I’ve been commenting on how Medicare switched to a DRG System for paying hospitals for services and capital. The system was supposed to promote efficiency in the delivery of health care by making payments “prospective” so that hospitals that delivered care at a lower cost would profit from that efficiency just like other suppliers in the economy. If Medicare had set this up with hospitals offering competing bids or, better, allowed beneficiaries to purchase coverage from competing health plans the “prospective” payments would have evolved to market clearing prices. Instead, they set the rates bureaucratically so that the system is nothing more than government price controls. More on their harmful effects in a later blog entry.

While Medicare was “fixing” payments to hospitals it also attacked payments to doctors. They gave the folks at the Harvard School of Public Health a $2 million grant to devise a payment system for physicians. They came up with a point system related to effort for specific physician services. The more points, the more payment. What could be fairer? Students of economics (a subject that faculty in the Harvard School of Public Health apparently haven’t mastered) will pick up on some immediate fallacies here. First, what is a point worth? If there was a bidding process there would be market forces working to determine it. As with DRG’s, the point value was determined bureaucratically.

Second, how much effort is put into something probably isn’t as important as the outcome it produces. How about a lousy doctor who puts lots of effort into discredited and ineffective treatments that harm his patients making more than a good doctor who uses best practices with less effort to make her patients healthier? Third, who can measure the input? Is it the force necessary to break open a chest for surgery or the skill to graph new arteries onto a heart? At one point in Cleveland, Medicare was paying more to vascular surgeons to perform a neck artery clean that to work on a life threatening chest aneurysm. The whole system is absurd and is powerful support for Dick Armey’s statement that most of the world’s truly stupid ideas come from American universities.