09/21/2009 05:12 am ET Updated May 25, 2011

How We Can Afford Health Care Reform

"How are we going to pay for health care reform in this terrible economic environment," followed by the warning that our children and grandchildren will be taxed to the gills because of the Boomers, is a legitimate question being asked by those opposed to health care reform.

Well, I have two suggestions. Neither is original, but neither is getting much notice in the hyperbole about government takeovers and death panels. And both of them concern Medicare, the largest government-run health care program, and the one that gets cited as an example by people both for and against health care reform.

Seniors, especially, are opposing reform because they don't want anything to "happen" to Medicare. Others say that Medicare's such a terrible example of a government-run program because of all its waste and fraud that we can't afford to have the government involved in any other initiatives.

But from my reading there seem to be two partial fixes to the Medicare problem. One consists of paying private insurers differently. The second consists of paying providers differently. Neither of these involves pulling the plug on me. (grandma)

The first involves an irony. One of the things free market proponents want is competition. Yet neither the Medicare Advantage Program nor the Medicare Prescription Drug Plan have competition. Yes, the plans compete for members, but they don't compete for the right to be private providers of Medicare-compensated services. (Medicare was freaked out that many private plans had dropped out of the program, so it agreed through the Medicare Modernization Act of 2003 to reimburse them at higher than the usual Medicare rates.) As the L.A. Times puts it,

"Obama and many congressional Democrats see Advantage as a wasteful bonanza averaging about $17 billion a year for the companies, which critics say provide few benefits beyond regular Medicare.

The companies and their supporters say they earn the extra payments by providing seniors -- who pay nothing extra -- with significant benefits, including freedom from government red tape.

What lifts the disagreement above other points of contention on healthcare is its potential for spreading fear and outrage among Medicare recipients as a whole, much like the public outcry after Republicans accused Democrats of trying to create death panels to cut off care for severely ill seniors and the disabled.

The allegation, although untrue, fueled outrage among critics of the health care overhaul at town hall meetings across the country."

The cousin of the Medicare Advantage program, the Medicare Prescription Drug program, drinks a similar rich beverage at the Medicare trough. When this benefit came into being in 2003, drug companies were not even asked to negotiate prices with Medicare -- the program just pays "list price" for all their products. That's why we have the "donut hole," a time of year when my benefits run out and I usually pay $1800 for my blood pressure drugs.

So if the Center for Medicare and Medicaid Services, the largest purchaser of health care services in the country, doesn't negotiate with its vendors, what do we have? We have a situation in which the government is charged $1500 for a $100 toilet seat, just like in the military. We've finally realized that military contractors rip off the government, so why don't we know that health care contractors do the same?

Which brings me to the next solution: better audits of the program. In many industries where there are large numbers of transactions, such as retail, there is a contractor called the Recovery Auditor. A Recovery Audit by an outsider examines transaction data after the fact, looking for errors and over payments. The Recovery Auditor often gets paid on the basis of how much it recovers for its client.

Medicare has had a demonstration program of Recovery Audits for a few years. Between 2005-2008, the program recovered almost a billion dollars from just three states. The money came from over payments, duplicate payments, and payments for services not correctly coded or performed. And 85% of the over payments came from hospital systems. In other words, the insurers are gaming Medicare, the pharmaceutical companies are gaming Medicare, and the hospitals (with the occasional physician) are also gaming Medicare.

So who knows what the actual costs of Medicare are? The Recovery Audit program was such a success that it's being rolled out nationally now. I bet it turns up quite a bit of money. And that's in addition to the programs that are already under way to identify other forms of waste and fraud. Like any household, we can pay for the things we really want by buying bargains and wasting less money.