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Why Medical Price Controls Are A Terrible Idea

In the over 4,000 years of which there is a history, there has never been a single instance of success where prices controls didn’t cause serious damage.

Lost in the efforts to repeal Obamacare is the fact that, even if it disappears, deterioration in the quality of care that Americans receive will continue. To date discussion centers on financial and political matters not the real problem which results from price controls on medical care;  how can we be sure that when we are sick or injured, we will receive the quality medical care we need?

In the torrent of information which deluges the public, the problem of price controls is scarcely mentioned because most writers in the medical policy community belong to a small group of academics, social scientists, economists and members of think tanks whose interests and expertise are in the financial rather than the medical aspects of healthcare.  They  lack the real life experience to appreciate the effects of their recommendations on practicing physicians and their patients. Doctors who know the problems are too busy coping with them to write about them.

What follows is limited to “Medical Care”, which is what happens to us when we need a doctor or hospital. Its quality determines whether we recover successfully, suffer needlessly or die prematurely. “Health Care”, includes these and everything else, pharmacies, public health, insurance. etc.

The consensus is that our medical care system is very sick.  A logical way to  approach it is as a competent physician would a patient suffering from a slow growing malignancy.  First we must be sure that we do not make the condition worse, by following the ancient medical maxim: “First, Do No Harm.”

Government actions in the healthcare field have not only consistently violated this, but actually are the cause of the disease they purport to cure.  Unlike the government, our doctor, before starting treatment, would review the history of the disease to make an accurate diagnosis from which a practical and purposeful treatment plan could be implemented.

This would show that the Federal Government’s planned and inadvertent actions have resulted in the disease of our health care system. This happened in several stages starting with World War II price controls which encouraged employer paid insurance and third party payment. Tax policy that made employer paid health insurance tax free to the employer and to the employee, but taxable to the self employed and the unemployed elderly, caused resentment. This set the stage for partial success of the 20-year campaign to enact government controlled care with the passage of Medicare/Medicaid in 1965 and opened the flood gates for the cost inflation that has continued ever since.

Third party payment insulated patients from the cost of coverage as well as the cost of the care they consumed.  They didn’t even see their bills as doctors and hospitals billed the insurance companies or the government directly. Employees didn’t realize that their insurance benefit was off set by lower pay and came to believe that their medical care cost very little leading to over utilization. We developed a payment system in which, because patients had no concern about costs, neither did doctors, hospitals, insurers, regulators and politicians. No wonder prices kept rising.

Finally, in a misguided attempt to control costs, Medicare price controls were imposed on hospitals in 1983 and on physician fees in 1992. Insurance companies piggybacked on the government rules, resulting in about 90% of physician fees being covered by government or contractual controls.

The lessons of price control

There is general agreement amongst economists that if price controls succeed in keeping prices below the normal market level they result in increased demand, shortages, lower quality, and black markets.

Until Price Controls were imposed, despite the many regulatory inefficiencies and high costs, the quality of medical care and services continued to improve with new technologies and greater knowledge. The controls have resulted in the damage to patient care that we have now and were the worst actions that could have been taken.

Price controls have never worked. In the over four thousand years of history — in Babylon, the Roman Empire, and into modern times in Communist countries, Nazi Germany, and in the United States with local controls on rent, and  federal controls on gasoline and universal controls in the 1970s — there has never been a single instance of success where prices were controlled without serious damage.

There is general agreement amongst economists that if price controls succeed in keeping prices below the normal market level they result in increased demand, shortages, lower quality, and black markets. They are particularly destructive in Medical Care where, in addition to economic problems, they result in needless suffering and death.

Hospitals, as tax exempt organizations, were able to supplement revenues with charitable contributions and, by virtue of effective monopoly status within their geographic areas, were able to shift their Medicare losses to private payers so that the full negative effects of the controls have not been realized for them. But physicians have no such safety valve.

Price Controls were imposed historically by simply capping the existing prices. This method had the advantages of being understandable and relatively simple to manage and enforce. While there is no right way to do the wrong thing, our government proved that there is a wrong way to do the wrong thing.  A committee of social scientists at Harvard University was tasked by government to establish new controls.  Instead of using the simple capping method, the committee came up with a complicated, costly, untested plan, the Resource Based Relative Value Scale “RBRVS”. This is based on the discredited Marxist Labor Theory of value which held that the only measure of value of a product or service is the work required to produce it. It made no allowance for quality or demand, had no valid theoretical or practical basis and, except for communist countries, was largely abandoned by the end of the 19th century.

