Lab Notes

I learned something today: the State of Maryland regulates hospital prices. In a post at The Hill Chris Pope compares Maryland’s experience with that of other states nearby:

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.

Left unmentioned: prices only tell part of the story. Providers are able to fill the gap left by lower prices by providing additional services.

I’m skeptical that politicians will hold the line on pricing because they have been reluctant to do so in the past. Their incentives actually point the other way—just let prices increase. I can imagine somebody not voting for their Congresscritter because they weren’t able to get the procedure they want but it’s hard for me to believe that anybody ever voted against their Congresscritter because he or she let a service continue to be provided even though it increased costs.

It will take more than a single-payer system to lower health care costs in the U. S. It will take a commitment to lowering health care costs and I just don’t see that.

6 comments… add one
  • James P Kirby Link

    What would lower health-care costs is for some insurance company to arrange for health care in Mexico, a cheap plane-ticket away. Prices there are 1/3 or less for a Medical Tourist. And you generally don’t need a referral to a specialist or a prescription for drugs. Even forcing price transparency and the posting of prices on the Web would eventually lead to price reductions. Why do you keep talking of outrageous medical pricing in the USSA without once discussing such reasonable alternatives?

  • Because there is no such thing as an international code of civil law.

  • steve Link

    “arrange for health care in Mexico, a cheap plane-ticket away”

    I have lunch with one of our marketing guys every now and then. (Serious Eagles fan so we talk football.) We have trouble getting people to drive 15 minutes out of their way to take advantage of prices that are 20%-30% cheaper and outcomes that are better. When I tell people they will die if they surgery at their little local hospital and they need to go to the big hospital 45 minutes away, they often argue with me or refuse. The only people who advocate forfending people to Mexico are people who dont work with real, live patients.

    Steve

  • steve Link

    “I learned something today: the State of Maryland regulates hospital prices. ”

    That surprises me. Thought everyone who follows health care policy and economics with any interest knew this. Having followed healthcare issues pretty closely for a long time I forget what others are likely or unlikely to know. Anyway, there is no system or reform that guarantees lower costs if you dont actually care about lowering costs.

    Your not knowing that made me think of the Cowen piece earlier today on air pollution. We have known for many years that air pollution has major health effects. We have correlated increasing asthma in children with increased pollution, then seen it drop in areas where pollution decreases. It effects on infant birth weights is well known, as well as heart disease. So when Tabarrok cites a nifty study that demonstrates again what we already knew, it surprises everyone.

    Steve

  • TarsTarkas Link

    These are IMO some of the reasons behind high health care costs:

    Price opacity, partly due to third party billing. Some years ago my wife spent time in hospital from a dogbite. It was covered under insurance, but I would have like to have known how much her treatment cost. To this day I have never been able to find out.
    The cartel system preventing carriers from selling policies across state lines (although they have worked around that to some degree).
    Lack of insurance policy portability (translation: You like your doctor? You better like your job too).
    All these and other problems result in the same things: Lack of accountability and lack of competition. I sell work trucks. I have lots of competition, nowadays not just local but national. I price my stuff too high, I get 100% of nothing. When you’re the only game in town (or damn near), aided and abetted by government, life is good.

  • I don’t believe that people are as willing to shop for health care as you do.

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