OP-ED

Are Price Controls the Answer?

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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bob hertz
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I love your spirit. Two notes: The uninsured certainly cannot pay the grotesque chargemaster bills, but they may not be able to pay Medicare fees either. You are fighting an uphill if you want to sustain a hospital on user fees at all. Hospitals should be financed like fire departments — from general taxes from all citizens. A fire department can easily burn through $10,000 of allocated costs on a three alarm fire. But few if any fire departments need to collect $10,000 from the beseiged victim of the fire. Or from the victim’s insurance company. (fire insurance policies pay… Read more »

Patty Seybold
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In Boothbay, Maine, customers are trying to save our local community nonprofit hospital–A Critical Access Hospital that has been serving the people on our community well for 105 years and is now being shut down by MaineHealth because we don’t make enough money and we don’t have high utilization (this after the parent entity removed ALL services–acute care, surgery, outpatient care, orthopedics–in short, everything that actually makes money in a hospital). The community group that has formed to save the hospital has done its homework. We’ve visited and discussed with the exec teams of 11 similar small rural CAHs in… Read more »

Peter1
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Peter1

“We want to let them pay only what Medicare would charge.”

If there was a god I’d say god bless you. But if there was a god healthcare wouldn’t be in this mess.

bob hertz
Guest

To MD as Hell: Your Mar 4 post got logged in about 12 posts behind today, not sure why, but let me respond…………. When you say that appendectomies used to cost $500, you are correct as far as the surgeon’s fee. In many insurance plans, the amount paid to surgeons is not far from what it was in the 1960’s, adjusted for inflation. When you see a bill for $15,000 for an appendectomy, that bloated amount is to pay the hospital. They bill $15,000 in order to collect $5,000 from Blue Cross or Medicare. That nuttiness is a whole separate… Read more »

Bob Hertz
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Medicare, Medicaid, and the larger insurance companies are constantly striving for and (in many cases) obtaining lower prices for health care. What Blue Cross actually pays hospitals is often not very different from what European hospitals are paid. The enormous problem in America is that you need either employer assistance or a substantial income to afford Blue Cross! We have all the techniques of cost control, only they are privatized! The solution of course is to let many more Americans into Medicare. This was always the only real ‘public option.’ This expansion might have to start on a catastrophic insurance… Read more »

Matt McCord (@mattMD)
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Matt McCord (@mattMD)

All, You may find these speaking events thought-provoking: Benjamin Rush Society-Arthur N Rupe Debate Series March 11 @ Ohio State University “Current Financial Conflict of Interest Policies Create Unjustified Obstacles to Medical Innovation and the Development of Affordable, Quality Medical Care” Dr. Tom Stossel, MD (Harvard) and Dr. Andrew Thomas, MD (OSU) March 12 @ Mt.Sinai Medial School, NYC “Medicare and Medicaid must be drastically changed to survive the current budget crisis and health care reform.” Sally Pipes (Pacific Research Institute) Dr. Scott Gottlieb, MD (American Enterprise Institute), Dr. Chris Lillis, MD, (Doctors for America), Dr. Elizabeth Rosenthal, MD (Physicians… Read more »

Matt McCord (@mattMD)
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Matt McCord (@mattMD)

Peter, Thanks for the comments and links. You and I have opposing world views and this occurs often when debating health care. Many who debate health policy find a price system distasteful, if not down-right illogical. As John Goodman states, most of the health policy “experts” are in this camp and they see top-down engineering as the only means of driving-down costs. Personally, I am of the opposite view, that real innovation will come from the bottom-up and should begin with what motivates the individual. We need leverage to get Americans to engage in healthy living and lifestyles and dictum’s… Read more »

Peter1
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Peter1

“Imagine if SNAP, our food stamp assistance program, was run like Medicaid. Instead of being able to shop for food in any market in the same aisles as the wealthiest Americans, your food purchases would be managed by a Gov’t agent.” Matt, ridiculous analogy, yes. Although I would love the same markups in health care as retail food. The poors’ choices even in food is limited as they can suffer from what’s called “food deserts” where they don’t have access to grocery stores and must rely on fast food or high priced “convenience” stores. Medicaid recipients don’t have the resources… Read more »

Matt McCord (@mattMD)
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Matt McCord (@mattMD)

Hello Martin…reviewed the above link. Connect with me (you have my email or via Twitter).

We are having a Forum on July 20, 2013 in Ann Arbor, Michigan on;

“Othercare: Liberation and Innovation in American Medicine”

This will feature speakers from around the country and be attended by doctors, businessmen and industry leaders.

Thanks.

Peter1
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Peter1

“This will feature speakers from around the country and be attended by doctors, businessmen and industry leaders.”

Any patient premium payers invited?

Matt McCord (@mattMD)
Guest
Matt McCord (@mattMD)

Yes. Absolutely.

Peter1
Guest
Peter1

Gee, will they get the podium? Will anyone listen or will anyone care?

In NC BCBS just increased compensation to the company’s top nine executives an average of more than 40 percent. While profits were down and premiums went up 8.8% (compounded). Think they are listening to premium payers?

Matt McCord (@mattMD)
Guest
Matt McCord (@mattMD)

Here we go Peter…common ground. While our solutions differ, we have recognized the same problem.

What decades of government-facilitated 3rd party managed health care has created is an industry that is dominated by middlemen (Big Insurance, Big Hospital and Big Pharma) while marginalizing the two most integral participants in health care: the patient and doctor.

To illustrate that point, Liz Fowler, who many claim authored much of the PPACA, was an Insurance industry lobbyist prior to working for Max Bachus and, eventually, the White House. Should we be surprised that there is no ‘public option’ in the law? See:

http://www.guardian.co.uk/commentisfree/2012/dec/05/obamacare-fowler-lobbyist-industry1

Martin Gaynor
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Martin Gaynor
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For my views on markets and competition in health care, go http://www.aei.org/events/2013/03/01/big-health-consolidation-and-competition-under-the-affordable-care-act/to . I’m the 2nd speaker.

Eric
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Eric

The link to AEI you posted does not work.

Guest

I heard a lecture yesterday re: neuroeconomics and how neuroscience was affecting policy. The speaker pointed out a book called “Nudge” of which Cass Sunstein (formerly a policy advisor to President Obama) which talks about how we can use various strategies to help people make better decisions. Note that I haven’t read the book, but could understand a few concepts from her description of it. The speaker called it “paternalistic libertarianism” and noted that you can see this approach’s fingerprints all over the current administration’s policy decisions. I think it relates to this discussion because policies about who should take… Read more »

Matt McCord (@mattMD)
Guest
Matt McCord (@mattMD)

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… Read more »

Peter1
Guest
Peter1

“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?

Peter1
Guest
Peter1

“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.