Socialism is Corporatism with a Human Face: Health Care Edition

The Washington Post has a detailed story on how the American Medical Association was asked by the federal government to “advise” the same on rates that Medicare should pay for medical services. If that sounds a lot like the old LIBOR rate-setting fiasco, well, that’s because it is.

It is also a classic example of what economists call the Capture Theory of regulation, i.e., the regulated end up “capturing” the regulator, and basically get it to do their bidding. Medicare has become so large that the federal government can basically regulate the price of medical services. At first, the feds set the Medicare rates themselves but… (WaPo)

At its inception, the Medicare system paid doctors what was described as “usual, customary and reasonable” charges. But that vague standard was soon blamed for a rapid escalation in physician fees.

In other words, the Capture Theory already seemed to be in place. So the feds tried something else… (WaPo again)

In the late 1980s and early ’90s, the United States called on a group at Harvard University to develop a more deliberate system for paying doctors.

What they came up with, basically, is the current point system. Every procedure is assigned a number of points — called “relative value units” — based on the work involved, the staff and supplies, and a smaller portion for malpractice insurance.

Every year, Congress decides how much to pay for each point — this year, for example, the government initially assigned $34.02 per point, though prices vary somewhat with location and other factors.

This point system is critical in U.S. health-care economics because it doesn’t just rule Medicare payments. Roughly four out of five insurance companies use the point system for the basis of their own physician fees, according to the AMA. The private insurers typically pay somewhat more per point than does Medicare.

In other words, this “point system” basically sets the public and private prices for medical services. That’s when things really get interesting (WaPo one more time)

Once the system developed by the Harvard researchers was initiated, however, the Medicare system faced a critical problem: As medicine evolved, the point system had to be updated. Who could do that?

The AMA offered to do the work for free.

I’ll bet they did!

Once the AMA had control of their own prices, the Capture Theory came to fruition. As the WaPo reveals, the AMA folks basically do this by claiming services take what appear to be much longer than they really take, which drives up the prices for those services.

Medicare turned the government into a monopsonist, but the government turned the AMA into a monopolist.

One final note: you may notice, dear reader, one medical coverage system not mentioned in the piece…Medicaid. Most opponents of Medicaid expansion (including yours truly), have cited Medicaid’s low rate structure as a reason for it not to be expanded, for it leads to Medicaid recipients being refused treatment (because the rates are too low). We don’t know – but must now ask – how much of the discrepancy is driven by the AMA’s monopolistic behavior. Once again, government intervention and unintended consequences combine to damage some of the very people who were supposed to be helped by the intervention: the poor.

This is why I use the axiom: socialism is corporatism with a human face.

@deejaymcguire | facebook.com/people/Dj-McGuire | DJ’s posts

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