Slide 1 - The Cato Institute_1_ by wanghonghx


									Price Controls: Worse than No
  Health Care Reform at All

                   Michael F. Cannon
      Director of Health Policy Studies, Cato Institute

          Cato Institute Health Care University
           Washington, DC, April 14-17, 2009
            Price Controls
• Economic/historical perspective
• In health care
   – Medical services
   – Prescription drugs
   – Health insurance
• The danger of further price controls




        Q*   Quantity


                             Price Ceiling

        QS              QD        Quantity


                          Price Floor,
                         Price Supports

        QD          QS        Quantity


                          Price Floor,
                         Price Supports

        QD          QS        Quantity
 “Price controls have typically
 led to significant marketplace
        distortions that harmed
 consumers. Price controls are
    also difficult to administer.
      Price controls that reduce
  prices too low reduce output
and capacity, lower the quality
         of the services that are
    provided, and diminish the
  incentives for innovation…”
“Price and exchange
controls inevitably create
harmful economic

Lawrence Summers
September 4, 1996
“Ultimately, government
price regulation will always
fail because it does not
change the underlying
economic forces driving up
prices… Price controls
evade the hard but essential
work of structural reform in
health care markets…”

David B. Kendall
Progressive Policy Institute, 1994
      “Administered Prices”
• Medicare: 16 different payment systems
   – Physician services
     • 7,000 distinct services
     • 89 payment localities
   – Hospital admissions
   – Medical equipment
• Medicaid
 Admin. Prices: How Accurate?
• “Any administered pricing system inevitably has difficulty in
  replicating the price that would prevail in a competitive
  market. Not surprisingly, one unintended consequence of the
  CMS administered pricing systems has been to make some
  hospital services extraordinarily lucrative and others
  unprofitable. As a result, some services are more available
  (and others less available) than they would be in a competitive
  market.” FTC/DOJ
• “Keeping payments in line with providers’ costs for each
  specific service can be difficult…[A]nnual updates to those
  prices may reflect statutory formulas or legislative responses
  to budgetary and other pressures that may deviate from the
  changes in providers’ costs.” CBO
 Admin. Prices: How Accurate?
• “Medicare sets the [prices]…but their productivity gains are
  much faster in cardiovascular services so that, in a sense, the
  rates become obsolete fairly quickly.” Paul Ginsburg, Center
  for Studying Health System Change
• “This pricing distortion creates a direct economic incentive for
  specialized cardiac hospitals to enter the market…which may
  or may not reflect consumers’ needs and preferences.”
• “Although CMS uses an administered pricing system for
  Medicare, hospitals engage in non-price competition to attract
  Medicare and Medicaid beneficiaries…” FTC/DOJ
Price Controls: Change-Resistant
•   “Every provider who feels his rate inadequately reflects some local
    variation; every patient who suffers waiting for use of a scarce
    technology; every hospital forced to effect lay-offs – each of these
    individually wrenching problems is laid at the feet of the local
    member of Congress…” Jeremy D. Rosner, “A Progressive Plan for
    Affordable, Universal Health Care,” in Mandate for Change, Will
    Marshall and Martin Schram.
•   “Even straightforward purchasing initiatives, such as competitive
    bidding for durable medical equipment (DME), have generated
    considerable resistance, despite the success of a pilot project for
    DME competitive bidding that resulted in savings of 17 to 22
    percent with no significant adverse effects on beneficiaries.”
“Not surprisingly, some
specialists welcome price
controls – which would lock in
their high income – and fear
competition, which might depress
it. For example, the American
College of Surgeons has endorsed
the single-payer approach, which
would control prices at the
current level and preserve
surgeons’ relative value among

David B. Kendall
Progressive Policy Institute, 1994
Admin. Prices & Cost Control

(Price) x (Quantity) = Spending
  Admin. Prices & Cost Control
• “Physicians responded to recent reductions in [Medicare]
  payment rates by increasing the reported volume and
  intensity of the services they deliver. In particular…the
  response of physicians offsets about a quarter of the
  reduction in spending that would otherwise occur.” CBO
               Deamonte Driver
• d.2007 at age 12 “for want of
  a dentist” (Washington Post)
• Mother could not find dentist
  willing to take Medicaid
• Infection from abscessed
  tooth spread to brain
• $250,000 spent on
  hospitalization, brain surgery
• Maryland Medicaid
     – 16% of dentists accept
     – 30% of kids get dental care
           “Reference Pricing”
• “The government pegs its price to some reference price
  in the economy rather than choosing a fixed number, or
  sets its price a fixed amount below that of other
  consumers…These schemes destroy welfare…the
  reference price chosen by the government rises because
  of the price control...” (Fiona Scott Morton)
• “Faced with having to charge Medicaid the lowest price
  given to any other customer, pharmaceutical firms
  reduced discounts,” thereby increasing prices for private
  purchasers by 15 percent. (Fiona Scott Morton)
       “Rating Restrictions”
• Obama
   – “Stable premiums that will not depend on
     how healthy you are.”
• Baucus
   – “Insurance companies could not deny
     coverage to any individual nor discriminate
     against individuals with pre-existing
     conditions…The ability…to rate on age
     would also be limited.”

   Insurers court
     Healthy drop out

Healthiest     B        C     D           E
          Dumping the Sickies
• “Humana counters that it merely passed along
  information to its customers about a competing product
  that might better suit their needs, and said federal
  regulators approved its actions….[A spokesman] would
  not explain, however, whether the company contacted
  each of the more than 400,000 Complete customers with
  the same information or if Humana targeted the calls to a
  subset of these beneficiaries such as those with the
  highest drug costs, as Sierra implied.” The Hill
• Despite risk-adjustment
  Price Controls & Plan Choice
• “The results for UC and Harvard are strikingly
  similar…The most generous indemnity insurance -
  which covered care from the doctor of your choice - was
  subject to an "adverse selection death spiral." Faced with
  an initial increase in price for this coverage, the
  healthiest dropped out of indemnity insurance into lower
  cost plans. Those who remained in the plan were,
  therefore, sicker on average. To cover their costs, the
  price of the coverage was raised, which led to more
  dropouts until, after a few years, no one was covered by
  the indemnity plan.” Thomas Buchmueller
Healthiest   B   C   D      E
         Unregulated Premiums
   “We find that regulation modestly tempers the (already-
 small) relationship of premium to risk, and leads to a slight
increase in the relative probability that high-risk people will
 obtain individual coverage. However, we also find that the
    increase in overall premiums from community rating
     slightly reduces the total number of people buying
  insurance. All of the effects of regulation are quite small,
 though. [G]uaranteed renewability already accomplishes a
large part of effective risk averaging (without the regulatory
  burden), so additional regulation has little left to change.”

 Mark V. Pauly, “How Private Health Insurance Pools Risk,” NBER Reporter
                   Research Summary, Summer 2005.
            “…covers the risk of premium
reclassification, just as medical insurance
    covers the risk of medical expenses.”
       National Health Expenditures by Source of Funds

                  34%                      Other Private


Source: CMS

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