We have written before about one of the success stories in our healthcare system: Medicare Part D. Medicare Part D works because competition and free markets work to keep prices down.

Paul Howard, Director of the Manhattan Institute’s Center for Medical Progress, writes in MedicalProcessToday.com:

The President is always talking about the need to invest in the nation’s future “infrastructure,” and Part D is a market-based investment in America’s ability to continue to produce cutting edge medical advances. It’s a program with a proven track record of high satisfaction among seniors (about 90%), fiscal savings for taxpayers (about 40% below initial estimates), and promotes a much needed focus on competition and value in health care markets. Rather than figuring out how to gut Part D, we should be modeling the rest of Medicare around it.

Markets also show signs of developing new paradigms for cost control in areas that haven’t seen much evidence of it in the past, like oncology. Take the recent decision by Memorial Sloan Kettering to not use a high priced colon cancer drug from Sanofi that doesn’t (at least according to MSK) offer any advantage compared to existing colon cancer therapies like Avastin.

Individual cancer centers haven’t normally entered into the cost debate, because they are directly reimbursed by Medicare at cost-plus, a 6% mark-up based on the average price of the drug. Kudos to MSK for pushing back, and getting a price concession from Sanofi.

This is the way markets are supposed to work, with providers, insurers, and manufacturers negotiating in an open market. Insurers can then compete on price and quality for consumers’ business – something that doesn’t happen much in Medicare outside of Part D and Medicare Advantage plans. Instead, most seniors opt for fee-for-service health care provided by any willing provider, no matter how inefficient or expensive. Until seniors have better incentives to actually shop for value, Medicare won’t be able to consistently deliver high quality, cost effective care.

Medicare’s history of price setting has unleashed a tsunami of unintended consequences across the health care system, since it is the nation’s single largest health insurer. As the HHS inspector general noted recently, providers are in the habit of gaming Medicare reimbursement costs (“upcoding”) to maximize reimbursements.

As a result, under Medicare’s administered pricing scheme we get both too little of some services (that are poorly reimbursed) and too many of other services (that are overcompensated). Medicare can never find the “right” price, because providers have much more fine grained information about the costs of their products and services, and their own patient mix, than Medicare does. The result is a game of Medicare price whack-a-mole that never really controls costs or offers consistently high quality care across Medicare’s vast universe of doctors and physicians.

There are very few true pricing signals available to seniors in Medicare today. Without those signals, Medicare will inevitably drag the rest of the economy over a fiscal cliff, no matter how many price controls Congress mandates for the program.