Medicare for All (or More) vs. Innovation

By at 26 January, 2019, 10:43 pm

by Raymond J. Keating –

A surefire way to finish off innovation in health care would be to adopt a single-payer “Medicare for All” system.  Even incremental expansion of government’s role – the latest is “Medicare for More” – would fuel the perverse incentives that undermine innovation. Enhancing consumer control over health care spending is the ultimate solution.

Advocates for everything from HillaryCare to ObamaCare to the latest push for so-called “Medicare for All” – that is, a government-run, single-payer system – have hammered on about how expensive health care is in the United States. Indeed, the U.S. ranks as the top nation (or one of the top) in terms of per capita health care spending. But without drilling down inside the numbers and examining how each nation’s system actually works, this point is rather meaningless.

Incomplete Comparisons

Consider that the dollar amount spent fails to take into account all costs involved, such as waiting lists for treatment that notoriously plague government-run health care systems, as well as other political rules that govern how care is rationed, including care being denied altogether.

In addition, per capita spending fails to capture what the money is being spent on. Part of U.S. health care spending is for treatment, part is for investments in innovative services and treatments, and part is due to government waste. The key is to focus on reducing waste, while incentivizing investments in improved services and innovation.

For good measure, third-party payments – that is, health care services being paid for by government or by medical insurance (usually employer provided) – dominate U.S. health care spending. When someone else foots the bill, there are no incentives for health care providers or consumers to be concerned about utilization or costs. This third-party payer problem only gets worse when the government is the third-party payer given that there are few, if any, substantive incentives in government to control costs or to increase quality. That’s what happens when politicians, their appointees and bureaucrats are spending other people’s money.

Irrational Policy that Stands in the Way of Innovation

Also, in a recent report, Marta Podemska-Mikluch and Elise Amez-Droz of the Mercatus Center at George Mason University explain: “One of the main barriers to innovation comes from Medicare’s reimbursement system: providers are paid on a fee-for-service basis, meaning that those providers who would achieve quality health outcomes using fewer services receive less revenue than providers who do not engage in such innovation.”

It is important to understand the fundamental difference between how government and the private sector view and deal with challenges. In government, poor service and/or outright failure usually are rewarded with more money. If something is not working properly in government, the political answer is to subsidize such failure with bigger budgets and more staff.

The private sector reacts in a strikingly different way. The authors of the Mercatus report explain:

“In a 2013 report, the Institute of Medicine (now the Health and Medicine Division of the National Academies) estimated the waste in the US healthcare system at $750 billion. In any other industry, entrepreneurs would jump at the opportunity to turn waste into profit. In healthcare, however, regulations and payment laws make it challenging for entrepreneurs to introduce cost-saving innovations or to reinvent service delivery.”

The authors go on to highlight two examples of hospitals that have attempted to innovate in a system whereby the volume of services serves as the basis for Medicare reimbursements as opposed to the quality of care, that is, actual outcomes.

In the case of Cincinnati Children’s Hospital, the institution “was able to make quality improvements and generate higher revenues through the admission of more patients” thanks to innovations resulting in shorter patient stays.

However, the story was different with the Duke Hospital Medical Center’s making improvements in its congestive heart failure program: “Thanks to better health outcomes, fewer patients needed to be admitted into the hospital, which translated into the average cost per patient going from $21,500 to $12,900, representing a 40 percent decrease. This, however, effectively reduced the hospital’s revenue per patient, leading the program to lose money.”

The authors summed up: “The bottom line is that as long as the payment mechanism is heavily influenced by Medicare, providers will continue to design their operations based on perverse incentives, where profit increases with the number of procedures performed and decreases as a function of patient health improvement if the improvement results in using fewer inputs.”

Will More Government Involvement Improve Health Care?

These foundational problems with Medicare should raise serious questions, and lead policymakers to steer clear of moving further down the path of more government control over health care, which, again, is what the latest push of “Medicare for All” is all about in the end. In most proposals “Medicare for All” means full government control of health care – that is, a single payer system.

Instead, the answer is to enhance consumer control over health care spending. The Mercatus authors are correct in observing:

“For individuals to regain control over their health service consumption and spending, they need to be in charge of the way funds dedicated to healthcare services are spent on them, and they need to be able to benefit if spending is reduced. Instead of reimbursing providers on a fee-for-service basis, the government should allow Medicare beneficiaries to spend the funds allocated to them on the healthcare services that the beneficiaries themselves deem necessary. This ability for individuals to be in charge of their healthcare purchases would in turn give an incentive to healthcare providers to innovate so that they can lower their prices and increase quality.”

So, rather than expanding a faulty and costly system, measures focused on greater consumer control, like health savings accounts, need to be expanded.

American entrepreneurship has had to fight against burdensome governmental policies to achieve incredible innovations in areas like medical devices, pharmaceuticals, and the use of assorted technologies to improve the delivery of care. Policymakers should not be looking to add to those burdens, but instead, should be focused on how to enhance consumer control and choice, competition, entrepreneurship, and innovation.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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