would like to provide additional services but consumers, who aren’t insured for those services, decline the ones they don’t think they need. With health care, it’s sometimes difficult for patients to know what they need, but a few questions or even a second doctor’s opinion will usually help them know what to do.

The amounts charged for each medical service depend on the prevailing rates in a geographic area. In the 18th century, medical associations published fee schedules to prevent price undercutting or gouging by one or two doctors. In Charlottesville, Virginia in 1848, physicians charged $1 for a vaccination, $5 to amputate a finger or toe, and $20 to amputate a leg or arm, according to the local fee schedule of more than one hundred treatments.

The number of services has multiplied due to medical advances and increased specialization. The Medicare web site how lists its approved prices for more than 10,000 physician services, with new ones being added yearly. Each service is assigned a a five-letter code and a value relative to other services. That value is known as its RVU, or relative value unit, which is comprised of component values for: 1) the amount of time or work involved in a medical service; 2) the expense of maintaining an office and staff for that type of service; and 3) the malpractice cost of that service.

Here’s an example: the RVU for a doctor’s visit with an established patient is 2.14 (code 99213), but a visit with a new patient (code 99204) takes longer and has an RVU of 4.84. The RVU is multiplied by a cost factor to determine what Medicare will pay, and that number is adjusted for geographic differences. In Los Angeles, Medicare’s approved amount for an established patient visit for a self-employed physician is $78.91 and for a new patient visit it’s $176.27. In Baton Rouge, the amounts are $67.60 and $153.55.

RVU’s are re-assessed every five years by a committee of physicians, whose recommendations to Medicare are approved more than 85% of time according to one recent study. Because the committee is made up mainly of specialists, fees are biased against primary care doctors.

Favorable payment rates for specialty care are responsible for the shortage of primary care doctors. Even within specialties, many physicians focus on the procedures that are compensated at the highest rates. Congress has tried with mixed success to enact regulations that will result in fairer fees. Paul Ginsburg, the founding executive director of the former Physician Payment Review Commission (now MedPAC), last year wrote an article explaining the reasons today’s physician payment schedule is inadequate.

Today’s process of setting fees is better than it was a few years ago, he says, and improvements continue. Ginsburg explains that the fee-for-service payment system will need to be maintained, even if it’s only so that experts know how much each medical service is worth. To know what to pay for a bundle of services, you need to know what the various elements cost.

Overtreatment is the most serious fault of the current combination of fee-for-service and comprehensive coverage. A recent controversial study cast doubt on the view that doctors overtreat patients to the extent other studies have indicated. It found that between 75% and 85% of Medicare’s regional cost variation could be explained by health factors and disease burden. Researchers at the Dartmouth Institute for Health Policy responded that the study was deeply flawed. Yet even if it is accurate, that means doctors provide between 15% and 25% too many treatments. Dartmouth researchers have consistently found the percentage to be much higher. As well, the Institute of Medicine has said that defensive medicine (or overtreatment) in this country costs at least $210 billion a year.

Studies never paint a complete picture. They rely on relatively small data sets to make inferences about large populations. That’s where anecdotes help to fill in the gaps. New York Times columnist Tara Parker-Pope wrote last year about the time her daughter sprained an ankle at dance camp. The daughter was treated by seven specialists, only two of whom she had sought out – the others were referrals that resulted from her visit to a second specialist. Parker-Pope’s daughter had three MRI’s, gave seven vials of blood at one visit, and had two pending referrals when she decided to stop getting new tests and going to new doctors to whom she was referred. Her ankle soreness had persisted for three months, and none of the tests had provided answers.

She returned to the second doctor and was given a simple treatment for pain relief. A few days after that, the ankle stopped throbbing. In the months before, however, thousands of dollars were wasted and needless pain caused. When Parker-Pope asked readers to respond with their own stories of overtreatment, there were more than 1,000 replies. ◊◊

© 2010-2018 Dover Healthcare Planning, LLC | Contact Us

Site by COPY & DESIGN