The Daily Item, Sunbury, PA

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December 31, 2013

Medicare plays costly part in health pricing

(Continued)

Moreover, while some fault private interests for gaming the pricing system, Scully and others said that the root of the problem is mispricing by Medicare.

"It's all about economic incentives," Scully said. "If you lay the bread crumbs out, you can't blame people for following."

To many observers, including the bipartisan National Commission on Fiscal Responsibility and Reform, federal-health care spending represents the nation's single largest fiscal challenge in the long run.

At the heart of this is Medicare, which, even after the Affordable Care Act is fully implemented, will consume more federal money than any other health-care program, according to estimates from the Congressional Budget Office.

Medicare spending is forecast to rise at about 7 percent per year, partly because of the aging of the population and partly because per-patient costs will rise.

Ten years from now, net federal spending for Medicare will amount to $903 billion, according to the CBO, while spending on Medicaid and children's health insurancewill come to $578 billion and spending for the health insurance exchanges and related items will come to $134 billion.

Economists believe that the Medicare prices are even more important than that massive scale suggests, because in the absence of a traditional market for medical services, the Medicare prices form the foundation for private insurers, as well.

That is partly because Medicare is such a huge player in the market, accounting for more than a fifth of the money spent on personal health care. But there is a second, possibly more important impetus: Because of the complexity of modern medicine, setting prices is an arduous, time-consuming task. Insurers save money by letting Medicare do the work.

To measure the impact of Medicare prices, Gottlieb and Jeffrey Clemens at the University of California at San Diego analyzed millions of claims to see how changes in Medicare prices were followed by changes in the prices that private insurers paid. The results were stark.

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