Are Price Controls the Answer?

Are Price Controls the Answer?

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A recent article in Time magazine by Steven Brill, “Bitter Pill: Why Medical Bills Are Killing Us,” is a brilliantly written expose of the excesses and outrages of health care pricing. In reaction to the story, some have suggested the price controls are the appropriate (or the only) way to rectify the situation. A recent story in the Washington Post’s Wonkblog, “Steven Brill’s 26,000-word health-care story, in one sentence,” suggests that US health care costs and cost growth are so high because we do not use rate setting, i.e., price controls.

In fact, I think it’s not easy to establish whether that is indeed the case. We don’t get to use randomized controlled trials for health policies or systems, so it’s difficult to figure out how effective a policy like rate setting is. Let me start with some simple examinations of patterns in data to see if something jumps out that strongly supports (or contradicts) the assertion that price controls reduce health care costs.

Starting at the most aggregate level, we can compare the growth rates of spending across countries that use price controls for health care with those that don’t. The figure below shows the growth rates of health spending for OECD countries from 2000-2009. The US is the main country with a substantial part of its health sector not subject to price controls. Spending by the privately insured in the US is about 50% of the total, so about one-half of our health spending is not subject to price controls. The Netherlands deregulated prices in their hospital sector starting at 10% in 2005 and moving to 34% in 2009, and also for many physician practices, although it’s not clear whether the 2000-2009 growth rate reflects any effects.

There does not appear to be a revealing pattern here — there are some countries that use rate setting, such as Australia, France, Israel, and Italy that have lower growth rates than the US, and some such as Canada, Finland, and the UK that have higher growth rates. The US is below the OECD average, whereas Finland is above, as is The Netherlands. While I wouldn’t put much weight on anything we see in cross-country differences (there are way too many differences across countries besides price controls), nonetheless nothing striking emerges from these numbers.

Another possible source of information on the effect of price controls on spending is the Medicare program. Medicare fixes the prices it pays doctors and hospitals, so it controls prices. The figure below shows per enrollee growth rates for personal health care expenditures from 1970-2011, as calculated by CMS for services covered both by Medicare and by private insurance (Source here, Table 21).

While examining this figure is clearly not a scientific test (there are many other things undoubtedly driving growth rates of spending), nonetheless, if we see Medicare growth rates consistently lower than private growth rates that would lend at least some preliminary support for the notion that rate setting controls costs. As can be seen, sometimes Medicare spending per enrollee grows faster than private spending, and sometimes the opposite. In particular, Medicare spending slowed dramatically in the mid-1980s after the introduction of the Prospective Payment System for hospitals. Private spending growth fell below Medicare in the early to mid-1990s, most likely due to managed care. More recently Medicare spending has grown more slowly than private spending. Over the entire period the average Medicare growth rate is 8.02%, while private is 9.34%. The patterns here are mixed, but the long run average growth rate for Medicare is lower.

The US does have quite a bit of experience with price controls for medical care at the state level, so we can look at evidence on the effectiveness of these programs. Many states used all-payer rate regulation for hospitals during the 1970s and 1980s. The evidence from these state hospital rate regulation programs indicates a mixed pattern of success. The setup and administration of the program played a large role in whether they were effective. Nonetheless, there is evidence that fi nds that mandatory rate regulation program in a number of states did reduce the rate of growth of hospital expenses (by a little more than 1%). I provide a few references here, for those who are interested. While a 1% reduction in spending growth rates isn’t very dramatic, if such an effect occurred and was sustained over time it would lead to a substantial decrease in spending over time.This is probably the most relevant evidence, since if rate setting were to be revived it would almost certainly happen at the state level.

This effect of rate-setting pales, however, compared to the estimates of the impact of managed care from a prominent study, “How Does Managed Care Do It?,” which found 30-40% lower expenditures (not growth rates) due to managed care in Massachusetts in the mid 1990s. Another prominent study, “Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition,” finds that hospital markups fell substantially in California in the 1980s, primarily due to the growth of managed care.

So what do we conclude? My answer is that we don’t know what the impact of rate setting (price controls) would be on health care spending in the US. It’s possible that rate setting could prevent some of the most egregious practices recorded in the Brill article, but that depends on what’s enacted and how it’s enforced. Whether rate setting would substantially slow the rate of growth of health care spending isn’t clear. Further, the question that must be asked is what is the alternative? There’s evidence to suggest that robust price competition, such as we had with managed care during the 1990s, can perform very well in controlling costs. Unfortunately there has been a tremendous amount of consolidation in health care markets since the 1990s, raising serious challenges to competition. Whether the US decides to go with competition or with regulation, we have some serious work to do to make the system we choose work effectively.

