The Sound Bite: 

Doctors and hospitals help save Medicare money. 

Fact or Fiction?

Fiction. Doctors don't have proper incentive to help Medicare save money. 

Doctors and hospitals are paid according to Medicare regulations and complex price rules. There is a detailed diagnostic system.

The fee-for-service payment system for doctors drives spending for Medicare, according to the Congressional Budget Office. “As the name implies, fee-for-service systems make separate payments to providers for each service they deliver, whether it is a medical procedure, an office visit, or an ancillary service (such as an X-ray). Compared with other methods, fee-for-service payments generally reward all efforts to provide care and create no financial incentive to limit the use of beneficial services. If the fees for the services exceed the costs of providing them, however, such payments can encourage providers to perform a greater number or more expensive mix of services, even though the clinical value of those services may be slight.”

Doctors, therefore, have a financial incentive to spend more in treating Medicare patients.

The Medicare regulatory system for hospitals, by contrast, bundles payments for types of treatment.

Under the bundling system, the CBO says, “most hospitals generally receive a fixed amount per admission that is based either on the patient’s diagnosis or on the treatment he or she receives. Several hundred payment rates (one for each diagnosis-related group, as they are known) have been established. If treatment costs are less than the payment, the hospital keeps the difference; if treatment costs exceed the payment, the hospital incurs a loss, though in certain cases Medicare makes additional payments for high-cost “outlier” patients. (Private health plans typically pay hospitals a fixed amount per admission or per day.) “

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