Comment by bhupy | Hacker News Reader

Comment by bhupy | Hacker News Reader

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So full disclosure: I work in claims processing.

First of all, Medicare is only “more efficient” on account of price controls. “Legal inability to negotiate pharmaceutical prices” is just a euphemism for “inability to force pharmaceuticals to charge anything other than a defined amount of money”, or in other words: price controls. If a law was passed today that forced private insurers to use the Medicare fee schedules, they would be just as “efficient”. Whether price controls are an efficient way to run an industry is a separate issue entirely.

Second of all, Medicare is separated into “original Medicare” (which is the government-run insurance program), and “Medicare Advantage aka Medicare Part C” (which is private insurance offered to Medicare beneficiaries). The data we have right now shows that Medicare Advantage is actually the part of Medicare that’s working the best in terms of raw efficiency and outcomes[1]. 34% of Medicare beneficiaries have elected Medicare Advantage instead of “Original Medicare”, and that number has been growing[2].

[1] https://freopp.org/medicare-advantage-a-platform-for-afforda...

[2] https://www.kff.org/medicare/fact-sheet/medicare-advantage/

Thanks for the clarification. Regarding the Medicare Part D provisions, which you call "price controls" . . . to many that term may imply that pharmaceutical companies have had to lower their prices for Medicare. My understanding is that a common complaint against Part D is that these prices are set at levels that are very favorable to the pharmaceutical companies (i.e., high), and that if there were free negotiation for drug prices the size and market power of Medicare would allow it to negotiate better prices. Curious if you have any comment on that.

Yeah, by price controls, I was referring primarily to the Medicare Fee Schedules: https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Paymen...

Every payer (public & private) has “fee schedules”, which is just the list of prices for all treatments and/or drugs (in the case of PBMs), and Medicare’s fee schedules are often (but not always) lower than those of private payers. The “Medicare is more efficient” argument is essentially predicated on the idea that physicians would be forced to accept the lower fee schedules for everyone, which essentially amounts to “price controls”.

Re: Medicare Part D, the federal government is actually not permitted to negotiate drug prices directly (unlike the VA), and that’s a really contentious issue on its own. Medicare doesn’t actually pay for Part D drugs. Ironically, with Part D, the opposite happens: Medicare doesn’t do the negotiating, and Part D providers rely on private insurer leverage.

>The “Medicare is more efficient” argument is essentially predicated on the idea that physicians would be forced to accept the lower fee schedules for everyone, which essentially amounts to “price controls”.

If doctors/hospitals were forced to accept Medicare's lower fee schedules for private insurers, too, that would mean Medicare is not more efficient. Efficiency would lie partly in the ability of Medicare to negotiate lower prices because of its size. If private insurers could free ride and get the same prices, then Medicare would not have an efficiency advantage. I think the complaints back when this was set up (i.e., when Part D was created) were that George W.Bush gave up the farm and could have negotiated much lower prices.

Right, exactly. Which is why it’s really just a price control, not really “efficiency”. The government setting fees as a monopsony buyer is just price controls with extra steps.

It’s also worth noting that Medicare Advantage carriers use their own fee schedules, not the Medicare ones. You might think that this means that Medicare Advantage plans cost more per capita than Original Medicare (the core thesis behind “Medicare is more efficient because monopsony price controls), but...the results have been complicated/unexpected: https://www.commonwealthfund.org/publications/issue-briefs/2.... It’s sometimes cheaper (depending on the geography), and that’s without the forced use of Medicare fee schedules.

Where does the issue of higher drug prices in U.S. vs. lower prices outside of U.S. issue fit into this? Any links to info on that?

I recommend checking this out: https://www.forbes.com/sites/avikroy/2020/07/24/trumps-most-...

As I mentioned earlier, Medicare actually largely relies on private insurance leverage to determine drug prices, BUT there is an incentive baked into Medicare Part B that has a really underrated impact on some of the high prices, known as "ASP plus 6".

When an Original Medicare beneficiary visits a physician and that physician prescribes drugs, the drugs are paid for differently from the actual services (which follow the standard fee-schedule model). Rather than operating on a fee-schedule structure, Medicare decides that the cost of a drug that it will pay to a physician is the "average selling price plus 6%". Medicare basically takes the average selling price for a drug that a doctor prescribes, and pays that amount + 6% margin (it's actually 4.3% after some budget sequestration, but that's not important). 6% margin to the doctor is fair, right? The issue is that it introduces an incentive for physicians to try and prescribe the most expensive drug to the patient, because they know that Medicare will cover 80% of the cost (plus 6%), and the doctor stands to make the most money. Pharma companies know this, and for drugs that are predominately used by seniors, they market the price as high as possible since Medicare will just pay for (most of) it.

Fortunately with the Medicare Advantage plans, the private payers have their own rules for how much they will pay for a drug, and they are incentivized to pay as little as possible because the private Medicare Advantage payers get to pocket the cost savings as profit.

More info on ASP plus 6, and how it favors higher-price products:

https://www.healthaffairs.org/do/10.1377/hpb20171008.000171/....

https://www.healthaffairs.org/do/10.1377/hblog20190611.58590...

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