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Price controls: Definitely not the answer to escalating healthcare costs

Written By | Mar 12, 2020
price controls, healthcare costs

Image by Gerd Altmann from Pixabay. CC 0.0 license.

WASHINGTON: Price controls always sound like a great way to control costs. The Federal government will just set a ceiling on price, and nobody will be allowed to charge more than that for healthcare costs. What could go wrong?

Everything. Always.

Remembering the 1970s US gasoline crisis

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.


Also Read: Healthcare goals: cost, coverage, quality. Dems, GOP differ on priority

Price controls won’t help. We must address “surprise medical billing” (SMB).

That brings us to healthcare, one of the most regulated businesses in the United States today. Some want to make healthcare even more regulated, by essentially imposing price controls on healthcare costs. 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 of surprise medical billing 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 keep looking at ways to impose price controls on healthcare costs. 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.

Why insurance companies are the big beneficiaries in the current healthcare system

Insurance companies are the biggest beneficiaries of today’s broken system. That way, they can continue to earn record profits, even as they try to pass incorrect or inaccurate bills along to innocent consumers. Meanwhile, they continue to spend tens of millions on lobbyists in Washington, aiming to get policies enacted that are even better for them. Insurers love the idea of price controls because then they can start squeezing hospital and physician and other compensation downward.

Of course, if insurance companies can pay doctors less, the nation likely ends up with fewer doctors. Some now in practice will retire early. Others may decide to go into teaching or research. Why see patients if you’re going to lose money?

Consequently, fewer doctors mean less availability, which hurts patients. As always with price controls, the idea sounds good. But if the product (health care) becomes unavailable, the price doesn’t matter.

Why not use market forces to bring down healthcare costs?

We already have a better solution to all of this, and that is to empower the market. Instead of giving insurance giants more control over healthcare costs in a way that benefits their industry, lawmakers could provide 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 big win for patients.

Modern healthcare 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.

– Headline image: Image by Gerd Altmann from Pixabay. CC 0.0 license.

Michael Busler

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. He has written Op-ed columns in major newspapers for more than 35 years.