Health insurance

The U.S. Health Care System Doesn't Need Price Controls. It Needs Price Signals.


credit: Images_of_Money / / CC BY

For years, Americans have heard warnings about high health spending: The U.S. spends a greater percentage of its economy on health care than any other nation, and the trend lines make clear that in future years we'll be spending more still. More recently, we've seen media attention focus on the prices that Americans pay for medical services. In March, journalist Steven Brill published a lengthy piece in Time magazine on high medical bills, comparing hospital "chargemaster" rates—the listed prices—to the rates paid by Medicare. And over the weekend, Elisabeth Rosenthal compared U.S. prices for a variety of health services to the lower prices paid by other countries.

Both pieces offer essentially the same thesis: The U.S. spends too much on health care because the prices Americans pay for health care services are too high. And both implicitly nod toward more aggressive regulation of medical prices as a solution.

Part of the reason these pieces get so much attention is that most Americans don't actually know much of anything at all about the prices they pay for health services. That's because Americans don't pay those prices themselves. Instead, they pay subsidized premiums for insurance provided through their employers, or they pay taxes and get Medicare or Medicaid. Even people who purchase unsubsidized insurance on the individual market don't know much about the particular prices for specific health services. They may open their wallets for copays to health providers, or cover some expenses up to a certain annual amount, but in many if not most cases they are not paying a full, listed price out of pocket.

What that means is that, in an important sense, the "prices" for health care services in America are not really prices at all. A better way to label them might be reimbursements—planned by Medicare bureaucrats and powerful physician advisory groups, negotiated by insurers who keep a watchful eye on the prices that Medicare charges, and only very occasionally paid by individuals, few of whom are shopping based on price and service quality, and a handful of whom are ultra-wealthy foreigners charged fantastic rates because they can afford it.

This is the real problem with health care pricing in the U.S.: not the lack of sufficiently aggressive price controls, but the lack of meaningful price signals.

Rosenthal's piece is based on a handful of international comparisons in which the U.S. pays far more for a similar service. But the important systemic question here is whether stricter rate regulations could meaningfully restrain the growth of health care prices.The evidence just isn't at all clear that it could. Cost growth in the U.S., where about half of prices are superficially 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. 

Indeed, deregulation of medical pricing can lead to relatively lower cost growth.

As Carnegie Mellon health economist Martin Gaynor recently noted, the Netherlands deregulated a substantial portion of its hospital pricing starting in 2006. Overall cost trends in the country didn't change—but the deregulated market segment saw substantially slower cost growth than the sector that remained regulated. In fact, costs fell for several years in the deregulated sector, even while they continued to rise where price controls were applied.

Price controls, in other words, don't necessarily control system-wide cost growth. Market-driven price signals, on the other hand, do a remarkable job of restraining price growth—and even lowering prices—in the few instances where we actually see buyers and sellers negotiating as they do in functional markets. A recent report by Devon Herrick of the National Center for Policy Analysis, for instance, notes that between 1999 and 2011, the price for corrective eye surgery dropped by about 25 percent. Quality and service improvements, meanwhile, helped create space for price and service competition. "Eye surgeons who wanted to charge more had to provide more advanced Lasik technology, such as Custom Wavefront and IntraLase (a laser-created flap)," Herrick explains. "By 2011, the average price per eye for doctors performing Wavefront Lasik was about what conventional Lasik had been more than a decade ago; but the quality is far better. In inflation-adjusted terms, this represents a huge price decline."

That's what a functional market, with real price signals, looks like: Customers who generally pay all or most of the cost themselves, and providers who, knowing that, compete for customer business based on price, service-type, and quality. Unfortunately, that's not what the vast majority of the medical market—if you can really call it a market at all—actually looks like.

