Booman is slightly worried about the Medicare Doc Fix and how it impacts availability of doctors for patients:
If there are any potential problems, one might be that the slow growth of reimbursement fees will cause fewer doctors to treat Medicare patients. Yet, I think it will be harder to exclude Medicare than Medicaid patients. On this score, we’ll have to wait and see….
I’m not too worried about that as I don’t know what his model is that significantly changes provider behavior from past performance and future trends.
Let’s build a simple provider level profit maximization model and see why I am not to worried. The goal of profit maximization is to create an economic profit that is on average as good or better than the next best alternative for someone of the same skill and experience outside of medicine as inside of medicine. For simplicity sake’s let’s just focus on a single doctor’s office.
Under current law and pricing practices, providers have clear accounts receivable preferences. They want to see a commercially insured, wide network, no cost-sharing individual before they see someone with a commercial HSA plan. They’ll want to see either before they see a Medicare member, and the Medicare member is roughly equal to a low cost Platinum, Gold or Cost Sharing Reduction (CSR) subsidy Silver Exchange plan. All of those plans are preferable to Bronze or Catastrophic Exchange because of the high out of pocket makes collecting on the entire contracted rate tough, while Medicaid is usually at the bottom of of the list as Medicaid pays, at best, marginal cost of a service.
We should assume that office managers/schedulers are acutely aware of the revenue implications of the office’s patient mix and are already actively managing it to maximize profitability within certain constant constraints. For example, they could hold three afternoon appointments open for same day patients and may only release one for a Medicaid patient while telling a commercial high reimbursement caller that the doctor is available at 2:15, 3:00 and 3:30. This is current behavior.
Dropping the trend in Medicare growth rate may change relative prices and make the commercial high payers more attractive to cater to but there are three problems with that simple supply and demand model.
First, there is good evidence that commercial/private insurance pricing is closely correlated to public pricing. The Incidental Economist has been harping on this for a while:
Indeed, one recent study found that from 1995 to 2009, a 10 percent reduction in Medicare payments was associated with a nearly 8 percentreduction in private prices. Another study found that a $1 reduction in Medicare inpatient revenue was associated with an even larger reduction — $1.55 — in total revenue.
This would be impossible if hospitals were compensating for lower Medicare revenue by charging private insurers more.
Hospitals tend to be insulated from market forces than individual providers, so it is hard to see individual providers having sufficient market power to demand private rates stay constant on previous trend when public rates are growing at a slower pace than projected.
Secondly, the high paying commercial contract is a shrinking universe for two reasons. The first is that the population is getting older, so there is an increasing flow of people out of private commercial insurance and onto Medicare because they just hit 65. The late 50s and early 60s Boomers are, and will continue to be a goldmine for providers, but the demographic bulge is working its way out. Even if PPACA never passed, the proportion of people on Medicare would be increasing, so the proportion of people near but not on Medicare to Medicare eligible would continue to shift. That is basic demographics. This is a basic monosopy argument that the biggest consumer of medical services in this country (Medicare) will get a good volume discount.
Additionally, the Exchanges introduced an extraordinary array of commercial products that are tied to Medicare plus a bit pricing. Standard commercial contracts are usually Medicare plus thirty percent or Medicare plus fifty percent. In most competetive markets, the Exchanges have products that are priced at Medicare plus five, or Medicare plus seven as the second Silver benchmark plan. This has two impacts. The first is a minor shift of people from standard commercial, medically underwritten individual plans to PPACA compliant individual plans that pay out at a lower rate. More importantly, it is starting to shift the large group employer market. Employers are looking at their costs and asking why they are paying Medicare plus 44% on average while the Exchanges have Medicare plus 7% pricing. They are willing to have conversations about switching to narrower networks to drop their pricing to Medicare plus 15% or Medicare plus 20%. The cash cow of large group private insurance is slowly dying. That market segment will still have higher pricing than Medicare or Medicare linked Exchange products but the gap is on trend to close.
If the relative gap is closing between Medicare and large group commercially priced products, than accessibility to care will continue to not be a problem for Medicare benefeciaries as long as we assume that the US medical community will not see providers exit in droves. That worry is unfounded in my opinion for two reasons. The first is that the average credentials of the first year US med student has been increasing, so this is a market signal that lots of very smart people still want to get into medicine and people who are completing their fellowships today are still perfectly good docs even if they would be marginal Fall 2015 med school candidates. Secondly, US providers are massively overpaid compared to the rest of the world’s doctors. A threat to immigrate to Canada or Germany or Australia to practice medicine for economic reasons is just not credible.