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Extras: Michael Cannon on Medicare

November 3, 2022


(Sing to the tune of "There was an old woman who swallowed a fly") There was a tax change that led to a new program; There was a new program that lead to new regulations; There were new regulations that now costs $4 trillion dollars. I don't know why. 
Host Juliette Sellgren continues her quest to understand the very complex US healthcare system with returning guest Michael Cannon. 
Who are we trying to care for? Are we actually caring for them? Michael Cannon returns to the Great Antidote to talk about Medicare. You don’t have to listen to Cannon’s previous episode on Employer-Sponsored Health Care before listening to this one, but he does reference it a few times. Host Juliette Sellgren continues her quest to understand the very complex US healthcare system. 

Some questions they discuss are
  • What is Medicare? 
  • What are the costs and the benefits? 
  • How did it start and how has it changed over time? 
  • Don't we want to spend “lavishly” on health services for seniors? 

You can listen to the podcast here. 

Cannon opens reminding all people–but especially young people–to have a sense of your own worth and to insist that other people respect that in both personal and professional situations. He and Sellgren then turn to what the Medicare program is and how it fits into the larger US health insurance system. 

One thing I learned and was surprised by was that signing up for Medicare is a requirement for receiving Social Security benefits. Perhaps this doesn't matter because presumably people want both benefits but it’s an interesting tie between the very different programs. Cannon makes sure listeners understand that Medicare is a very popular program but he also wants listeners to understand the big, often hidden problems with the program as it has and continues to exist. 

Key Quote (lightly edited)
[Medicare is] not popular because it's a better alternative than the other options available to seniors. It's popular because it provides such lavish subsidies to senior citizens and to the healthcare industry, which makes tons and tons of money off the Medicare program. It spends about a trillion dollars a year. So that's about a quarter of US health spending, a huge chunk of every hospital's revenues and the revenues of physicians and pharmaceutical companies. They get lots and lots of money from the Medicare program. And that's another reason why may, why Medicare is popular, is popular with the industry, because the industry makes tons of money off of the taxpayers through the Medicare program.
Cannon has lots of stories in addition to lots of numbers. One of the first ones he tells is the story of how Medicare came to be as a reaction to the challenge created by exempting health employee benefits from taxes in 1913 (this topic is covered in much great detail in the previous podcast with Cannon). 

Key Quote (lightly edited)
In the 1920s, Congress started penalizing people who wanted to control their own healthcare dollars, make their own healthcare care decisions, and purchase their own health insurance. That was in the 1920s. 40 years later (remember, they're penalizing you unless you enroll in an employer sponsored plan that disappears when you leave that job, such as when you retire). So for 40 years before 1965, Congress had been penalizing workers if they enrolled in coverage that covered them after they turned 65 and would cover them until death. The only way to avoid that penalty is if you enrolled in an employer sponsored plan that disappeared when you turned 65. 

So when Congress looked around in 1965 and noticed, “Hey, half of senior citizens don't have health insurance,” a lot of them said, “Well, this is a market failure.” It wasn't a market failure at all! Government created this problem or made it far, far worse. Left a lot of seniors poorer because even though there were health insurance plans available that could have covered them through retirement and all the way until death, Congress penalized those plans, effectively rewarding a kind of health insurance that disappears when you retire. And they left that policy in place for 40 years. And so that's why so many seniors lacked health insurance. 

And this is significant because this happens all the time when we look at government and government trying to solve problems. This is a problem that government itself created by accident when it created that penalty on lifetime health insurance. And rather than go back and fix the thing that Congress did to create this problem, did they do that? No, no, no, no, no, no, no. That's not what we do. We don't admit and fix our mistakes. We create new government programs to try to solve the problems we've created with the old government intervention in the economy. And that new government program was Medicare.

Sellgren asks about how to think about the relationship between the high costs and the benefits seniors receive and Cannon responds by talking through the scope of the program, the problems with Medicare officials being price negotiators, the incentives of the people within the health services industry, and how researchers try to look at these questions. 

