Medicare's Price Regulations: How the Government Determines What It Pays for Medical Care

James Capretta and David Bernstein
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James Capretta: American Enterprise Institute

AEI Economic Perspectives, 2023

Abstract: Medicare’s rules specifying payments for covered services are among the most powerful levers in health care. Private insurers use the same codes and formulas as their starting points for payments to avoid reinventing the wheel even as they are forced to “plus up†the amounts to appease their affiliated providers. (Medicare’s size allows the government to adopt take-it-or-leave-it terms.) While the differential between what Medicare and commercial plans pay is said to validate the benefits of price regulation, the empirical bases for the government’s rates are not well understood. A partial review shows a pattern of combining dated, imprecise cost reports with idiosyncratic and opaque adjustments that were not constructed to guarantee the best outcomes for the dollars spent. Properly designed competitive pricing, with a focus on value and not just cost, could be used to tether more Medicare payments to the rates that will incentivize efficiency and innovation, leading to optimal patient care. As the debate over how to control health care costs without compromising quality continues, Medicare’s regulated prices should not be given unquestioned status as the best available options.

Keywords: AEI Economic Perspectives; Centers for Medicare & Medicaid Services (CMS); Health care costs; Health care policy; Medicare (search for similar items in EconPapers)
JEL-codes: A (search for similar items in EconPapers)
Date: 2023
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