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


credit: Images_of_Money / Foter.com / 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.