The Surprising Case of Failure in Medicare

Apparently, the Washington Post is shocked (-shocked-) that Bad Practices Net Hospitals More Money. This weekend’s article in the WaPo contains the following howlers:

In a four-year period, 106 heart patients at Palm Beach Gardens developed infections after surgery, according to lawsuits and government records. More than two dozen were readmitted with fevers, pneumonia and serious blood infections. The lawsuits included 16 patients who died.

How did Medicare, the federal health insurance program for the elderly, respond? It paid Palm Beach Gardens more.


Researchers at Dartmouth Medical School, who have been studying Medicare’s performance for three decades, estimate that as much as $1 of every $3 is wasted on unnecessary or inappropriate care. Other analysts put the figure as high as 40 percent.

Despite collecting “reams of information on quality of care”, the data are left unused. As a result, “[t]he way Medicare is set up …it actually punishes you for being good.”

So did WaPo finally discover that the market is superior? Nope.

The article suggests several culprits: monitoring, enforcement, geographic disparities in payments, not rewarding good care, and others. It does not, of course, blame the real offender: a socialist system that cannot work. Instead it blames the usual suspects: “the powerful lobby of hospitals, doctors and nursing homes.”

While WaPo cites several folks dismayed by Medicare’s failure to reward good practice, the perverse incentives present in Medicare are not, in fact, surprising at all. The waste, escalating costs, and rewarding of inferior outcomes is inherent to a nationalized health care system such as Medicare.

No amount of tinkering can repair a program based on fixed prices. Any brief reading of Mises or Hayek, a look at the fate of the Communist bloc, or review of the demise of nationalized industries in Western Europe proves beyond doubt that abolishing the market will not work because it cannot. It is, in fact, impossible.

Yet despite the collapse of communism, the socialist ideal has not disappeared, nor has it been weakened. As William R. Luckey writes in The death of Socialism: “The reason that socialism has not vanished is that it is not really an economic theory but a kind of gnostic ideology with economic overtones.”

In supporting the dominance of government allocation over market principles, Medicare is by definition a socialist endeavor. So why the surprise when socialism fails (again)? It is a closed economic system with a built-in mechanism for generating shortages and fiscal crises, for which there is no solution. Efforts to remedy its perverse incentives either exacerbate its problems or return it to market principles, voiding its raison d’être.

I applaud the WaPo for pointing out Medicare’s failure and perverse incentives, but the comments blaming providers move in precisely the wrong direction. In fact, it reads as if they are suggesting that what is really needed is to have Medicare take control of the entire system.

Why are we still pretending that socialism can work?

5 thoughts on “The Surprising Case of Failure in Medicare”

  1. The impulse to blame the problem on some arbitrarily defined minority like the health care providers themselves is especially chilling when you consider that such thinking was behind every mass democide of the 20th century. Rather than question their own designs, the political class would rather find scapegoats to blame for the designs failure.

    Despite their warm and fuzzy marketing image, Leftist in general are very hate driven. Their ultimate explanation for virtually every negative event is that some small group of evil individuals caused it. Every bad thing is ultimately the result of a conspiracy. With this world view, the temptation to solve all your problems by eliminating the conspirators becomes very tempting.

    I suppose we should be grateful that in the democracies such thinking usually just leads to even more government regulation intended to restrict the imagined conspirators freedom of action.

  2. The core problem with medicare is that it has attributes of both a price-fixing system and a cost-plus system. With a cost-plus system, the provider is paid for the actual cost of the work plus a percentage of that cost for profit. This creates an incentive for the provider to featherbed the cost of the actual work in order to increase the plus percentage.

    With a price-fixing system, the only way to make more money is to sell more stuff at the same cost. In medical care, this creates incentives for more test and needless procedures.

    So we have a system where the providers (1) have no incentive to improve their productivity and lower cost and (2) receive an incentive to perform as many billable procedures as possible. We should not be shocked that it waste a great deal of money while providing inferior care.

  3. The root of the failure (or view as failure) here is from the driving criteria not being used as the judge of results. Socialized medicine’s goal is to provide equal access to health care, whereas ‘capitalized’ medicine’s goal is to make as much money as possible. SM’s results cannot ever be viewed as successful from a capital efficiency standpoint, and CM can never be viewed as successful from a social standpoint. A system that could do both would probably not do either well. I’m afraid that’s what we’re seeing.

  4. “whereas ‘capitalized’ medicine’s goal is to make as much money as possible”

    I think it important to remember that the goal of making money applies only to one side of a healthcare transaction. From the patients side, the goal is the best medical care at the least cost. It is the intersection of the profit-motive and best care/lowest cost that makes freemarket medicine often superior in quality and lower in cost for “most” people.

    The problem with socialized medicine in this regard is that the actual patient has little to no input into the decisions that directly effect their care. Frankly, our system of 3rd party paying via employer insurance isn’t much better.

  5. Re: “whereas ‘capitalized’ medicine’s goal is to make as much money as possible”

    I have to disagree.

    Self-interest is far more complex and multifaceted than mere greed can explain, as works of charity clearly show. Nobel economist Gary Becker concluded that behaviors maximizing self-interest are not equivalent to narrow materialism, but include “a much richer set of values and preferences,” whether that is “selfish, altruistic, loyal, spiteful or masochistic.”

    Even so, Schultze described how “harnessing the ‘base’ motive of material self-interest to promote the common good is perhaps the most important social invention mankind has yet achieved.”

    Mueller noted, it is the productivity, creativity and competence of the free market that has been “the greatest –indeed, the only significant- alleviator of poverty in history.”

    In contrast, socialism can properly lay claim to having killed over 100 million people in the 20th century, so they’ve got that going for them.

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