NCPA - National Center for Policy Analysis


August 15, 2007

Virtually any U.S. reform proposal promising "universal coverage" will reduce health care spending.  Why?  Because Congress has a long and sordid history of support for health-care price controls, says Merrill Matthews, director of the Council for Affordable Health Insurance and a resident scholar with the Institute for Policy Innovation.

  • Medicare reimbursements to hospitals have been price-controlled since 1983 and to physicians since 1992.
  • If Medicare represented 1 percent or 2 percent of the health care market -- as the U.S. Department of Veteran's Affairs (VA) does with respect to prescription drugs -- price controls would create distortions, but they would likely be manageable.
  • However, Medicare is the dominant insurer in the country; its price controls become the benchmark.

Whenever the government controls prices, it arbitrarily determines who it will pay, how much, and for what, explains Matthews. Vendors that provide goods and services generally begin to work the system in order to maximize their gain -- or more accurately when referring to doctors in Medicare, minimize their losses.  When Medicare distorts a price -- and virtually all government-set prices are distorted -- the reverberations are felt throughout the health-care system.

Consider the case of physician reimbursements:

  • Every year, doctors face a cut in Medicare reimbursements, even though their costs for providing care continue to rise.
  • The American Medical Association's lobbying effort has managed to keep current reimbursements about the same as they were in 2001, in part by backing the Medicare Modernization Act in 2003; that's six years without an increase.
  • And unless Congress acts, doctors face a 10 percent cut in reimbursements in 2008, and a 40 percent cut by 2016.

Because politicians want to keep health-care spending as low as possible, they have very little incentive to raise those reimbursement rates, says Matthews.

Source: Merrill Matthews, "Cost Control for Dummies," Wall Street Journal, August 15, 2007.

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