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Rationalizing helps everyone. Neither doctors nor patients are exception to this rule. The reason why Medicare’s crackdown does not hurt patients is due to the fact that even after the crackdown, doctors will still not leave their patients in the dark.

By making the doctors accept Medicare patients at a lower fee, the standards of healthcare pricing may be brought down, or at least prevented to some extent from rising any further. Such control of healthcare pricing will actually help a lot of patients, even those who don’t depend on Medicare.

Economics of Medicare Crackdown on Doctors’ Profits

Economists call it ‘marginal cost’ and ‘marginal revenue.’ These concepts are necessary for understanding how Medicare’s actions will affect us.

The marginal cost, for the doctor, is the cost of providing services to one more patient. Since most of the overheads are fixed, like cost of building (investments or rent), equipment, assisting staff, utilities and professional costs like those incurred on medical education and licensing etc, so these costs will have to be incurred by the physician even if she treats one patient less. These are sunk costs. So, the real ‘marginal’ cost of seeing one more patient is just the cost of the doctor’s time. Now if there is some other patient (not covered by Medicare) ready to pay a higher fee to the doctor, then the Medicare patient may have to wait. The reason is that the ‘opportunity cost’ of doctor’s time has increased – by treating the Medicare patient, he stands to lose the higher fees offered by the other patient. But once there is no other patient, the opportunity costs are not very high, so he chooses to see the Medicare patient, even for a lower fee.

The net effect is that the Medicare patient may have to wait, but she will get the treatment, at a lesser cost, without hurting either the doctor (who is still making a profit) or anybody else. As you see, it definitely helps the patient.

Medicare Payments as Industry Benchmark

Another reason why this is helpful for the patients in the long run is because it creates a benchmark price that acts as a signal for the medical community, and creates an incentive for them to cut costs and become economically efficient. In some quarters, there has been a myth that the basic concepts of economics are not exactly applicable on the doctors and hospitals. But that is just a myth. In reality, the principles are just as applicable.

When forced to cut costs, the doctors will end up using their resources in a more efficient way, including time, and every one will benefit from their efficiency, most of all, the patients.

The Imperfect Market of Healthcare Cannot be Left on Market Forces

Lastly, one needs to remind oneself about the fact that the market of medical care is full of several imperfections, which prevent it from having the usual free market dynamics and market efficiency derived from demand – supply matching.

The medical and health care market suffers from information gaps between buyer (patient) and supplier (doctor). It is supplier (doctor) driven. Lastly, the medical care is a ‘merit good’ that we want every human being to have. In short, medical care market is very different from any other market. The inherent distortions in this market justify the intervention that comes in the form of Medicare’s crackdown on doctors’ profit.

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