Systemic changes don't seem likely in the near future. But even in small doses, there can be significant gains from shifting away from bureaucratically managed price systems. Last week, the Bangor Daily News reported the story of Dr. Michael Ciampi, a Portland, Maine doctor who recently decided to cease acceptance of any type of insurance, public or private. He says he immediately cut some of his prices in half. Office visits that were $160 are now $75. Strep throat patients in his area, he says, can either go to a local emergency room for $300—or book an immediate appointment at his office and pay $50.

What we need are more health providers like Dr. Ciampi, who are willing to disentangle themselves from the third-party payment system that has so thoroughly muddled our medical marketplace. Which is to say that what we need is fewer reimbursements and more actual prices. Real prices, and real price signals, can lead to price reductions, because suddenly the price matters—to the seller, who wants to find a buyer, and to the buyer, who wants to get value for her money. The state experience with price setting, on the other hand, suggests that it leads to bureaucratic bloat and incumbent favoritism. And the federal experience with price setting systems for Medicare leaves much to be desired. In other words, price controls aren't the solution. If anything, they're the problem.

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  1. All true, but it is difficult to rate shop while you’re in the ER or captive to your insurers suppliers.

    1. How much of health care spending goes towards ER visits in cases of actual emergencies? I’d honestly like to know because my suspicion is that it isn’t a whole lot.

      1. I don’t know. Tell us.

        1. Some quick Googling reveals that total hospital expenditures accounted for 31% of US healthcare spending in 2010. But I haven’t found a breakdown by the type of hospital services.

          1. Ok, we spend 17% of GDP on health services and if only 31% is hospital related that would mean there is serious overcharging going on.

            No surprise of course.

            But I know the office visits my insurer reimbursed are a tiny fraction compared to the nine surgeries they coughed up for.

            1. It took 9 surgeries to remove your brain? Funny, I thought one would do it.

              1. They had to be sure they didn’t have positive margins. The 2012 election was coming up.

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            2. Another stat: according to Kaiser, chronic diseases accounted for 75% of health care expenditures. I suppose that could include something required immediate emergency care, though.

              The larger point was that you implied that you couldn’t find the cheapest rates when you were being rushed to the nearest ER. So your nine surgeries (which I assumed were planned) aren’t really relevant.

              1. Why would anybody bother finding the cheapest rates when the costs are socialized anyway? How would you even know which hospital is cheapest?

            3. But I know the office visits my insurer reimbursed are a tiny fraction compared to the nine surgeries they coughed up for.

              The surgeries weren’t for him per se…it was for the nine rectums (recta….?) he was stuck in!

            4. But I know the office visits my insurer reimbursed are a tiny fraction compared to the nine surgeries they coughed up for.

              When you got these surgeries, did you make any choices at all in terms of who performed the surgery? Or was it all dictated by your insurer?

              1. Also, given your condition, did you have any choices in terms of type of treatment and surgeries, and how they would be performed (i.e., robotic surgery, by hand, etc.)?

            5. How do you think health services are overcharging? If private insurers base their rates off of Medicare reimbursements, and Medicare bases it’s rates off of a central planning committee of technocrats, how can we blame the market? The market isn’t there.

        2. PB’s argument is a red herring. Roughly 2% of our care is Emergency Care in the US (see That means the vast amount of money in this country is spent on treatments where the customer can do at least some price-shopping.

          1. No, the ability to make rational decisions about health care is impossible. Progressives tell me so.

            Only the state can figure it out, apparently.

          2. That means the vast amount of money in this country is spent on treatments where the customer can do at least some price-shopping.

            Nothing says ‘shopping around’ like an unaccountable committee of technocrats fixing the prices of medical procedures over the whole 3rd party payor system imposed on what remains of the market by way of legislation.

    2. the vast majority of medical expenses are not of the emergency variety

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    3. Palin’s Buttplug| 6.3.13 @ 5:02PM |#
      “All true, but it is difficult to rate shop while you’re in the ER…”

      Yes, we should definitely arrange policy around those who don’t buy medical coverage until they’re in the ER!
      Dipshit,k the contortions you go through apologizing for the asshole in the WH must be very amusing to see.