Martin S. Gaynor is a professor of economics and health policy at Carnegie Mellon University’s Heinz College. He blogs regularly at Compassionate Economics, where this post originally appeared.

 

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52 Comments on "Are Price Controls the Answer?"


Guest
MD as HELL
Feb 27, 2013

They have never worked in the past or we would not have this discussion.

Guest
Feb 27, 2013

“There’s evidence to suggest that robust price competition, such as we had with managed care during the 1990s, can perform very well in controlling costs.”
__

The salient question is: what did it do for patients’ health?

Guest
mark
Feb 27, 2013

From a medical device perspective?

The best way to control costs is the open market, Look at coronary stents and knees…………..

ASP are down 40% in many markets in last 4-5 years alone. As the JNJ, MDT big companies look to consolidate via acquiring more companies and in effect, lock out smaller companies? GPOS are really shooting themselves in the foot by signing major share agreements

What is the motivation to negotiate when 1-2 companies have 80% share? Looks good on paper to a CFO but in the long rung, it stifles competition.

Guest
Aurthur
Feb 27, 2013

One of the big problems of ACA, as I see it, is there will not be health insurance coverage extended to over 30 million Americans and there will not be much if any reduction in the ranks of the uninsured. I am willing to make the wager that by January 2017 (two full years of exchanges and 7 years after ACA passed), there will be relatively fewer Americans covered by insurance policies and the ranks of the uninsured will have swelled.

Guest
CJ
Feb 27, 2013

The current system is immoral and price controls won’t really change that. We need a single payor system with provider accountability for outcomes.

Guest
Feb 27, 2013

Re patients’ health, there is evidence that competition improves health. One study shows that Medicare AMI patients who were treated by hospitals facing more competition had substantially higher survival rates than similar patients treated at hospitals facing less competition. There’s similar evidence from the English NHS for heart attack patients and for all-causes mortality. There are some good research syntheses commissioned by the Robert Wood Johnson Foundation that provide more information (full disclosure: I’m co-author of one of them), http://www.rwjf.org/en/research-publications/find-rwjf-research/2006/02/how-has-hospital-consolidation-affected-the-price-and-quality-of.html and http://www.rwjf.org/content/dam/farm/reports/issue_briefs/2012/rwjf73261

Guest
Feb 28, 2013

Matt, I agree that patient engagement is very important. That also has to include financial engagement to the extent possible.

Guest
Feb 27, 2013

For more evidence and discussion on rate setting versus competition, see a new post reviewing evidence from The Netherlands, http://www.martingaynor.blogspot.com/2013/02/are-price-controls-answer-netherlands.html.

Guest
Curly Harrison, MD
Feb 27, 2013

There are already price controls on most everything doctors do. Been that way for decades. That is the problem, the economically viable reason for the rampant inflation in health care.

Guest
Carl Simon, PhD
Feb 28, 2013

I agree w Dr. Harrison.

The reason why the volume (about which everyone complains) has increased with less time with the patient and reduced quality is from the economic incentives driven by restricted (by government and insurers) and in some cases, much lower fees, tinctured with human behavior to want to be able to pay overhead.

Guest
Peter1
Feb 28, 2013

It contributes nothing to narrow down the success or failure of our system versus other systems to price controls (convenient for private health care).

If you want the Dutch system you’ll also have to take their tax system and their national psyche for social responsibility.

Guest
Cynthia
Feb 28, 2013

Too many policymakers and healthcare economists wrongly believe that lack of price transparency is the biggest problem in health care. But the truth is that the biggest problem in healthcare, by far, is lack of cost constraints. Needless to say, health care is a heavily subsidized industry (well over half of all healthcare dollars come from the Federal government), so even if we were to improve price transparency, we’d still have the huge problem of cost. And yet policymakers and healthcare economists would rather focus on improving price transparency than on reducing costs.

Why is this so? I don’t know for sure, but I suspect that it’s because there are far too many policymakers and healthcare economists who are stuck in the mythical mindset that healthcare is part of the free market. They’ve got a mental block which is preventing them from believing that health care is a heavily subsidized industry, and will always be a heavily subsidized industry. They’ve got blinders on that are preventing them from seeing that health care is front and center to our social welfare system. Almost every social program that’s funded by the Federal government is centered around health care. You can’t say that about finance, nor can you even say that about education, but you can certainly say that about health care, private as well as public!

