WASHINGTON — Medicare may be best known for paying the medical bills for millions of people 65 and older, but recent studies show it plays another gargantuan role in American health care: It helps determine prices for everyone.
For virtually every procedure and service — from routine colonoscopies to brain surgery and hospice care — Medicare comes up with a dollar figure that the government considers a fair price. But economists are finding that largely because of the program's vast scale, Medicare prices substantially shape what all Americans pay for health care.
"Our results suggest that Medicare's decisions are far more influential than you may imagine," said Joshua Gottlieb, an economist at the University of British Columbia. His research shows that a $1 change in the price that Medicare pays yields a $1.30 change in what private insurers pay.
What happens if the government gets those prices wrong? In the past year, a Washington Post investigation has shown that Medicare prices are sometimes based on faulty premises, offer perverse incentives for unnecessary care and provide widely varying amounts for equivalent drugs.
The government may be spending billions of dollars more than necessary for some products and services. Moreover, the influence of Medicare prices means that those faults may be replicated throughout American health care.
Over the next year, agency officials said they will be developing new ways of determining the value of physician work and also altering other payment systems, such as those for hospice care.
"It's a very big problem — Medicare pays too much for a lot of stuff it buys," said Bruce Vladeck, who headed Medicare under President Bill Clinton. "If you had better pricing policy, a whole lot of hysteria about long-term insolvency of Medicare would go away."
"Medicare is a wonderful program, but behaviorally, because of the price fixing, it's a mess," said Tom Scully, who was Medicare chief during the George W. Bush administration and is now a partner in a private equity firm that invests in health care.