A Simplistic Medicare Model

Moneybox
A blog about business and economics.
Aug. 28 2012 11:24 AM

A Controversial and Simplistic Model of Medicare Spending Control

Locally (either temporally or spatially), variation in Medicare spending is driven by supply rather than demand. Where empty hospital beds exist, the local health care industry will find a way to fill them with senior citizens whose bills are paid by Uncle Sam. But since Medicare's reimbursement rates are lower than what private insurance companies provide, when empty hospital beds are scarce the local health care industry will find a way to fill them with higher margin private clients rather than Medicare patients.

But in the long term, investment in the capacity to provide health care services is driven in part by projections of the future availability of Medicare patients to fill the beds.

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So the main thing you need to do to control future Medicare spending is control present-day forecasts of future Medicare spending. If people believe that in the future Medicare won't be spending tons of money, then people won't make the investments to create the capacity to soak up those dollars. So on this view the main thing we need to do to get the CBO projections of future Medicare spending down is for the CBO to stop issuing such dire projections about ballooning Medicare spending. Try to create a self-fulfilling prophesy! Congress is never going to let that happen! Better not count on that money!

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.