Why Price Controls Won't Fix American Health Care

States have already tried strict rate setting systems-and given up on them.


Photo credit: Alex E. Proimos / Foter.com / CC BY

Anyone looking for a clue about the future of health policy debates should take note of a Center for American Progress panel convened earlier this month. The topic at hand was journalist Steven Brill's Time magazine story on high medical bills, which compared rates charged to uninsured and privately insured patients with the negotiated, lower per-service rates charged to Medicare.

But rather than push for a government-run, single-payer system—what liberals often term "Medicare for all"—several of the left-leaning health experts on hand talked up a technocratic alternative known as "all-payer": Instead of the federal government serving as a universal insurer, as in single payer, the government would set payment rates for the entire system, public and private, eliminating price discrepancies for different payers.

In other words, price controls. This is the great new idea that has gripped liberal health wonks as health costs have continued to rise: to simply have the government declare that prices must be lower. That's neither a new idea nor a particularly great one, and there's little reason to think it will have result in meaningful restraint of health care cost growth.

All-payer and other forms of rate setting have a long history in the U.S. Throughout the 1970s and into the early 1980s, multiple states experimented with various forms of state-driven rate setting. The Nixon administration pursued a bevy of wage and price controls, while Congress passed legislation encouraging states to set up rate-setting regimes. A federal effort backed by President Jimmy Carter failed to pass, but by the end of the decade states such as Maryland, New York, and New Jersey were all moving forward with ambitious all-payer-style price control systems.

Those systems, however, became impossible to sustain pretty quickly. For one thing, they were just too complicated: Not only did these systems attempt to set rates for every single hospital product and service, they also included provisions attempting to redistribute funds from relatively wealthier hospitals to relative poorer hospitals. The result was a labyrinthine system of reimbursement procedures and payment exceptions that confused even the public administrators who were supposed to oversee its workings.

As Harvard health professor John McDonough chronicled in a 1997 essay for Health Affairs, officials from many of the states that tried rate-setting later concluded that "the statutes and regulations needed to sustain their rate-setting systems were complex and often incomprehensible." McDonough quotes the former chair of Massachusetts Senate Health Committee describing the payment rules as being "like Sanskrit—no one could understand them."

The complexity didn't just make the systems hard to run, it made them easy for large and powerful hospitals to game. One New Jersey legislator, according to McDonough, likened the state's system to "a methadone program, a guaranteed bottom line every year, and no one could understand how it worked." State officials sometimes attempted to adjust the systems in response to concerns that particular providers were manipulating them, but McDonough reports that the adjustments merely "resulted in greater incomprehensibility," followed by further requests for adjustments.

Some studies from the era showed that state-based rate-setting schemes helped control the growth of hospital costs—at least on some measures. But the systems were so complex, and so dependent on factors unique to each state, that researchers also warned that policymakers should not be able to count on reproducing the savings in other states.

A 1985 study for the Journal of Health Politics, Policy, and Law, for example, found that most states that implemented rate-setting saw per-admission costs contained, but found "no direct evidence that total health care costs" were contained. (Other studies found that while per-admissions costs were restrained, the total number of admissions increased.) The study also cautioned that "were rate-setting established in additional states, it is not clear that comparable results would be realized. It is still less clear that rate-setting would constrain health care costs more than would increased competition and selective contracting."

Starting in the mid 1980s, most states gave up their rate setting programs. Today, only Maryland continues to maintain a legacy all-payer system. And while Maryland's system has won plaudits from some policy analysts, it has recently developed problems of its own: Maryland operates its rate-setting program under a federal waiver that requires it to keep its average cost-per-admission from rising faster than the average cost-per-admission in the rest of the country. Yet recently the state has had trouble keeping its average per-admission cost below the cap, and has toyed with the idea of cutting Medicare reimbursements—and forcing private insurers to pick up the balance. 

Other countries have tried to control healthcare cost growth through rate setting as well, with less than compelling results. As Carnegie Mellon health economist Martin Gaynor recently noted, international comparisons don't suggest any obvious conclusion about he efficacy of rate setting. Cost growth in the U.S., where about half of prices are private and therefore deregulated, is below average for countries in the Organization for Economic Cooperation and Development (OECD). It's also below several countries with robust price control systems. 

Gaynor also points to the Netherlands, which deregulated a substantial portion of its hospital pricing starting in 2006. Overall, cost trends stayed the same following the implementation of market pricing, and the deregulated market segment actually saw substantially slower cost growth than the sector that remained regulated—indeed, costs actually fell for several years in the deregulated sector even while they continued to rise where price controls applied.

Ultimately the emphasis for public health reforms should be on public sector spending, and an all-payer system could end up straining public finances further. As Boston University health economist Austin Frakt has noted, an all-payer system is fundamentally just a tool for eliminating price discrimination: all payers, public and private, would have to pay the same charge for the same service within the same hospital. Balancing out public and private payments, however, would probably mean higher prices for Medicare and Medicaid—potentially creating additional budget headaches for the federal government as well as states.

All of which is to say that liberal health wonks should not be too hopeful about the prospects for controlling costs via newfangled price controls. The state experience with similar systems suggests that they are too complicated, too arcane, too susceptible to gaming by big industry players, and too uncertain to guarantee results. Anyone tempted to argue that sweeping price controls are the health policy of the future should also remember that they are the discarded health policy of the past.