The Republicans and Democrats have been lately tussling over how to best resolve the fiscal deficit.  The Republicans recently won a victory of sorts when Obama agreed in principle to prevent the Bush tax cuts from expiring, in return for which he will possibly get an extension of unemployment benefits.  In other words, nothing was done to address fiscal deficits one either side of the debate.  There apparently is no constituency big enough that cares enough for anything real to be done for fiscal deficit reduction.

Soon enough, unemployment benefits might comprise as big a detriment to fiscal solvency as does Medicare, but probably only because of the disincentives to work that being paid for not working entails.  But the arguments about it and about extending tax cuts are arguments around the margins of fiscal health.  There is no way to substantially repair the long-term fiscal health of the US without tackling Medicare, from the Wall Street Journal:

This year, the federal health-insurance program for the elderly and disabled is expected to spend $524 billion on the care of its 47 million beneficiaries—a 40% increase from 2006. The Congressional Budget Office recently projected that federal spending on Medicare could double as a share of gross domestic product to as much as 7% by 2035.

Get that?  Roughly 1/6 of the US population (47/300) is on Medicare.  $524 billion is a 40% increase in spending since 2006.  If spending continues to increase at the rate it has, Medicare will most assuredly consume far greater than 7% of the gross domestic product by 2035, notwithstanding CBO projections. 

But why is the health care beast so impossible to tame?  In the same article, a urologist interviewed by the Journal, Deepak Kapoor, offered a glimpse at one of the true sources of the problem:

After being presented with the Journal’s data, Dr. Kapoor denied earlier giving a one-in-six estimate, and said he believed Integrated Medical’s utilization rate for IMRT was in “line with what’s practiced in the community.” He added that financial considerations never influenced IMP’s treatment decisions.

Financial considerations never influenced his urology practice in its treatment decisions?  Really?  The urologists all just work for the good of their patients, never mind the costs? 

What if the patient couldn’t pay and there was no Medicare to pay for him?  Might financial considerations then be considered in the treatment decisions?  The only way that financial considerations aren’t considered when deciding on a course of treatment is if a third-party to the transaction is picking up the tab.  That third-party would be the US taxpayer.

Dr. Kapoor was defending his practice against allegations that they overtreated prostate cancer patients with a new procedure of directed radiation.  The procedure garners $40,000 from Medicare each time it is chosen.  Doing nothing, as is often the best treatment for old men that are as likely to die of prostate cancer as something else, garners nothing.  But surely, financial  considerations had nothing to do with the decision to treat 35% of men over eighty with the procedure.  Or, the roughly 53% of all patients that the practice treated with the procedure since investing in its own radiology equipment for performing the procedure.

The treatment procedure, called Intensity-Modulated Radiation Therapy arose as an answer to Medicare’s end of an earlier scam in treating prostate cancer patients.   Urologists had been splitting profits with chemotherapy drug manufacturers, getting paid at a much higher rate by Medicare for dispensing the drugs than the drugs were costing the physicians.  Medicare shut down the scam, which is when IMRT arose, and doctors were encouraged (by equipment  manufacturers, et. al) to invest in radiation equipment and personnel in order to maximize revenues by doing the procedure in-house, which is usually forbidden by Medicare, but this fit one of the accepted exclusions from the rule that doctors can’t refer patients for treatment to facilities in which they have a financial interest.

The problem with Medicare is similar to the problems with Fannie Mae and Freddie Mac that contributed the real estate market implosion.  Medicare, like the GSE’s, represents the public funding of private enterprises.  There is no fixed limit to the resources devoted to it, so unlike a normal marketplace that is all about parceling out scarce resources depending upon the efficacy and efficiency of market competitors, the fount of funding to Medicare is determined by other factors, namely government bureaucrats.    Which is why the urologists formed a lobbying group to protect its IMRT stream of revenue when it appeared that funding would be cut.

What to take from all this?  Doctors are motivated by profits like anyone else.  Manipulating Medicare is one of the best means of corralling outsized profits (i.e., revenues that greatly exceed costs) in medicine.  The funds seem to be unlimited–they are not–but since Medicare is several steps removed from its source of funds, there is a huge agency cost in limiting treatments to only the ones that taxpayers would reasonably pay, so effectively, very few treatment decisions are made, as Dr. Kapoor asserts, if for a different reason, based on the expense of the treatments.

But the American taxpayer is not a bottomless well.  At some point, fiscal deficit concerns will force treatment decisions to be coldly calculated on a cost/benefit basis, taking account of a person’s life expectancy, among other factors.  Spending forty thousand dollars on cancer treatments for eighty-plus year-old men would probably not pass the analysis.  Call it a death panel if you wish, but we will soon be forced to quit squandering scarce resources on treatments for people who have no real hope of ever again leading productive lives.  The problem with Medicare is that it postpones the hard decisions by fostering the illusion that money for medical treatments is limitless.  It isn’t.  Financial considerations should always play a factor in deciding upon treatment strategies, just not for the purpose of enriching a urology practice.