History, Basic Economics Are Clear: Price Controls Would Destroy Health Care
Price controls destroy incentives that lead to innovation.
Price controls sound like a great way to control costs. The government will just set a ceiling on price, and nobody will be allowed to charge more than that. What could go wrong?
Many Americans are too young to remember the gasoline shortages of the 1970s. They’ve seen great swings in the price of gasoline — it jumped during the early 2000s, then plunged again after the market collapse of 2008. But there’s never been a shortage of fuel, the way there was in the 70s. In those days, the price of gas was low. But there wasn’t any to buy.
When the federal government tried to set a ceiling on the price of gasoline, it set it too low. Producers would have lost money on every sale, so they didn’t produce. That’s what always happens with price controls. The below-market price always means that the quantity supplied will be less than the quantity demanded, eventually resulting in a shortage.
The problem, as Austrian-British economist F.A. Hayek pointed out, is that no government has access to all the information that is available in a market.
That brings us to health care, one of the most regulated businesses in the United States today. Some want to make it even more regulated by essentially imposing price controls. The reason this time is to stop “surprise medical billing” (SMB).
SMB happens when an insured patient accidentally uses an out-of-network provider. This can happen because the patient is taken to an ER and doesn’t know whether the hospital is in-network. It can even happen within a hospital, where some practices aren’t covered by every insurance plan.
This practice allows insurance companies to skip paying some bills and can even send patients into bankruptcy. Admittedly, SMB should not happen. But the proposed solution is actually worse than the problem.
Lawmakers are looking at ways to impose price controls on health care. They may go with a plan that imposes arbitration on disputed medical bills. Or, they may rally behind a different proposal, one that uses the in-network charge as a benchmark and bans rates higher than that.
What these proposals have in common is that they are both forms of price controls. They would use the power of the government to set rates. This would end up helping insurance companies but could harm patients and doctors.
Insurance companies are the biggest beneficiaries of today’s broken system. They are earning record profits, even as they try to pass bills along to innocent consumers. They are spending tens of millions on lobbyists in Washington, aiming to get policies enacted that is even better for them. They love the idea of price controls because then they can start squeezing compensation downward.
Of course, if insurance companies are able to pay doctors less, there will likely be fewer doctors. Some will retire early; others will go into teaching or research. Why see patients if you’re going to lose money?
Fewer doctors mean less availability, which hurts patients. As always with price controls, the idea sounds good, but if the product (health care) isn’t available, the price doesn’t matter.
There is a better solution to all of this, and that is to empower the market. Instead of giving insurance giants more control, lawmakers could give patients (consumers) more choices. Allow them to choose their own insurance plans. Give them the same tax benefits we give to employers. Allow them to negotiate on price and service. Eventually, costs will come down and service will improve.
If some insurance companies end up going out of business in this new environment, they’ll be replaced by companies that are more consumer-friendly. That, too, would be a win for patients.
Modern health care is seldom simple. The solution to surprise medical billing won’t be simple either. But one thing is certain: Price controls are the wrong approach.
Michael Busler, Ph.D. is a public policy analyst and a professor of finance at Stockton University where he teaches undergraduate and graduate courses in finance and economics. www.facebook.com/fundingdemocracy @mbusler