Sustainably addressing the problems of rising prices and declining quality requires reforms that empower patients and doctors, improve price transparency, and eliminate the perverse incentives of our current health insurance system that drive up costs and limit care.
Instead of addressing the health care system’s core deficiencies, policymakers push for counterproductive policies like price controls. Efforts in Indiana show that politicians do not need to pass legislation to implement bad ideas. The threat of legislation is sufficient.
Indiana’s Senate President Pro Tempore and House Speaker asked state hospitals “to work collaboratively with third-party payers to present a plan to the legislature by April 1, 2022 that would lower Indiana’s hospital prices to at least a national average by January 1, 2025…[otherwise] we will be left with no choice but to pursue legislation to statutorily reduce prices.” Those proposals are now under consideration by state lawmakers.
Channeling their inner Michael Corleone — making an offer these hospitals can’t refuse — the legislators are demanding that hospitals impose price controls on themselves, otherwise they will do it for them. Price controls, whether by threat or legislation, impose large costs that reduce the quality and availability of health care for patients.
The legislators raise an important point. Hospital prices are expensive, and it is difficult to justify Indiana hospital prices that are 50% more expensive than the already inflated national average. However, the disincentives created by the growing government share of spending coupled with the broken health insurance system is driving the problem. Price controls do not eliminate these disincentives, they simply manifest the adverse consequences differently.
Consider that government spending through programs like Medicare, Medicaid, and the Veterans Administration account for nearly 51 cents of every health care dollar spent, according to the Centers for Medicare and Medicaid Services (CMS).
As a Medical Group Management Association poll shows, “more than two-thirds (67%) of medical practices” report that Medicare’s reimbursement rates do not cover the cost of delivering care. To offset the losses, practices increase prices to shift the costs onto private insurers.
The shortfalls are significant. Medicare pays 84 cents per dollar of actual expenditures and Medicaid pays 88 cents on the dollar, according to the American Hospital Association. Hospitals must consequently charge private insurers $1.14 on the dollar just to break even.
Private insurance practices only worsen this situation. The current private insurance system encourages opaque prices and diminishes patient control over their own health care decisions. Without transparent prices and empowered patients, we can’t control inflating hospital prices.
Slapping price controls on hospitals or encouraging hospitals to voluntarily impose them will lower the prices they charge, but it does not address the root causes of the problems — meaning that these adverse consequences will continue.
Given that hospitals earn a 6.5% profit margin compared to an economy average around 15%, it is exceedingly likely that, in response, we could see hospitals cut staff, reduce services, or even cease operations completely. Significant reductions in the amount and quality of health care services will subsequently follow.
Reduced access to lower quality health care services imposes significant costs on patients that include worse health outcomes. The reality is that price controls substitute one bad outcome — inefficient prices — for a worse outcome — reduced health care outcomes.
Establishing affordable health care prices and promoting better health outcomes requires reforms that remove the systemic inefficiencies driving the cost problems. Reforms should eliminate the government’s adverse impacts on hospitals, promote pricing transparency for patients, and reform the health insurance system to empower patients and doctors rather than payers.
Imposing voluntary price controls in lieu of government price controls does not address the problems afflicting the health care system. Improving health care affordability while increasing the quality of health care we receive is possible but requires fundamentally reforming the ineffective health insurance system.