The cost of U.S. health care is out of control. Medical prices rise at about three times the rate of consumer inflation. Worse, price gouging has reached epic proportions of gall, with hospitals and health care providers finding new ways to increase charges, with no shame for doing so. Earlier I wrote about a few doctors freezing warts and tweezing out splinters and billing the task as surgeries costing nearly $500. The providers who do this argue it meets the definition of surgery because the skin is slightly ablated. In another example of surprise charges, a private equity-owned gastroenterology group practice billed patients $600 for surgical trays used during colonoscopies. You can buy the reusable stainless-steel trays on Amazon for around $30. In yet another example, a hospital billed a colonoscopy with polyp removal as two colonoscopies, charging $19,206, more than 10 times what I can get the procedure for paying cash. And let’s not forget the Texas woman whose urine sample was sent to a lab to test for opioids after back surgery. A bill that should have cost less than $100 ended up billed at $17,850. Then there was the woman who needed four vaccinations for post rabies exposure. One facility charged $15,242 for immunoglobulin shots that several other facilities only charged around $1,200. None of these providers were charged with fraud or faced disciplinary action.
An essay in the journal, Health Affairs, explores why reining-in overpriced medical care is not easy. Why regulate medical prices? There are arguments that market failure occurs in the medical marketplace for a variety of reasons. One is asymmetry of knowledge. The doctor knows a lot more about medical you than you. Another is your life could be at stake; thus, you are not objective. A bigger reason is patients pay only about 11% of their medical bills and the proportion is even smaller inside the hospital (about 3%). You are willing to spend every nickel of someone else’s money when your health is at stake, and they are paying the tab. Finally, consumers cannot negotiate prices and get up and leave when admitted to a hospital. They have no discretion about care at that point.
Reasons not to regulate prices. The oldest and most common answer is that nobody really knows what the market clearing prices should be. Economists will tell you (often on the first day of Econ 101) that a price ceiling set too low results in shortages, as there is more demand than supply. By contrast, a price ceiling set too high has no effect on prices. If experts were able to figure out the market clearing prices (there are more than 10,000 prices in health care) they could set them but that is impossible. Plus, the price in New York City should not be the same as in Dallas, Texas.
What challenges do policymakers have? Michael Chernew and Quincy Martin discussed 10 challenges to medical price regulation. (Some comments are mine and mine alone)
- Antitrust could be used to break up or prevent anticompetitive hospital consolidations.
- Price transparency, while desirable, is unlikely to restrain prices by much. Patients lack the incentives and educational training to compare prices. Hospitals purposely avoid complying with transparency regulations.
- Negative externalities of price regulations. Quality could suffer (in the absence of a competitive environment) and local employment could suffer (and that is a good thing, but not in the view of local officials).
- Some states have All Payer regulations that require uniform prices to all payers. It forces some to pay more so others can pay less. It is a poor excuse for a competitive market.
- Service level or aggregate facility level is another concern. Regulating the price of expensive procedures may lead to numerous price hikes on small procedures. An alternative would be to create a price index that regulates price levels across the board. That is still a difficult analysis to get right.
- Which is better: regulated prices or price caps? Price caps could reduce prices of the most expensive facilities, but setting 10,000 prices is not going to be easy.
- Another concern is price level targets and price growth. If prices are capped but growth is not, the problem will return eventually.
- Should benchmarks be used? Medicare is often touted as the benchmark for medical prices. Commercial insurers pay about 2.5 times what Medicare pays. While it is tempting to use Medicare prices, there are reasons that it is not a perfect solution. Patient mix differs, and some (many) Medicare prices are inaccurately priced among other things.
- Out-of-network price regulation may be a good place to start. Prior to the No Surprises Act some providers (the ones patients do not choose) made a business model out of declining network affiliation so they could price gouge patients, and their insurers. If there is an ideal place for price regulation, it is forcing those facility-based providers (patients cannot choose and cannot refuse) to disclose prices prior to care or negotiate prices with facilities before providing patient care.
- Another option is targeting hospitals in noncompetitive markets. This is challenging as well. Competitive markets have high priced hospitals that are considered top tier, while it is not always straightforward defining market competition and where to regulate.
Conclusion: It is easier said than done with respect to price regulation of health care facilities. There are numerous challenges, as the authors explain far better than I. Also, some of my explanations are my opinion, and not necessarily the opinion of the authors in Health Affairs. The original article is worth reading.
Health Affairs: Challenges Confronting State Regulation Of Health Care Prices: Ten Questions