Expanding the benefit package to include only prescription drug coverage will reduce, but not solve, this problem. Fee for service Medicare, which enrolls some 85 percent of all participants, lacks strong incentives either for beneficiaries to seek or providers to supply only cost-effective care or, for that matter, only care that has a reasonable chance of improving health outcomes. Of course, many private sector health plans also suffer from this deficiency. The program pays for thousands of medical services delivered by hundreds of thousands of providers and suppliers operating in hundreds of separate market areas. Because it must operate throughout this very diverse nation, it is impossible to set uniform payment rates that will be efficient everywhere.
Some providers are overpaid, others are undercompensated.
Of course, all complex systems tolerate some inefficiency because the costs of wringing out the excess exceeds the gain. But the level of inefficiency accepted in Medicare is higher than that in private sector plans because Medicare, being a government program, has objectives other than efficiency, such as ensuring that certain types of providers survive in rural areas. As reform options that promise improved efficiency are debated, it will be important to consider whether and how these other goals of the Medicare program will be met under a restructured system. Undoubtedly, some of this variation represents regional differences in the proclivity of beneficiaries to seek medical care. Some reflects the availability of providers, particularly those offering expensive, sophisticated diagnostic services and treatments.