Regarding the issue of cost, it’s wrongheaded to think that if we just reduce the number of test and procedures on patients, whether they are done on an inpatient or outpatient basis, we will quickly and magically solve the cost problem in healthcare. Most tests and procedures are necessary in order to rule-in/rule-out a specific diagnosis or a specific set of diagnoses. If tests and procedures aren’t done, we run the risk of improperly diagnosing patients. And believe me, I’ve seen this happen far too often with very tragic results. The smart thing to do is to NOT order fewer tests and procedures, but reduce how much these tests and procedures cost. It doesn’t make a bit a sense that a CT done in the US costs three to four times more than what it does in Japan, especially given that in both countries, the quality of the CT scanners are the same, as well the quality of radiologists who are reading the scans.

Guest
Feb 28, 2013

I agree that transparency alone is no panacea. Multiple approaches are required, and even then we have to realize that (although we can do much a lot better) this isn’t going to look like the market for milk.

Guest
Matt McCord (@mattMD)
Feb 28, 2013

Martin,
Good article. Price controls will have little overall effect on our growing health care costs. And, while managed care solutions like ACOs sound promising, Americans will not tolerate the lack of choice. Remember the HMO backlash in the ’90s and the “Patient’s Bill of Rights”?
I think that Clayton Christensen nailed it in his critique of the ACO model in the WSJ recently: http://online.wsj.com/article/SB10001424127887324880504578296902005944398.html

We need need patient engagement to control costs. We have a disengagement problem in health and health care in America. Whether we like it or not, Americans have been responsible for their health since birth, our model for health care needs to embrace this reality, not ignore it.
As the Brill article pointed out, giving the insiders (big insurance, big hospital, big pharma) control of the industry increases costs and Americans have little to show for it. It is the foxes guarding the hen-house.
We need to become engaged in our health and healthy behaviors and we need control of where our health care dollars go. A consumer-driven model using HSA’s/FSA’s attached to a HDHP would accomplish this.
Via the ‘self-insurance’ pathway more and more businesses are doing this very thing.
It is no coincidence that the two most competitive economies in the world, according to the WEF, have a consumer-driven HC model. America should too.

Guest
Feb 28, 2013

Well said, Matt!

Guest
Matt McCord (@mattMD)
Feb 28, 2013

Thanks Sandra.

Guest
Peter1
Mar 1, 2013

“A consumer-driven model using HSA’s/FSA’s attached to a HDHP would accomplish this.”

Really? Just what income range can afford the HS and HD part of the this idea? And how would “consumers” negotiate prices with providers?

Guest
Matt McCord (@mattMD)
Mar 1, 2013

Thanks Peter. The HSA/consumer-driven model is not simply for the well-to-do. This has worked very well for even Medicaid patients in Indiana:

http://www.forbes.com/sites/aroy/2011/11/11/obama-administration-denies-waiver-for-indianas-popular-medicaid-reform/

Certainly, if you have to go to the hospital you will likely need insurance to cover the costs. That is what insurance is for. However, for most Americans, most health care is periodic and procedural.

Yes, with this model you would have to ask the costs, not negotiate. There are sites that will give you price knowledge going in:

http://www.healthcarebluebook.com/page_MobileDefault.aspx

Not only does this lower everyone’s overall costs, it incentivizes the individual and it gives them leverage to obtain care…this will be increasingly important as we move forward as access to health care will be the new crisis (in addition to costs).

Here are two great articles on this:

http://spectator.org/archives/2012/06/20/priceless-john-goodman

and..

http://www.theatlantic.com/business/archive/2012/03/the-myth-of-the-free-market-american-health-care-system/254210/

Guest
Peter1
Mar 1, 2013

“This has worked very well for even Medicaid patients in Indiana:”

Really Matt?

“the Medicaid expansion was paid for with a 44-cent increase in the state’s cigarette tax.”

“2 to 5 percent of income, up to $92 per month.”

““One of the criticisms was that people didn’t have enough money to pay for preventive care. So we took preventive care out, made that first-dollar coverage.”

“Also, people said that people didn’t have enough for the deductible, so we fully funded it”

“They’re visiting emergency rooms less”

Well sure, preventive care is covered.

