Obama has it exactly backwards on health costs

The Toomey camp sent out one detailed release on the issue of whether the public option insurance plan will pay Medicare rates to providers. Sestak said erroneously that the rates would be negotiated. According to HR 3200, the bill that Sestak voted for, the rates are Medicare rates for the first three years of the public option’s operation.

It seems like an obscure, insider’s issue, but the release raises a much broader point:

Medicare payment rates are far below private plan payment rates. According to the well-respected Lewin Group, Medicare payments to Pennsylvania physicians are 76% of private payments and Medicare payment to Pennsylvania hospitals are 71% of private payments.

When doctors and hospitals lose money, they leave the profession and close down. According to a 2006 report by the Pennsylvania Medical Society, the number of permanent full-time equivalent physicians declined sharply in recent years.

While factual, detailed and relevant, this rebuttal misses a much more important issue that goes to the heart of President Obama’s push to reform health insurance.

In order to stay in business despite Medicare underpayments, doctors and hospitals make up for them by gouging private insurers, who in turn pass the increased costs along to patients in the form of higher premiums and co-pays, and/or reduced benefits. If Medicare is underpaying doctors by 25 to 30 percent, then your insurer is paying (read: you are paying) more for health care to make up the difference.

President Obama’s approach to health care reform begins with the premise that the broader health care market is driving up costs for Medicare, which has in turn become an unsustainable fiscal liability for the federal government. He has it exactly backwards. Medicare, already an usustainable liability, is driving up costs for the broader health care market.

By confusing cause with effect, the president risks exacerbating the problem with his solution.