You Contain Health Care Spending With Price Controls

A blog about business and economics.
July 30 2012 3:00 PM

You Contain Health Care Spending With Price Controls

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An Israel ambulance near Tel Aviv on July 19

Photo by Jack Guez/AFP/Getty Images.

Mitt Romney speaking in Israel professed admiration for the country's success in containing health care spending, prompting Sarah Kliff to note that Israel achieves this through socialism and price controls.

To me far and away the most frustrating aspect of the health care debate in the United States is failure to acknowledge this point. All around the world you see lots of different models of health care finance, but one thing that all the systems have in common is that the systems where spending is low have very stringent price controls. That's even true of Singapore, which is often perversely touted as an example of a successful market-based approach.

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To get an example of how this works, you don't even need to go any further than the United States of America. We have a single-payer health care program called Medicare that provides insurance to old people. Since there are a lot of old people and old people see the doctor a lot, Medicare is a big chunk of the market for health care services. Since Medicare is such a big chunk of the market, it can offer health care providers lower payment rates than the private sector and many providers will accept Medicare patients anyway. But we dare not allow the gap between Medicare rates and private rates grow too large lest more providers stop accepting Medicare patients. Normally Congress chooses to prevent the gap from growing too much by means of passing "doc fix" legislation that increases payment rates. But Congress could choose to act on the other end and just apply Medicare rates further across the board.

The downside to this approach is that if the price of health care services fell, you'd see less investment in the health care sector and less capacity over the long run. But if the problem you're trying to solve is high levels of health care spending, then this is nothing to worry about. By definition anything that discourages spending on health care will have the consequence of discouraging investment in health care capacity.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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