“The program is not without blemishes. In 2009, the costs of the program exceeded the revenues gained from the cigarette tax, a problem that may continue in the current economic environment. But because enrollment is capped, the program can’t cause the kinds of runaway fiscal problems that have roiled most states.”

The problem with health care costs is not primary care – it’s hospital bills. How far afield do you think Medicaid recipients can look to get quotes, even if they can find a provider taking Medicaid? And if the Medicaid patient is sick enough for hospitalization who pays their $92 premium when they can’t work?

Guest
Matt McCord (@mattMD)
Mar 1, 2013

Peter,
No government managed program is not without it’s blemishes and I am certain that just about everyone can find fault in any of them.

We have been down this road of ‘free health care’/3rd party care for decades and what do we have to show for it:

1. A morbid obesity/diabetes pandemic.

2. Costs higher than virtually anywhere else on earth.

3. Poor ratings on many public health measures.

Instead of doubling-down on more-of-the same (an ACO is an HMO) we need to think differently about health care in America. We need someone to pay attention to costs and I believe that the more ethical way to do this is to give the individual or family control rather than middleman price-controls or rationing.
We need real transparency in pricing and more choices not less. Every time that we have done this in our health sector costs go down: Lasik surgery, Medicare Part D, Cosmetic surgery, Medicare Advantage.

Regina Herzlinger, John Goodman, and Dr. Ben Carson are right.

Guest
Peter1
Mar 2, 2013

Matt McCord says:

“Peter,
No government managed program is not without it’s blemishes and I am certain that just about everyone can find fault in any of them.”

Matt, what did the Indiana experiment solve? It provided more funding (cigarette tax and covered preventative). It did not lower hospital bills except for emergency care, the only success I can see.
Medicaid lacks funding, that’s why states don’t want to touch it, and it only covers the poorest of the poor.

“We have been down this road of ‘free health care’/3rd party care for decades and what do we have to show for it:

1. A morbid obesity/diabetes pandemic.”

Not because of “free” health care. It’s our corporate processed industrial food system with it’s focus on salt, sugar, fat.

“2. Costs higher than virtually anywhere else on earth.”

Everywhere else on earth use more government controls and price controls.

“3. Poor ratings on many public health measures.”

Diet, diet, diet. It’s the food culture.

“We need someone to pay attention to costs”

Agreed – but it’s “the prices stupid”.

http://articles.washingtonpost.com/2012-03-02/business/35449534_1_higher-prices-health-care-services-health-care-costs

“Every time that we have done this in our health sector costs go down: Lasik surgery, Medicare Part D, Cosmetic surgery, Medicare Advantage.”

Lasik and most cosmetic is not a necessary medical procedure done outside hospital cost structure.

Med Part D (a government program) – an economic boondoggle for drug companies brought on because seniors were forced to travel to Canada (where drug pricing is controlled) to buy drugs they did not get here for free.

Medicare Advantage (a government program)

http://money.cnn.com/2012/08/22/news/economy/medicare-government-insurers/index.html

Guest
MD.MA
May 17, 2013

Keep it up, Matt. I appreciate your perspective and your style.

Guest
Bob Snodgrass
Feb 28, 2013

I’m an old physician, working half time at age 75; I think that you are looking at details because you don’t have the guts to face the big picture. The big picture is dreadful manipulative behavior that didn’t exist in 1946, behavior very similar to Wall Street and possibly worse in the so-called nonprofits than in for profit healthcare. Brill lays it on but he doesn’t lie.
Yes, I can do PCR gene tests for $12-18, whereas hospitals and Athena charge vastly more, partly because of the money that they spend on marketing. I can do transaminase or troponin assays for a dollalr each if you let me wait until I have ten samples
Saying, we need to nationalize healthcare may be a reasonable sentiment but it’s about as realistic as syaing that we must nationalize investment banking.
Look at Congress- giving away $500 million of Medicare costs to Amgen in the add-on to the Fiscal cliff deal, refusing to let Medicare bargain with drug companies, the list is endless. We ahve lots of corproate entitlements but we only hear about individual entitlements. Senators Baucus, Hatch & McConnell will soon be heard dmeanding that little people give up Medicare benefits. Congress is corrupt; we can’t change that in one or two elections, maybe not at all They will block sensible healthcare. I think that the ACA is a small wobbly step in the right direction. Americans must understand that letting doctors in training run up hundreds of thousands of dollars in debts is destructive. I could take a moderate income because my wife worked and paid my medical school costs- we had no debts.
Public attitudes expecting cures for everything add to our problems. The media fan the fires of a corrupt system.
Price controls without other changes are unworkable. The first step is to change the cosnciousness of medical students and physicians in training.

