Let Medicare test ways to save money

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If the agency that runs Medicare can’t even test out ways of holding down spending on prescription drugs, the entire US health care system will be worse off for it. Unfortunately, interest groups within the health care industry are trying to keep the Centers for Medicare and Medicaid Services from launching a common-sense experiment on lowering costs.

Earlier this month, the agency proposed a five-year experiment on the formula that determines how much health care providers are reimbursed for medication they administer in outpatient settings. Currently, doctors receive the average sale price of a drug, plus an additional 6 percent. Under the experiment, doctors in designated areas would be reimbursed the average sale price, plus a 2.5 percent premium and a flat fee of $16.80. The hope is that, by reducing the premium doctors receive for prescribing the most expensive drugs, Medicare will encourage them to use cheaper ones when doing so is appropriate.

If the experiment proves fruitful, it will be a boon for the program’s sustainability over the long term — and would likely encourage more tests of other cost-saving regulatory changes. But a number of industry groups, in areas ranging from oncology to mental health care, are mobilizing against the initiative and, in a letter to federal health regulators, cite potential harms to “our nation’s oldest and sickest patients.”

Providers generally bristle at the implication that they order up more expensive drugs, or perform more procedures on patients, because they have a financial incentive to do so. Indeed, a separate letter from the Community Oncology Alliance called the very suggestion “highly offensive and derogatory.”


Yet, at the least, existing Medicare rules — like so much else in a health care system where most of the bills go to government or private insurers — give doctors and patients no reason to take cost into account. Changing those incentives is urgent, and not just for Medicare.

One of the more shopworn slogans in decades of health-reform debates is that neither government nor insurers should get between doctors and their patients. Patients lack the information to question whether doctors are prescribing more expensive treatments than are medically necessary, and have little reason even to ask about costs when someone else is picking up the tab.


There’s no question that seemingly modest changes in Medicare reimbursement formulas can have significant effects on providers. Business models built on a 6 percent premium for cheap and expensive drugs alike may be less viable under regulations that pay lower, flatter rates. Whether the proposed experiment succeeds or fails, Medicare needs the flexibility to alter its regulations in ways that contain costs while maximizing the welfare of patients.