Naked Capitalism: Medical Price-Fixing

How the AMA Engages in Government-Sanctioned Price Fixing

One of hedge fund manager David Einhorn’s saying is “no matter how bad you think it is, it’s worse.” An article in Washington Monthly, Special Deal by Haley Sweetland Edwards, deep dives into one big and largely hidden reason why medical costs in the US are out of control and are unlikely to be reined in any time soon.

I can’t stress enough that you need to read this well-researched and written article in full. I’ll nevertheless recap some of its main points.

Three times a year, an AMA committee called the Specialty Society Relative Value Scale Update Committee, aka RUC, meets. Per Edwards:

…it’s the committee members’ job to decide what Medicare should pay them and their colleagues for the medical procedures they perform. How much should radiologists get for administering an MRI? How much should cardiologists be paid for inserting a heart stent?

While these doctors always discuss the “value” of each procedure in terms of the amount of time, work, and overhead required of them to perform it, the implication of that “value” is not lost on anyone in the room: they are, essentially, haggling over what their own salaries should be. “No one ever says the word ‘price,’ ” a doctor on the committee told me after the April meeting. “But yeah, everyone knows we’re talking about money.”….

In a free market society, there’s a name for this kind of thing—for when a roomful of professionals from the same trade meet behind closed doors to agree on how much their services should be worth. It’s called price-fixing. And in any other industry, it’s illegal—grounds for a federal investigation into antitrust abuse, at the least.

But this, dear readers, is not any other industry. This is the health care industry, and here, this kind of “price-fixing” is not only perfectly legal, it’s sanctioned by the U.S. government. At the end of each of these meetings, RUC members vote anonymously on a list of “recommended values,” which are then sent to the Centers for Medicare and Medicaid Services (CMS), the federal agency that runs those programs. For the last twenty-two years, the CMS has accepted about 90 percent of the RUC’s recommended values—essentially transferring the committee’s decisions directly into law.

The RUC, in other words, enjoys basically de facto control over how roughly $85 billion in U.S. taxpayer money is divvied up every year. And that’s just the start of it. Because of the way the system is set up, the values the RUC comes up with wind up shaping the very structure of the U.S. health care sector, creating the perverse financial incentives that dictate how our doctors behave, and affecting the annual expenditure of nearly one-fifth of our GDP.

Now technically, what the RUC is doing is not directly setting the size of the Medicare pie but providing the price parameters that determine who gets what, in terms of how much goes to primary care physicians v. specialists, and how much various specialists get relative to each other. And even if in any particular year, one can argue that the effect of the RUC process is merely distributive (which doctors get what), it’s hard not to infer that this process has played a major role in the ratcheting up of health care costs (I hope some health care policy wonks will pipe up, but based on reading a paper by Federal Reserve economists who took a hard look at the CBO health care cost forecasts, Medicare’s excess cost, adjusted for age growth of the population, grew faster than that of health care spending overall). And those Medicare rack rates determined private sector rates and billings:

Allowing a small group of doctors to determine the fees that they and their colleagues will be paid not only drives up the cost of Medicare over time, it also drives up the cost of health care in this country writ large. That’s because private insurance companies also use Medicare’s fee schedule as a baseline for negotiating prices with hospitals and other providers. So if the RUC inflates the base price Medicare pays for a specific procedure, that inflationary effect ripples up through the health care industry as a whole…

Over the past few years, a few well-placed health care figures from both parties have spoken out—at least once they’ve left office—about how crazy this system is. “The RUC is really just a giant cabal run by the AMA,” Thomas Scully, former head of the CMS under George W. Bush, told me. “A private trade association should not have that sort of control over the biggest spending account in the government. It’s an outrageous travesty of democracy.” Bruce Vladeck, former head of the CMS under Bill Clinton, agrees, calling the RUC “a significant part of the problem.”

The article sets for the sad history of how the AMA got in the position of being able to cartelize the pricing of medical services. And brace yourself for how institutionalized it is:

…by controlling the RUC, it controls much of the source code that our health care system uses to operate. Every single one of those roughly 9,000 medical services and procedures has its own five-digit code, known as current procedural terminology (CPT), and the AMA owns them all. That means that anyone—physicians, labs, hospitals, you name it—who wants to bill Medicare, Medicaid, or a private insurance company has to purchase either AMA books and products, or products from other software companies that pay AMA royalties and licensing fees to use the CPT codes. According to its annual report, in 2012 the AMA made $83.1 million in “royalties and credentialing products,” a large chunk of which comes from licensing CPT…

But in talking to a half-dozen current and former RUC members, including both generalists and specialists, the image of the committee that emerges is less a gathering of angels, cloaked by some Rawlsian Veil of Ignorance, and more akin to a health care-themed Game of Thrones. Several RUC members I spoke to mentioned that the chairwoman often reminds the committee to “Put your RUC hat on,” meaning: “Don’t think from your society’s standpoint.”

The article goes into considerable detail as to how the AMA uses procedures that inflate the estimate of the “work units” that it takes to perform a particular procedure. The effect over time is to greatly overcompensate specialists who are heavily represented on the RUC, at the expense of primary care physicians (I’m sure readers can provide examples of the absurdity of some specialist charges; I was stunned at the charge for a dermatologist to evacuate a not-very-large cyst, which I am certain could have been done as well by a nurse but that’s not how we do medicine in the US. Or how about the ridiculously priced MRI, which also generates tons of lucrative orthopedic false positives?).

But arguably the biggest flaw with the RUC process is that it never questions efficacy:

Perhaps the most damning aspect of the RUC’s methodology, however, is that, while its members often spend quite literally hours debating if a certain procedure takes three minutes or just two, the RUC never so much as flicks at the question of how much—or even whether—a procedure actually benefits patients. This failure, which is part of a broader flaw in federal health care policy, is enormously damaging to the practice of American medicine. Among other things, it means that many patients wind up undergoing expensive procedures for which more effective and less costly alternatives are available.

Edwards also describes how there have been some improvements around the margin in the RUC process, such as taking steps to curb redundant billing. And she also describes the provisions of Obamacare that could be used to leash and collar it, but almost certainly won’t be, given how the whole point of Obamacare was to enrich industry incumbents. She notes:

Even if these incremental steps remain in place, some critics argue they are akin to frosting on a rotten cake. “You can make these tweaks,” says Brian Klepper, a health care analyst and principal at WeCare, a primary care clinic and medical management firm, “but what you’re doing is ignoring the fact that this system is fundamentally insane. It’s so corrupt and collusive, it’s not something that can be incrementally fixed.”

Again, I strongly urge you to read the article in full. It’s another well-documented example of how deeply corrupt our society has become.

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