“Medicare for All” advocates, such as Sen. Bernie Sanders (I-Vt.), argue that single-payer health care could help pay for a major expansion of coverage by greatly reducing the cost of purchasing medical services. They base their argument on two principal observations: that Medicare pays 40 percent less than private insurers for hospital services, and that medical costs are much lower in countries where prices are set by the government.
What do we learn from comparing America’s health care costs with those of Sweden or Spain? The answer is, very little. Those countries differ from the United States in so many ways — wage rates, medical needs, political systems, income levels, access to medical technology, and almost every other related government policy — that the specific effect of medical price regulation is hard to identify.
Instead, it makes much more sense to assess the effect of price regulation by looking at Maryland, which has regulated hospital prices for 45 years, and comparing the cost and quality of its health care system to that of neighboring states such as New Jersey or Pennsylvania. I recently took a comprehensive look at Maryland’s all-payer system — and no matter how you measure them, Maryland’s overall health care costs are not significantly lower than those of its neighbors. If anything, costs have increased slightly over time relative to other states.
Based on Maryland’s experience, the idea that government control will reduce hospital prices seems far-fetched. In reality, the main motive for Maryland retaining its “all-payer rate-setting” system is that it allows Maryland to claim $2 billion more in federal dollars each year. How? The state has a waiver from the nationwide Medicare fee schedule, which requires Medicare to pay Maryland hospitals based on the rates the state sets for private insurers — a provision which increases Medicare revenues that Maryland hospitals may claim from the federal government by around 40 percent for inpatient care and 60 percent for outpatient procedures.
While Maryland consistently has met various narrowly-defined targets for constraining the growth of hospital costs — which are required in order to keep the state’s special waiver — its broader performance is unimpressive. Maryland’s health care premiums, per-capita hospital costs, the rate of hospital cost growth, and the level of charity care its hospitals provide differ little from neighboring states or the nation as a whole.
Why hasn’t putting the government in charge of setting prices reduced hospital costs in Maryland? Largely for the same reason that costs have risen steadily in other states: politicians want to protect the ability of hospitals to fund and deliver expensive services to their local communities. While price regulation is sold as a method of reducing prices, it also increases them: Maryland law bans new hospitals from competing with existing facilities by offering lower prices and prohibits insurers from negotiating significant discounts with networks of preferred providers.
More sophisticated advocates of price regulation understand that suddenly cutting hospital costs would decimate revenues and current levels of access to care; yet, they hope that price regulation could slow the growth of hospital costs over time. But, after 45 years of trying to do so, Maryland’s experience makes it pretty clear that this isn’t going to happen. To shed costs, America’s hospital market needs more price competition, not less.
This piece originally appeared at The Hill
Chris Pope is a senior fellow at the Manhattan Institute and author of the new report, “When Government Sets Hospital Prices: Maryland's Experience.” Follow him on Twitter here.
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