Saturday, August 18, 2012

Setting Voucher Levels or Setting Supplier Reimbursement Rates?

One issue in the Medicare debate that I have not seen anyone address concerns the political economy of setting voucher levels versus setting supplier reimbursement rates.

The Ryan plan would set a level of "premium support"-- think of it as a voucher -- which seniors would use to buy their health plan.  While the Ryan plan might have in mind a path for the voucher amount each year in the future, the actual level is of course going to be up to the Congress at the time.

Current Medicare sets thousands of individual prices at which hospitals and docs are reimbursed -- the notorious fee-for-service regime.  Each year, at least ostensibly, the Federal government, through the Centers for Medicaid and Medicare Services, determines all these prices.  Under ACA, it is true, there is some incentive to move away from fee for service to bundled payments -- payment for treating a disease condition over a period of time -- or even to capitation, whereby an entity such as an Accountable Care Organization will be paid for maintaining the health of a whole population.  Even in these cases, there will still be a lot of individual prices being determined.  Fee for service is not going to entirely disappear.

In order to say which regime will be less generous to Medicare beneficiaries, it is necessary to address the political economy of setting the different prices.  Will the political process really be able to hold the voucher level below the average cost of a senior buying a reasonable health plan on the open market? How does the political process deal with the setting of individual doctors' reimbursement rates?

I won't pretend to have done a full analysis of this.  But I think the visibility of the voucher and its sufficiency will be a key issue, and those who say that the voucher will be set at too-low levels need to think twice.  Seniors are a powerful political lobby.  Meanwhile on the other side, there is the invisibility of all the individual suppliers' prices, and the power of the American Medical Association.  The so-called "doc fix" where a previous cut in doctors' reimbursement rates has been put off year after year suggests the nature of the problems in setting individual payment rates.

The issue reminds me of  Stigler's paper "The Theory of Oligopoly."  Is it more conducive to collusion to having many small buyers or a few large buyers?  Stigler argued many small buyers is more conducive to collusion, as a seller will not risk defecting from a collusive agreement for just a small increase in sales:  "It follows that oligopolistic collusion will often be effective against small buyers even when it is ineffective against large buyers."

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