The Stick or the Carrot

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I’ve often written about the dangers of letting the government insert itself too deep into our healthcare. It’s not because our government is evil −it’s because the goals of government are not always aligned with those of the people it governs. It’s just another case of bad incentives. Our lawmakers don’t get elected by proclaiming that they will let our economy, through the powers of the free market, solve a problem. Their solution is generally to come up with some regulatory fix or to introduce new legislation. Unfortunately, we are partially to blame because we seem to immediately turn to the government to solve every little problem, and we continue to elect politicians who promise us easy solutions. It is for all these reasons that I try to limit the government’s involvement in our healthcare. Having said this, I do want to point out that government has its place.

Government involvement in healthcare is needed to ensure the safety of medicines and procedures and to ensure that the less fortunate have adequate care. The question I want to focus on today is, what is the best way for the government to be involved? As you might have guessed from the title of the blog, I think it comes down to the stick or the carrot.

The stick approach centers on constructing rules and regulations, created by civilian agencies, a presidential executive order, or legislation, that outline how you must operate as you dispense healthcare services. Medicare has part of both the stick and the carrot in its operation. Medicare sets standards for hospital care and doctor’s services and sets the price for these services. The program pays based on a huge number of codes that cover, at a detailed level, all the procedures and services available to doctors as they treat patients, both in and out of the hospital. Correctly coding these services in the most advantageous way for the provider has fostered a cottage industry that shows doctors and hospitals how to code procedures to extract the maximum payments. When the government finds providers who are skirting the rules or committing outright fraud it enforces consequences (the stick) and works to close the loophole. There are millions of dollars lost to fraud in Medicare. It is a cat and mouse game that takes government resources to create and update the rules and then to police them. It costs the providers money as they work to code their services correctly and to try to keep up with the changes.

A part of Medicare that highlights the value of the carrot approach is Medicare Part D, Medicare’s prescription drug program. When this program was debated, many lawmakers wanted it to be a single-payer, government-run program. The alternative was a public/private partnership where the government outlined broad requirements and incentives and then let the private insurance companies compete for our business. The public/private partnership won, and this competitive carrot approach has proven to be successful. Part D has ended up costing 40% below what was initially estimated, and the premiums have remained low even in the face of inflation and overall increases in healthcare. The choice of plans is broad – there is an average of 33 different plans available in each region. There are programs to help low-income beneficiaries pay for their premiums and cost-sharing. What other government program have you heard of that has a 90% approval rating? Could Part D be improved? Absolutely! For over a decade I’ve advocated for enacting a yearly cap on out-of-pocket expenses for Part D. There was a percentage of beneficiaries that became bankrupt by the cost of expensive medicines. Not having a cap on the costs made retirement planning a guessing game. This cap finally became law and will begin next year, guaranteeing that you won’t pay more than $2,000 a year for your medicine.

This carrot approach seems to work. Unfortunately, the same legislation that solved the out-of-pocket problem turned around and picked up the stick and instituted price fixing for selected prescription drugs, one of the worst ways that a government can insert itself into our lives. This part of the Inflation Reduction Act used methods and approaches that have been challenged in court, some of the challenges siting breaches of our rights under the constitution. Is this how we want Washington to work, making laws that can be challenged as infringing on our constitutional rights?

It seems that the trend in Washington is to venture into the grey areas of the law to bring the big stick of government to bear. Issuing large numbers of presidential executive orders has now become a common approach for the executive branch of our government. If the President’s administration can’t get the legislative branch to pass the laws it wants, it just issue executive orders. Almost by definition. this bypasses the checks and balances outlined in our constitution. This isn’t the way our government should work.

Using the stick approach brings out the worst in our government and exposes all of its worst aspects. On the other hand, partnering with private enterprise with appropriate oversight and rewards has proven to be the more efficient and appropriate way for our government to operate. The government shouldn’t be delving into the grey areas of our constitutional rights to find a big enough stick to keep private enterprise and its private citizens in line. Just the sound of that sentence makes me cringe. Our government can do better.

Best, Thair   

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