Guest
Peter1
Mar 1, 2013

“Americans must understand that letting doctors in training run up hundreds of thousands of dollars in debts is destructive.”

Doctor Bob, would you then want tax dollars used to lower doctor education costs? If the tax payer makes that investment what payback do we get – price controls?

“Senators Baucus, Hatch & McConnell will soon be heard dmeanding that little people give up Medicare benefits.”

How then should we tackle the deficit without restraining this entitlement program?

Guest
Aurthur
Mar 1, 2013

“Doctor Bob, would you then want tax dollars used to lower doctor education costs?”

Problem is anytime you put more tax dollars into education (or anything else) the price actually goes up. This is one of the main reasons college tuitions are as high as they are and rising faster than overall inflation. You would think in a country like this, everybody would have “access” to “affordable” education. I guess we could solve that with obamacollege. Of course we would have to regulate how these greedy colleges charge their students, and of course no college would be allowed to turn down a student due to a pre-existing condition like dropping out of high school, low mental capacity…etc.

Guest
Peter1
Mar 1, 2013

“Problem is anytime you put more tax dollars into education (or anything else) the price actually goes up.”

Possibly. The following link discusses the reasons (not just one). Part of the blame is reduced state contributions and a sellers market.

http://www.csmonitor.com/USA/Education/2012/0606/Student-debt-What-s-been-driving-college-costs-so-high-anyway

As with most things using just cash would bring down prices, but we’d sell less cars and houses as well.

Would going to a just cash basis for health care lower costs and increase access? Doubt it.

Guest
Aurthur
Mar 1, 2013

I believe it depends on who’s cash and what strings are attached.

Guest
MD as HELL
Mar 4, 2013

Dr. Snodgrass,

You are not too old to remember when people did not buy what they could not afford. You can surely remember when it only cost about $500 to have your appendix removed. Thanks to insurance and government is costs 40-80 times that amount.

Nothing gets better until the patient is holding all the money once again. The trouble is that patients do not want to be making those choices. They are totally spoiled at this time by the third party payor system. They like being ignorant. since most people rarely engage the healthcare system, it is entirely understandable that they do not have a clue how anything works.

But the patient must take charge. To do it they must have the power of the purse. They are not free otherwise.

Guest
Matt McCord (@mattMD)
Feb 28, 2013

Bob,
I agree with much of what you said except that final comment. While there are bad actors in every industry, the bulk of doctors are not the problem–in fact, less than 15% of the costs of HC are due to their fees. Both doctors and patients have been marginalized by big industry in the middle–which has been aided by favorable legislation.
Costs are spiraling out of control because two parties benefit (greatly) by this arrangement; insurers and hospitals.
Most (65%) of our 5000 acute care hospitals in the US are ‘non-profit’. Thus, they need to justify their no-tax status by documenting charity care or ‘uncompensated care’. The higher they bill, the more that is left unpaid, the better that number is.
Insurers are in this scheme too because a significant amount of their income is from ‘repricing claims’. That is, they receive a percentage of savings on the difference from what was billed to what they pay. Thus, here too, the higher the bill, the greater the discrepancy, the more money they make. This situation is well described in this article:

http://www.aapsonline.org/index.php/article/what_a_scorpion_sting_teaches_us_about_hospitals_and_insurance/

As the above and the Brill article point out: if air travel was like health care is in America today, you do not know if you are flying first-class or coach, you do not know if the plane is air worthy, and you did not notice that they charged you $500 for that bag of peanuts.

Guest
Peter1
Mar 1, 2013

“As the above and the Brill article point out: if air travel was like health care is in America today, you do not know if you are flying first-class or coach, you do not know if the plane is air worthy, and you did not notice that they charged you $500 for that bag of peanuts.”

If the patient knew that she would be charged so much for scorpion bite what would she have done – negotiate price while the venom takes affect?

Wouldn’t price controls have prevented her from being charged so much?

Guest
Peter1
Mar 1, 2013

“less than 15% of the costs of HC are due to their fees.”

Everybody uses this line. It’s not me it’s the other guy.