Don't take price controls off the table

In Medicare and Medicaid, administered prices are 40% below the private market. Antitrust enforcement would be hard pressed to match that record.

Former Secretary of Labor Robert Reich posted an article yesterday defending Kamala Harris’ vow to go after corporate price gouging through rigorous antitrust enforcement. Last week, Donald Trump accused the Democratic presidential candidate of seeking “communist price controls. … If they worked, I’d be for them, too,” Trump said. “But they don’t work.”

In arguing that Harris’ plan to bust up monopolies to promote price competition wasn’t price controls, Reich seemed to agree with Trump on one point. “Much of the economic establishment … justifiably believes price controls don’t work,” he wrote.

Hmm. Is that really true? Every state in the union regulates electricity, natural gas and other common services because their capital-intensive delivery systems inevitably lead to monopolization. The prices set by those state regulators has kept the price of those necessities affordable for most Americans.

While the federal government over the past half century has largely gotten out of the business of rate regulation (think railroads, airlines and telecommunications), it remains central to health care, the nation’s largest economic sector. Both Medicare and Medicaid, which together account for about half of all health care expenditures, set the prices that are paid to hospitals, doctors and, starting next year, a handful of drugs. Those prices are set through the federal rule-making process.

Private insurers now run half of Medicare through the Medicare Advantage program. The also manage care for three-quarters of state Medicaid beneficiaries. Both these programs are subject to price controls in the form of capped annual payments for each person they cover. The Medicare Advantage rates are set by the Centers for Medicare and Medicaid Services. States set their own Medicaid rates, but they generally are just below Medicare rates.

The relative success of Medicare price controls

Have those price controls failed medical consumers? If there is one thing that medical economists agree on, it’s that the price of almost every component of health care is too high. Americans pay more for drugs, more for hospital stays and more for physician visits than any country in the world. Several times a year, the Medicare Payment Advisory Commission issues a report documenting how the prices that Medicare pays for various services is well above what providers of those services need to remain profitable. Its most recent reports show Medicare Advantage rates are a stunning 22% above what it would cost taxpayers had the 51% of beneficiaries now in MA plans stayed in traditional Medicare. (See pg. 134 of this MedPAC report.)

But it is also true that the prices that Medicare pays for services are just 40% of what the private sector pays, according to the most recent Rand study on the subject. If government regulators deserve a C- in holding down health care prices, the prices set through private sector competition, which are determined through marketplace negotiations between insurers and providers, get a big red F.

Why has private sector competition failed? In short, it is because both sides of the kabuki drama called price negotiations — providers and insurers — are oligopolistic. In some cases — like in small cities or rural areas — there is only one hospital and one insurer on each side.

When they sit down to negotiate, there is no incentive for either party to seek a lower price since they both benefit from higher prices. Providers benefit because higher prices generate more revenue. Insurers benefit because they can simply pass along higher prices to their customers — the employers and individuals who buy their plans. Both providers and insurers are relatively fixed margin businesses. They routinely generate profit margins around 4% to 5% of total sales. The easiest way for both to grow profits is to grow revenue through higher prices.

Of course, there are some markets, usually big cities, where greater antitrust enforcement could promote more competition. But would that necessarily result in lower prices?

The experience of the recent federal rules requiring hospitals to post prices is instructive. It hasn’t led to a burst of competition to win over consumers shopping for services. The biggest users of this price data may well be other insurers and providers, who now can look up the posted prices of their rivals to learn what they are receiving or paying and insisting they get the same. That’s just as likely to push up prices as hold them down.

Don’t get me wrong. Breaking up monopolies is a good thing. Beyond prices, there are other forms of competition that will be promoted by having a greater number of players in a field: Quality, service, and, particularly in health care, outcomes.

But when it comes to driving down the cost of care, I wouldn’t take price regulation off the table. It’s the one mechanism that has proven capable of holding down prices in a social service that naturally leans toward monopoly.