Medicare Needs a More Logical Formula

The number of physicians per capita is a major indicator of quality and quantity of health care services available in New Mexico, or anywhere. This ratio is a function of money available to pay physicians.

A: The short run. The only provision in the (recent) tax bill proposals that makes economic sense is to rescind the gross receipts tax (GRT) paid by medical care providers. The report by the New Mexico Health Policy Commission, “Physician Supply in New Mexico: 2002,” concluded that the main factor contributing to physicians leaving New Mexico is GRT. Consider a physician who grossed $350,000 a year, of which $100,000 from Medicare and Medicaid is not subject to GRT. After paying all expenses, the physician nets $150,000 income before taxes. Rescinding the GRT (5.8125 percent) would net the physician an additional $14,531- almost 10 percent of net income before taxes. Obviously, the relief from abolishing GRT on medical providers will be shared by both doctors and patients, but the lion’s share will benefit the doctors. The GRT is a good tax, and except for the doctors’ and hospitals’ bills it should be retained. In particular, grocery tax on food should be retained.

B: The long run. According to the U.S. Census Bureau, in 1998 the average number of physicians per 100,000 resident population in the United States was 251. For New Mexico this figure was 212. Is the physician shortage in New Mexico severe? The ratio for Massachusetts was 412. If we sort the 51 states (including D.C.) by a descending order, New Mexico is No. 32. Idaho, with a ratio of 154, has the most severe shortage.

Calculations based on the Census Bureau reports show that in 2000 the average Medicare expenditures per enrollee nationwide was $5,578. The highest level was $10,316 in D.C. The second highest was Louisiana with $7,342, and the lowest figure was $3,053 in Iowa. In New Mexico, the fourth state from the bottom, the average Medicare expenditures per enrollee amounted to only $3,729.

Getting New Mexico a little closer to the national average, say by increasing its Medicare allocation by 20 percent, roughly to $4,500 per enrollee, would increase the number of physicians by 17- from 212 to 229 physicians per 100,000 residents.

Obviously, the archaic formula used in the process of allocating Medicare money is senseless and disadvantageous to New Mexico. A basic economic principle tells us that, on average, in a free labor market, incomes of physicians (and nurses, etc.) across the U.S. would be proportional to the cost of living. For example, if the cost of living in California is 10 percent higher than in New Mexico, we should expect neurosurgeons to earn 10 percent more (in nominal terms) in California relative to New Mexico.

To illustrate the arbitrariness of the federal allocation of Medicare money, I compare two states, Texas and New Mexico. The accompanying comparison illustrates my point:

Texas and New Mexico: A Comparison Based on ACCRA

• Medicare expenditures per enrollee: 2000

$3,729 in New Mexico

$6,540 in Texas

• ACCRA cost of living: 2002, four-quarter average

103.7 in Albuquerque

91.9 in Houston

The cost of living in Albuquerque is 10 percent higher than in Houston. Yet, in 2000, Texas was allocated 75 percent more Medicare money per enrollee than New Mexico. This is ludicrous. States like Iowa, Vermont, Maine and New Mexico that come up on the short end of the stick should band together and form a political coalition for the purpose of revamping the allocation of Medicare money. To this end they must have a cross-sectional price index that would calculate the cost of living for each of the 51 states. There is no reason why the experienced Bureau of Labor Statistics could not undertake to perform this task.

Our congressional delegation should lead the battle for a logical distribution of Medicare money by first convincing their colleagues to legislate the creation of a cross-sectional Consumer Price Index. The distribution of Medicare money to enrollees should be determined solely by a cross-sectional price index.

We should note that New Mexico legislators deserve credit where the U.S. Senate failed. New Mexico law caps punitive and economic damages at $600,000. (See “Better Than Most” by Winthrop Quigley, Business Outlook, Albuquerque Journal, June 26, 2003). However, the fact that New Mexico offers physicians cheaper malpractice insurance than most of the country is not enough to overcome physician shortages.