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Why Price Controls Will Make Healthcare Worse

Massachusetts Governor Deval Patrick announced this week he has had enough of rising health care costs.

So he is proposing a novel solution: make them illegal.

Well, it’s not fair to call this idea “novel.”  Governments have tried price controls for 40 centuries.  And even though they don’t work, they keep trying.  The explanation isn’t complicated.  It’s an easy way for a politician to seem to do something about rising prices.  In this case, it won’t do much about the underlying problem, but it is a terrific way for a governor to look like a man of action.

There is a small irony in the governor’s proposal.  It admits that government itself is one of the important reasons health insurance is so expensive.  How?  Mandates.  He says he wants a two-year moratorium on telling insurance companies what new benefits they have to cover in their policies.  Mandates are one of the important reasons why health insurance is so expensive.

But the problems of costs in Massachusetts are about way more than just the mandates.  It’s the market.

In the last 20 years, Massachusetts has become dominated by bigger and bigger insurance companies and bigger and bigger hospital systems.  They’ve been fighting it out with each other — or not — and the result has been that consumers and small businesses are getting a very bad deal.  What’s worse is that it’s happened as the state government leaders of both parties have stood by and watched, or even approved.

How consolidated is the market today?  One company controls about half of the health insurance market, with the rest is split up among 4 smaller insurers.  Likewise for hospitals.  In the Boston area, where most Massachusetts residents live, one hospital system dominates.  The rest is split up among a small number of other, smaller systems.

Now, Governor Patrick’s Attorney General, Martha Coakley said something surprising about all of this last week.

She said the problem isn’t really the insurance companies.  Instead, she says, health care is so expensive in Massachusetts because of the consolidation of hospitals.  She did a study and found that big hospital systems use their leverage to charge insurers more money, which they must pass on to consumers.  Coakley says these are “serious system-wide failings in the commercial health care marketplace which, if unaddressed, imperil access to affordable, quality health care.”

It’s odd that Coakley ran for Senate on a platform devoted to a reform bill that would have done nothing to address the “serious system-wide failings” she identified.  Or maybe it’s not.  The gulf between politicians’ rhetoric about the health care and the reality of how it works shouldn’t be surprising anymore.  But the extent to which the government acts in such disconnected ways explains a lot about how our system could become such a fine mess.

One economist, talking about the failure of price controls over the last 4,000 years said this about their appeal, and their peril:

With the wave of a hand, or the flash of a legislative pen, they promise to make everything cheaper. And for more than four thousand years the results have been exactly the same: shortages, sometimes of catastrophic consequence; deterioration of product quality; the proliferation of black markets on which prices are actually higher and bribery is rampant; destruction of a nation’s productive capacity in the industries where prices are controlled; gross distortions of markets; the creation of oppressive and tyrannical price control bureaucracies; and a dangerous concentration of political power in the hands of the price controllers.

In health care price controls won’t work, and they will do something worse.  They will be yet another way to keep in place the corroding system we live in today, yet another in the line of unfortunate policy choices that have brought us here.

And years from now people will look back and wonder: how did the system ever get this way?

*This blog post was originally published at See First Blog*


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One Response to “Why Price Controls Will Make Healthcare Worse”

  1. The problem is all about prices. Prices send critical signals which coordinate human activity. Thomas Sowell actually describes market based economies as “price coordinated”. If we reform our system and leave in place the administrative pricing structure, we will simply get more of the same. Wrong prices = bad outcome.

    http://online.wsj.com/article/SB118101135977724637.html

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