Key Quote (lightly edited)
There are two things that Medicare did that most scholars recognized had a negative impact on quality of care. One of them is that Congress prohibited Medicare from trying to improve quality in 1965... .There's some limited programs, but there's also a general proscription on the Medicare bureaucracy trying to change the way doctors practice medicine. That's one of the things that doctors wanted in there as the price of dropping their opposition to the Medicare program...Congress actually changed that years down the road and created some quality improvement programs, and it basically had no effect. So that one might not have had much of an impact because even when Medicare tries to improve quality, it fails.
And we could talk about why that is. But there's this other factor that I don't think even health policy scholars understand very well. And that is that, healthcare is so complex that any single way of paying doctors and hospitals is going to promote some dimensions of quality and discourage other dimensions of quality. And there's no single payment system that will promote all dimensions of quality….And the only way to get around that problem is to have open competition between different ways of financing medical care, paying doctors in hospitals and organizing doctors in hospitals and how they practice different organizational forms. But what Medicare did was Medicare tilted the playing field toward one way of paying for medical care, one way of delivering medical care.
We call it fee for service or financing and fragmented delivery. Medicare would pay doctors in hospitals a fee for each additional service that they've provided to patients. This promotes quality in some ways. It means that you get a broad choice of doctors because they all like getting paid that way…but this way of paying doctors has a negative impact on quality in a number of ways actually. 

At this point Sellgren recalls her episode with Lauren Hall on the Medicalization of Giving Birth. In this episode, Sellgren and Hall talked about the variety of factors—often unrelated to the personal welfare of the individuals involved—that contribute to moms and babies having these incredibly personal events reduced to a one-size-fits-all (and often doesn’t fit well!) experiences. 

Sellgren also brings up a story about a doctor who was also a fraud and Cannon fills in the details about Farid Fata, a hematologist-oncologist who pleaded guilty to a health care fraud scheme administering unnecessary chemotherapy so that he could charge Medicare and private insurance for additional billings. 

You can read more about this horrible and fascinating case here. Cannon talks about two of his colleagues, Charles Silver and David Hyman, who wrote a book documenting this and many more problems, Overcharged: Why Americans Pay Too Much for Health Care. There are additional scary stories in the podcast and on the website for the book but Halloween is over so I’ll let you search for them yourself. On a more optimistic note, Cannon continues: 

Key Quote (lightly edited)
There are other ways of paying for healthcare and organizing its delivery where all of the doctors and all nurses and hospitals and other facilities are part of the same entity and they work together. And where the way you pay them does not create incentives for them to provide unnecessary services and does not reward medical errors like fee for service does…
Medicare has prevented the sort of competition between these two ways of paying for and delivering medicine and all sorts of hybrids in between the sort of competition that would force each of them to improve on all dimensions of quality. That's really the biggest way that Medicare has had a negative impact on the quality of care, is by eliminating innovation and competition in healthcare that would otherwise be enhancing quality.
Sellgren asks about Bernie Sanders and what “Medicare For All” would even mean. That conversation is around 37:01-44:50 and might be of particular interest to policy wonks. Then Sellgren asks for just one or two things that could make this situation better. Cannon focuses on 
(1) changing who controls the money. According to Cannon, in the US health sector, the government controls about 83% of the spending. But, since the money comes from a LOT of different places, that would be a LOT of legislative changes. For just one small example, to return money to people under 65 is a totally different fix than for over 65s. 

(2) eliminate barriers to cost reducing and quality improving innovations. Just by giving all that, that trillion dollars of Medicare spending to enrollee as cash, you'll get rid of a lot of the rules that Medicare puts in place about fee for service and other things that tilt the playing field away from cost saving innovations,like the sort of integrated he health plans that I talked about where you use different financial incentives to encourage different dimensions of quality, and you'll get then open competition between all these ways of paying for healthcare and all these ways of delivering healthcare. And, that competition will force them to improve on all dimensions of quality.

Cannon also points out that this second point also requires getting rid of regulations that block innovation put into place by physicians, drug companies, hospitals, and others. For more on this aspect, definitely check out Matt Mitchell on CON laws and Occupational Licensing and Adam Thierer on Permissionless Innovation.

Key Quote (lightly edited)
So you change who controls the money and you remove those barriers, and we will see better, more affordable and more secure health insurance and medical care and innovation that fills in the, because an innovation will be filling in the cracks of our health sector so that fewer and fewer people fall through every day.

Cannon closes around 53:15 by talking about changing his views on medical malpractice systems and its effectiveness. 


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