Healthcare Price Controls Don’t Come For Free

America’s healthcare bill continues to rise. Our tab reached $3.8 trillion in 2019, nearly $11,600 per person, according to the Centers for Medicare and Medicaid Services. Health care consumes some 17.7% of our nation’s gross domestic product.

In recent months, two leading research organizations, the Rand Corporation and the Kaiser Family Foundation, have released plans for reining that bill in. Kaiser, for example, says, “Reducing the prices private insurers pay for health care services could help alleviate the financial burden of health care for employers and individuals with private insurance.”

In other words, America would spend less if the price of health care were lower. Perhaps these eminent researchers will soon tell us that we’ll have fewer floods if it rains less—or we’d have more money in our 401(k)s if we saved more.

Rand and Kaiser are really just calling for the government to implement price controls on health care. In so doing, they’re ignoring decades of evidence and basic economic theory that shows that price controls result in life-threatening shortages of medical care.

Rand’s study focuses on hospital spending, which accounts for roughly one-third of healthcare expenditures. “Regulating prices for all private plans,” the report says, “has the potential for a significant impact on hospital spending.”

It’s an observation that’s head-spinningly obvious—if the government imposes price controls, then spending will go down. Rand and Kaiser specifically recommend that private health plans be allowed to reimburse providers at the same rates as Medicare.

But there’s no free lunch here. The consequences would be devastating. Medicare systematically underpays hospitals and doctor’s offices. In 2019, the program reimbursed hospitals 87 cents for every dollar of care consumed by Medicare patients, according to the American Hospital Association.

If private insurers did the same, spending on privately-insured patients would fall by $352 billion a year, according to Kaiser. Rand’s report estimates that setting hospital prices for all private payers equal to—or even 50% above—Medicare’s reimbursement rates could cut hospital spending by $61.9 billion to $236.6 billion a year.
Both these findings oversimplify healthcare economics. The only reason Medicare’s underpayment scheme hasn’t bankrupted our health system is that providers charge private insurers more to compensate.

In fact, the Rand Corporation has documented the extent of this cost-shift. Last year, the organization released a study that found that hospital prices for private payers were 247% higher than what Medicare paid in 2018.

If government set healthcare prices at Medicare levels, then doctors and hospitals would see their revenues plummet. Many would go out of business.
The Covid-19 crisis has put a number of providers on precarious financial footing. One recent survey found that 8% of practices have shut down as a result of the pandemic. Cutting payments to physicians even further would accelerate this trend.

Such a policy could also drive aspiring physicians away from the profession. Who would endure more than a decade of education and training—and take on tens or hundreds of thousands of dollars in debt—if all that awaited them was endless financial stress? We can ill afford to make practicing medicine even less appealing, given that we’ll be short as many as 139,000 physicians by 2033.

This fall-off in the supply of care would coincide with a huge increase in demand—the natural consequence of lowering prices for any good or service. The result would be massive shortages and lengthy delays for treatments and procedures.

This is happening in other countries where the government regulates healthcare prices. In Canada, where I grew up, the typical wait time in 2020 for receipt of care from a specialist following referral by a general practitioner was nearly 23 weeks, according to an analysis by the Fraser Institute.

In the United Kingdom’s single-payer healthcare system, the wait list for hospital care is expected to reach 10 million in the coming weeks. If that occurs, nearly one in six British patients will be waiting for care.

Neither Rand nor Kaiser explores these tradeoffs. Both admit that they chose not to do so. Rand’s study states that it does not model “the extent to which reductions in hospital revenues could result in possible adverse effects, such as hospital closures or reductions in quality of care.” The Kaiser report made a similar acknowledgement, writing that reducing revenue for hospitals and healthcare providers would have “uncertain effects on patient care.”

Those effects are far from uncertain. Capping the price of medical care will lead to rationing and poor outcomes for patients. Giving patients more control over their health expenses—by expanding tax-advantaged Health Savings Accounts, boosting the availability of telehealth services, and insisting on price transparency from providers—will reduce health costs without compromising access to care.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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