This Is Not the Answer to Soaring Health Care Costs

THE NEW YORK TIMES

With health insurance premiums surging again, a growing chorus of economists and policymakers has settled on a cure for American health care: Cap what hospitals, drug makers and insurers can charge. The idea shows up in many forms, including Medicare drug price negotiation, proposals to limit private hospital prices to multiples of Medicare rates, and calls for public plans that pay providers at government-set rates.

Their diagnosis is half right. Prices are high, opaque and frequently baffling, and they often do not reflect superior quality or convenience.

But it does not follow that the government can fix the problem by replacing current prices with government-set ones, whether through hospital price caps, drug price limits or ceilings on insurance premiums. A price cap isn’t merely a limit on what can be charged; it’s a claim that regulators know what the maximum price should be, and that they can keep that judgment from being manipulated by the very industries it is meant to discipline. On both counts, the confidence is misplaced.

The economist Friedrich Hayek’s insight was that the knowledge needed to coordinate a complex economy is dispersed, local and often tacit. It cannot be extracted from a database by a bureaucrat or a health economist. Prices, for all their imperfections, carry information about what people value, what providers can supply, where capacity is scarce and what alternatives are available.

Yes, health care prices are badly distorted by insurance, regulation and market power. But the fact that a signal is distorted doesn’t mean a central authority can easily replace it with a better one. Price controls substitute administrative confidence for decentralized knowledge.

When a hospital charges a high price, it may be the result of monopoly power. It may also reflect the cost of maintaining emergency capacity, training future doctors or delivering better care. Centralized price setting requires reducing all those factors to a single, static number. The number may look precise, but that doesn’t mean it’s optimal.

Price controls are especially crude when quality differs. Consumers willingly pay more for convenience and superior performance, and health care is no exception. Yet traditional Medicare generally pays the same for a service whether it is delivered by an exceptional provider or a mediocre one. Medicare tries to adjust payments for quality and safety, but its formulas cannot capture all the reasons patients may value one doctor or hospital over another. Some sought-after doctors respond by taking fewer Medicare patients or charging membership fees for extra access and services that Medicare does not cover. Government-imposed prices rarely reward excellence.

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