The hidden public-private cartel that sets health care prices.

The hidden public-private cartel that sets health care prices.

The hidden public-private cartel that sets health care prices.

How to fix health policy.
Sept. 2 2009 12:13 PM

The Fix Is In

The hidden public-private cartel that sets health care prices.

Doctors in operating room.
Doctors in an operating room

Living in Massachusetts should, by all indicators, mean having access to good health care. Following the landmark passage of a health insurance mandate in 2006, the state today enjoys the nation's lowest percentage of uninsured citizens. Major cities like Boston have the nation's highest numbers of doctors per capita and anchor some of the world's largest and most prestigious medical centers. And Massachusetts isn't stingy—it spends more on health care per person than any other state. Yet, as a remarkable NPR documentary reported last year, patients calling Massachusetts General Hospital—ranked the fifth best in the nation by U.S. News and World Report—were informed that Harvard's massive academic hospital was no longer accepting new patients needing primary care. And that problem isn't limited to Massachusetts General—it's occurring throughout the state. Despite near-universal insurance, oodles of doctors, reams of cash, and no dearth of bright minds, the average person in Massachusetts can't find a new primary care doctor.

The nation soon may face the same fate. To have any hope of meaningful national health reform, therefore, we must address the perverse financial incentives that created and continue to inflame this problem.


The root of the shortage can be traced to 1985, when a Harvard economist named William Hsiao developed a scale to measure the relative value of every single one of the thousands of services provided by doctors, a job later compared to measuring "the exact amount of anger in the world." For example, Hsiao's team deemed that a hysterectomy required 3.8 times more mental effort and 4.47 times more technical skill than a psychotherapy session. In 1992, Medicare formally adopted Hsiao's concept; private insurers followed suit. Today, this relative value-based system sets the prices—and therefore drives the priorities of American medicine.

Here's how it works. Doctors do a job—like placing a coronary artery stent, reading an EKG, or spending an hour examining and diagnosing a patient with a complex problem like insomnia—and earn something called "relative value units." In 2009, according to Medicare, the stent guy scores about 24 units for his relatively quick procedure, the EKG person gets 0.5 units for the 10 seconds his job requires, and the poor internist gets only 2.5 units for his hour of time. Figuring a doctor's total take per task is straightforward: Medicare adds up a doctor's total RVUs, multiplies the total by a fixed amount (roughly $40 right now), and writes the check.

It's clear that Medicare and all major insurers place far more relative value on fancy procedures like stents, EKGs, skin biopsies, CT scans, and bowel clean-outs than they do on actual face-to-face time with patients. Procedures, they have decreed, require more mental effort and skill than seeing actual people. The implications are obvious. Just visit any hospital: The dermatology, radiology, and cardiology centers that depend on high-volume, relatively quick procedures have gleaming new facilities, while the primary care and psychiatry clinics languish, since they earn their keep from poorly compensated face-to-face time with patients. And, obviously, specialists make more money than primary care doctors. (Even trainees grasp this; recently, only a single graduating internist out of a class of 50 residents at Massachusetts General Hospital planned to become a primary care doctor.)

Fundamentally, the entire payment model of American health care drives medical centers, doctors, and hospital managers to push for more fancy procedures at the expense of primary care doctors. How'd we get here? Since 1992, Medicare has depended almost entirely on the American Medical Association for guidance on how relative values should be set. In a devastating critique published in the Annals of Internal Medicine, scholars from the Urban Institute and the University of California-San Francisco explained that Medicare uncritically accepted 95 percent of the AMA's recommendations, which are formulated by the group's Relative Value Scale Update Committee, or RUC.


Of the committee's 29 members, 23 are appointed from subspecialties like cardiology and dermatology. Just three represent primary care, even though half of all Medicare dollars are spent on face-to-face encounters. Their meetings are closed to uninvited observers. Unsurprisingly, over time, the relative values of various procedures far outpaced face-to-face "evaluation and management." In 2000, for example, the RUC recommended relative value increases in 469 specialty procedure codes but made no change in codes related to evaluation and management—which are used by primary care doctors for outpatient visits for physicals, back pain, headaches, and so on.

This price-fixing process explains why people can't find primary care doctors in Massachusetts. By law, Medicare's costs are capped so what one doctor gains, another loses. (Medicare has long "rationed" care in this manner.) To meet budget targets, Medicare doesn't alter the relative valuations of different medical services; instead, it simply cuts the multiplier (say, from $40 to $38 per RVU), which just worsens the disparity between specialists and primary care doctors.

Over time, the big-money specialists dominating the AMA have demanded more and more "relative value" for their procedures. Medicare has rolled over and complied, which has drained revenue from the little-money workhorses—primary care doctors. More than any peculiarity of American medicine, these procedure-mad incentives have corrupted our health care system.

The funny thing is, paying more for medical care that's more valuable does makes sense. That's how capitalism should work. Unfortunately, ever since William Hsiao created the system in 1985, the collusive market valuation of medical services considered only the doctor (paying for his or her mental effort and stress, for example). The system completely fails to consider the value to the person actually getting the service. If we did, for example, angioplasties for stable chest pain would never be worth so much more than outpatient visits to lower cholesterol and blood pressure, which are just as effective.

Who speaks for patients? The 36-employee Medicare Payment Advisory Committee serves as Congress' adviser on Medicare policy but lacks the authority and funding to counter the AMA's lobbying. For years, MedPAC has sensibly argued that Americans shouldn't outsource medical pricing to a private interest group. Because properly valuing medical services is a public good, we should invest tax dollars in comparative effectiveness studies and a stronger public agency to fight for patients.

That terrifies powerful special interest groups like physician specialty societies and drug companies. In the mid-1990s, the medical device maker Medtronic sued to block a sound federal report showing spinal fusions didn't help back pain, and Republicans gutted the responsible agency. The Medicare-approved relative value for the pointless surgery remained largely unchanged and the gravy train chugged along. When Barack Obama recently proposed expanding MedPAC and reducing some of the AMA's influence, the interest groups again fought back ferociously to defend the status quo—and christened MedPAC a "death panel."

And while nobody's been looking, they pulled the plug on primary care doctors.