  2. You just want Granny to DIE, you monster!


    1. See, I love the death panels (the cost containment board). I must be a heartless robber baron exploiter of the downtrodden.

      1. What the fuck are you talking about?

        1. “PolitiFact’s Lie of the Year: ‘Death panels'”

          Of all the falsehoods and distortions in the political discourse this year, one stood out from the rest.

          “Death panels.”

          The claim set political debate afire when it was made in August, raising issues from the role of government in health care to the bounds of acceptable political discussion. In a nod to the way technology has transformed politics, the statement wasn’t made in an interview or a television ad. Sarah Palin posted it on her Facebook page.

          Her assertion ? that the government would set up boards to determine whether seniors and the disabled were worthy of care ? spread through newscasts, talk shows, blogs and town hall meetings. Opponents of health care legislation said it revealed the real goals of the Democratic proposals. Advocates for health reform said it showed the depths to which their opponents would sink. Still others scratched their heads and said, “Death panels? Really ?”


          1. The U.S. Preventive Services Task Force (that’s a panel charged with reviewing evidence and making recommendations for preventive services) changed their guidance on best practices for screening women for breast cancer, suggesting that women in their 40s should not have annual mammograms and older women should reduce the use of this screening device.

            It isnt a death panel because….uh….because we call it a task force.

            1. To be fair, they made that recommendation because there was no evidence that yearly mammograms were actually helping, and in fact could be hurting because of the false positive rate. I agree that those decisions should be in the hands of patients and their doctors, but the mammogram recommendations aren’t an example of “death panels”.

              1. They’re a joke cost containment apparatus. That particular recommendation came right after a huge longitudinal Swedish study that proved AND quantified the mortality improvement in the 40-50 cohort, and a big Dutch study the year before that came to the same conclusion. They had to get an obscure, small-scale Russian study translated to drum up any kind of evidence to support their recommendations.

                The case that breast cancer screening is tremendously cost-effective is getting stronger all the time, and if anything, we need better imaging modalities. For reasons I can’t entirely fathom, the USPSTF keeps making recommendations that are penny-wise pound-foolish in order to reduce imaging costs. I don’t think they’re trying to kill expensive patients, because mammogram patients AREN’T expensive, at least not compared to late-stage cancer patients. I think they’re just trying to get insurers in the habit of taking government recommendations on what they have to cover.

          2. PolitiFacts is wrong; such panels exist in every large health care system. In Germany, for example, it’s a panel of doctors, insurance company representatives, patient advocates, Christian clergy, and politicians.

            Someone needs to make the decision whether to spend an additional $300k to keep someone alive for another six weeks; Democrats apparently want that decision to be made by a government panel, others think that’s not a good idea.

            1. Politifact is right in that no committee goes by the name of “death panel”. That doesn’t mean that such committees do not functionally exist, because they do.

  3. All very true, and note how Obamacare is several big steps in the wrong direction: coverage mandates that remove price flexibility, elimination of many copays, etc., etc.

    1. “…note how Obamacare is several big steps in the wrong direction…”

      I think that was the goal.

    2. Somehow, the media missed this during the Obamacare debate: the price of services issue. Back then, all we needed was health insurance regulation.

      It just takes them a few years after the fact to get it right. I’m sure they’ll catch on to the difference between price signals and price controls a few years late, as well.

  4. Price controls. How fuckin’ stupid do you have to be to advocate price controls?

    I keep thinking of the old Soviet joke; “If socialism were introduced to all of north africa within a year they would have a shortage of sand.”

    It is funny to me that price control systems cause shortages of everything but people dont get really hot about it until the toilet paper runs out.

