The Health Care Blog: The Case for Price Ceilings for Health Services

BY DAVID HANSEN Most in the current health reform debate agree on the need to curtail health care costs. Despite this, few discuss directly how health services are priced, though clearly this a central issue. Prices have both immediate impacts and longer term impacts. Immediate impacts include dividing up who pays what burden of current costs. However, I’d like to focus below on what should be a longer term impact of price mechanisms: driving inefficiency out of business. An economic sector, to stay healthy, needs mechanisms to kill inefficient business approaches, while either prodding efficiency improvements or moving customers and staff to better performing entities. In most sectors, lower prices adequately incent customers to drop inefficient suppliers. In medical care, however, suppliers seem to have too much power over prices, and thereby price loses effectiveness as the sector’s cleansing agent. Evidence of pricing’s ineffectiveness for health services is found in the huge price variations that can be observed for similar services. Where markets function well, pricing variation across suppliers reflects quality or feature differences. For example, cars of similar attributes, such as the Honda Accord vs. the Toyota Camry, are priced approximately the same. In medical care, however, prices for services vary inexplicably widely. Read More