Republican lawmakers in Indiana have taken a page from Democrat’s playbook and imposed price controls on the amount nonprofit hospitals can charge employee health plans. Price controls are not something Republicans ordinarily support except in very isolated cases. However, this will be an interesting case study. The following is from Kaiser Family Foundation (KFF) Health News:
Under a law enacted last year, five of Indiana’s largest nonprofit hospital systems cannot charge patients covered by job-based health plans more than an established price cap. Hospitals that fail to keep prices below the threshold by 2029 risk losing their tax-exempt status — which would mean owing millions of dollars in state taxes.
…Indiana hospitals must offer direct contracts to employers for a variety of procedures priced at or below 260% of what Medicare pays for hospital care. That’s setting a ceiling at slightly more than 2.5 times what Medicare pays.
Here is the problem with price controls: nobody really knows what the market rate would be in a competitive market. Set the price cap too low and it can result in providers leaving the market (i.e., shortages of care). Set it too high and it can result in overpaying for care. I suspect that 250% of Medicare will become the de facto price for all services regardless of what was being charged before the law. There is also the risk that health insurance premiums will continue to rise and any potential savings from capping hospital rates will be captured by insurers. More from KFF Health News:
This move represents a departure from the status quo for the business lobby. Ashton Eller, a healthcare lobbyist for the Indiana Manufacturers Association, said the group generally opposes government price controls. But it believes this is a step in the right direction, he said.
“Is this a silver bullet that will bring down prices overnight? We don’t pretend it is,” he said.
No matter what happens in the Hoosier State, Indiana’s experiment with price controls has attracted attention.
Health care is a unique service that often doesn’t respond to traditional incentives. Patients only bear about 11% of medical costs directly. In the hospital, that falls to about 3%. Thus, attempts to get patients to act like consumers are ineffective once in the hospital because patients care less about the cost of care. Cost sharing is supposed to make patients more price sensitive but if cost sharing is 20% they only care about 20% as much about unreasonable prices. Once in the hospital their out-of-pocket max has been reached, rendering patients indifferent about prices. In addition, hospital patients are unable to negotiate or second guess doctors who work for the hospital.
Indiana hospitals are notoriously expensive compared to hospitals in other states. Many nonprofit hospitals also do not appear to be very charitable. Indiana hospitals failing to comply with the law risk losing their tax-exempt status. Nonprofit hospitals pay no federal income tax, no state income tax, no local property tax, no sales taxes and often get preferential bond interest rates. State lawmakers can and should exercise their discretion over which charities qualify for nonprofit status.
The Indiana experiment is unlikely to work in the long term, partly because lawmakers will face lobbying to raise the rates. A better solution would be to collaborate with employers and insurers to implement a system of reference pricing. Once patients are told they will bear the difference from a reference price and the actual price more patients will ask questions about price. The RAND Health Insurance Experiment showed that consumerism can work in health care. The CalPERS reference pricing experiments illustrated how hospitals will compete on price and quality when they risk losing lucrative patients.
Read more at KFF Health News: Indiana Takes on Powerful Hospitals by Capping Prices They Charge Employers
Goodman Institute Health Blog: Why Health Care Price Transparency Regulations Have Not Lowered Prices