    1. What did the socialists use before candles?


      1. That is a better one. I will remember that.

        1. It’s the short version of Anthem.

    2. Even then, they just introduce ‘toilet paper rationing’ and go after hoarders:…..ight-raid/

      1. And yet you can step across the border to brazil, colombia or even fucking guyana and toilet paper abounds. It is just incredible to me how politicians can spout the ‘free stuff’ line and the ‘ you are being exploited by the greedy rich’ and people just lap that shit up no matter how many times in the past it has caused disaster.

  5. Let each of us learn the cost of health care by being obliged to pay the same share. I’ve suggested making all health care costs exempt as part of a move to a flat tax. Were that tax high (35%-50%) it would represent the government’s share of paying our health care costs, for the exemption would reduce our taxes by that amount. The high tax rate could be made acceptable to most Americans by a high personal exemption, equal to the so-called “living wage”. Too simple?

  6. The problem is, the vast majority of voters will never, ever grasp the idea that the way to make healthcare cheaper is to stop allowing employers to provide health “insurance” as a benefit that is not taxed as income to the employee.

  7. So, how you going to get there (in the USA or anywhere else)? I’m not asking for a plan that gets anyone all the way anywhere, just for ideas for steps that lead in the right direction that could well be marginally better supported than opposed politically. How do you buy off opposition in ways cheaper than they might extort otherwise, or at least distract them with something shiny? How do you get powerful people to pay more att’n if they’re likely to be in favor, or less att’n if they’re likely to be opposed? What steps might be taken that, once taken, won’t induce Lobagola movement to undo as much as, or more than, was done?

    Or do you judge this entire field less fruitful than others that an equal appl’n of limited resources might improve? I concluded some years ago that the best that could be done regarding socialized medicine, practically forever, would be to slow its progress, and that we should work in the meantime on measures to make us so much richer that the effects of socialized medicine won’t be much of a bother. The memes and values operating in favor of it are too powerful to defeat, ever, but its proponents can be tied up for a while tussling with each other over the details.

    1. …”I concluded some years ago that the best that could be done regarding socialized medicine, practically forever, would be to slow its progress, and that we should work in the meantime on measures to make us so much richer that the effects of socialized medicine won’t be much of a bother.”…

      It’s possible, and the attempt at increasing wealth has worked well as regards, oh, food production; the improvement kept that asshole Ehrlich and his ilk from screwing up the world so far.
      But with regard to non-market medicine, there’s a problem in that people will be more than happy to pull a gun on you to keep from dying, even if that means you dying instead.
      We’ll see; the Brits are now ‘adjusting’ matters.

    2. Put another way, maybe there is enough ruin in prosperity that even asshole socialists can’t kill it.

    3. So, how you going to get there (in the USA or anywhere else)?

      HSAs combined with high deductible policies and government subsidization during the transition.

      That subsidization could take the form of direct cash grants into an individual’s HSA, government matching of deposits similar to corp matching for IRAs or government guaranteed payment above a high threshold ($5m per idividual) or a combination of all three.

      The thing is that the government is already spending so much on healthcare each year and that Obamacare will ramp that spending up – that we are already wasting more money than it would take to make the transition politically feasible.

    4. Like most things: inflate it away. Just set attractively high monetary caps for employer contributions and other things people like, then don’t adjust them.

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  9. I’d suggest that to get liberals to listen to our thoughts on the healthcare system, we need to focus on an issue they are concerned about in general: corporate influence on politics. The reason there aren’t price signals in the healthcare system is largely because of “crony capitalist” favors for various special interest groups, which have only gotten worse with Obamacare, which next year will cap the maximum deductible you have. It would make sense in a competitive market for insurers to give kickbacks if you shop around and save money on major non-emergency procedures, but oligopolies (like the one government limits on competition have created) don’t tend to engage in price wars. More importantly, in case some decided to risk it given the publicity about price disparities, Obamacare instituted “Medical Loss Ratios” which pretend to be about reducing insurer overhead, but in reality are incentive for insurers to spend as much as possible on healthcare and let prices rise. Details on “crony capitalism” and related issues in the healthcare world here:…

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