It has already received some attention from Tyler Cowen, Reihan Salam, and Noah Millman, and I’ve already received some comments about it from readers. The key question among the bloggers is whether the phenomenon Kim investigates explains why US health expenditures pulled away from that of other nations beginning in the early 1. Actually, it’s fairly easy to put that question to rest without reading very far into Kim’s paper. It suffices to know that it’s about how Medicare’s payment system for inpatient hospital services increased use of certain costly inpatient services and inpatient spending. ![]() Readers of this blog might recall that the 1. Though it is true that the way Medicare pays for inpatient services affects outpatient spending (through substitution), this is not what Kim’s paper is about. Hence, it does not address the main driver of the 1.
The payment reform on which Kim focuses is Medicare’s shift from retrospective to prospective payment for hospital services, phased in in the early 1. The key difference between the two payment schemes is that the former pays hospitals whatever they claim their costs are and the latter sets prices for procedures, putting hospitals at risk for covering costs above the set prices or reaping gains if they can provide care below them. Abstracting many details, Medicare’s hospital prospective payment for a procedure is its national average cost. Therefore, if a hospital’s marginal cost for a procedure is below the national average cost, the hospital has a huge incentive to do more procedures of that type. This, Kim rightly points out, is a perverse incentive, having nothing to do with the need or appropriateness of those additional procedures. It could cause higher spending than necessary for appropriate care. Kim’s results suggest it did just that. I show that an unintended consequence of PPS . In the context of cardiac treatments, coronary artery bypass graft (CABG) surgery has a greater average- to- marginal cost ratio than angioplasty, whose ratio is greater than drug therapy’s. Furthermore, hospitals expanded CABG use by treating relatively healthier patients for whom the alternative technology (angioplasty) was readily available and medically substitutable at a lower cost. Notes: This interactive graphic displays gross government debt for the globe. The clock covers 99% of the world based upon GDP. It uses latest available data and assumes that the fiscal year ends in December. The Federal Reserve Board of Governors in Washington DC. Meeting calendars, statements, and minutes (2011-2017) The FOMC holds eight regularly scheduled meetings during the year and other meetings as needed. The results of this paper may therefore provide one of the explanations for the continuing rise in health care costs, despite the efforts of policymakers to contain them. Kim’s analysis is thorough and employs a strong, regression discontinuity design. Even if you don’t want to spend the time on the technical details of the paper, I highly recommend turning to the end and flipping through the figures and tables, of which there are many. Below is just one figure that illustrates the basic result. The horizontal axis is age. ![]() ![]() The vertical axis is change in CABG discharge rate relative to that of 1. PPS). Shown are results from three time periods: 1. PPS), 1. 98. 6- 1. PPS). The vertical line at age 6. The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address the challenges facing the public and private sectors around the world. RAND’s publications do not. EMPLOYMENT EFFECTS OF MILITARY AND DOMESTIC SPENDING PRIORITIES: 2011 UPDATE Robert Pollin & Heidi Garrett-Peltier Political Economy Research Institute University of Massachusetts, Amherst December 2011. Medicare- eligible ages and not (ignoring non- age based eligibility, which Kim addresses elsewhere). There is a clear discontinuity pre- and post- PPS across the age 6. This suggests that Medicare’s PPS included strong incentives for additional CABGs, diverting patients that might have benefited more from angioplasty (results for which do not exhibit the same discontinuity). However, when I posted Kim’s paper to last week’s Reading List, physician Steve Sisson commented. A single angioplasty was cheaper than CABG. The multiple angioplasties needed to equal a CABG, especially a LIMA graft, were more expensive. The research showing that we could safely operate on octogenarians came out in the 8. Thus, there were other possible explanations for an increase in CABG over angioplasty around the same time PPS was phased in. On the other hand, Kim also analyzes four states that were exempt from PPS and no discontinuity similar to that shown above is exhibited by them. That would seem to separate the PPS effect from the effect of medical science described by Steve. ![]() It would not be surprising at all if PPS was not the best payment system. However, Chapin White does give it some credit for the decreasing rate of growth in per beneficiary Medicare spending, at least over the long term. Also, private plans followed Medicare’s lead, adopting PPS later (in the 1. Kim told me by email). Further, other countries use PPS- like systems (Germany, Sweden, and Italy beginning in the 1. Kim, again by email). No law or international treaty forced all these health payers to use PPS. If Medicare was duped, it was not alone. It seems nobody else had a better idea. Actually, Medicare itself did have a better idea. From 1. 99. 1 through 1. ![]() CABGs. Robert Coulam, Roger Feldman, and Bryan Dowd summarize. Three other sites were added later. Pressure from providers significantly diluted the negotiation model to a discounted bundle of Part A and B services. That makes sense since what gets bundled tends to be lower fixed cost pre- and post- operative visits and rehab. As average costs of the bundle approach marginal costs, the issue raised and illustrated by Kim diminishes. Naturally, forcing providers to compete for Medicare volume also provides incentives to lower prices. Medicare’s struggle to implement competitive pricing is decades old. Click through to see who is mostly to blame for that.
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