Destroying quality of service

Undaunted, the committee undertook an experiment to set numeric values for each of the 10,000 medical procedures included in the Current Procedural Terminology (CPT) of the American Medical Association. The very idea that mere mortals could equitably and accurately compare the values of such diverse procedures as heart transplants, psychiatric consultations, blood counts, gastric X-rays, office visits, etc, etc. done in hundreds of thousands of physicians offices, hospitals, and clinics all over the country is so unrealistic that it only shows the ignorance and arrogance of the committee. It would be laughable if it had not resulted in the complex costly bureaucratic monstrosity that we are saddled with today – the “Resource Based Relative Value Scale” (RBRVS).

One big defect in the RBRVS system is that there is no credit for quality of service.

All physicians, whether  recognized experts who teach others procedures they pioneered, or one barely out of training are paid the same exact amount for every procedure regardless of their knowledge, skill, experience or the outcome. If baseball players were compensated like physicians, a consistent 20 game winning pitcher in the major leagues would be paid the same as a rookie minor leaguer, because each would be paid based only the number of pitches (whether balls or strikes) he threw.

Insurance companies have similar needs to check on the bills submitted. Government auditors, bureaucrats and enforcement agencies all add to the overall costs.

In this system each physician must place a code on every procedure that he does, with the risk of payment being denied or even of being prosecuted if the code is not correct. This has resulted in costly office overhead. Insurance companies have similar needs to check on the bills submitted. Government auditors, bureaucrats and enforcement agencies all add to the overall costs. The costs of all this are incalculable. All of these costs are resources that should be spent on  patient care rather than compliance with pointless government regulations.

The damage from Price Controls began in 1993. Of the inevitable results: shortages, lower quality, increased demand and black markets, the shortage of physicians and resulting decrease in quality are the most important. The conservative estimate of the American Association of Medical Colleges is that there will be a shortage of 91,000 physicians by 2020.  Physician responses to having their incomes severely limited while their expenses and the incomes of comparable professionals increase are what would be expected from rational individuals and are harmful to patients.

The most obvious response is to see more patients and decrease the amount of time spent with each patient. Appointments are often scheduled for 10 -15 minutes each, much of which is spent on paperwork. If more time is needed for more than one problem  additional appointments are scheduled.

Since they are only paid for procedures that are included in the CPT codes, a physician’s incentive is to cut back on the many valuable services which are not included in the codes such as: more time for a careful history and physical examination resulting in better diagnoses; education of patients and their families about medications and healthy lifestyles; telephone consultations; and, discussions of the patient’s situation with them and their relatives. These not only provide better service but save costs.

The incentive is to seek patients who are able to pay reasonable fees and avoid those who, because of their coverage restrictions (Medicare, Medicaid, HMO) can not. As a result Medicaid patients have difficulty in getting appointments and many physicians refuse to take new Medicare beneficiaries. This emphasizes the fallacy of the delusion, apparently shared even by our President, that medical insurance and medical care are the same thing. They are not, and the fact is that without access to physicians and hospitals insurance is as worthless as a free pass to a full parking lot!

This situation and the loss of the many intangible rewards of practice: gratifying patient relations, respect, time and funds for continuing education; have made the practice of medicine a much less attractive profession. Physicians who are financially able retire sooner than they would have previously, and the best qualified potential replacements often choose less frustrating careers.

With the diagnosis clear, the logical treatment is obvious. Destroy the malignancy by removing the price controls.

The result is the growing shortage which, unless corrected, will result in conditions here like those in Great Britain, Japan and Canada where patients are dying and cancers becoming untreatable while they are on waiting lists for care.

A simple solution

With the diagnosis clear, the logical treatment is obvious. Destroy the malignancy by removing the price controls.

This can be accomplished by simply repealing the laws that authorized them. It requires no replacement legislation and will have no significant effect on government or private systems of payment, which were functioning before the controls were imposed. The administrative cost savings for physicians’ offices, insurers and government, although huge, can only be determined after they are achieved.

This obvious solution may not be easy to achieve. It will doubtless be opposed by many of the huge number of persons who are dependent on the needless work, as well as by those whose real interest is the control of, rather than the quality of our health care, and it is essential for a solution that ensures quality medical care in America.

With the removal of the price controls we can expect that in  addition to to saving the enormous administrative costs they cause the devastating effects of the physician shortage will be relieved.  Patient care services will improve significantly as physicians compete for patients on service and fees.  Medicare patients will regain the right to protect their lives, which they are denied now, by being able to freely contract  with  physicians who require fees greater than the government allows, and we will be spared the ridiculous spectacle of the ”doc fix”.

Shortages caused by price controls protect less effective doctors who now have busy practices regardless of the quality of their service.  The exciting new developments in diagnostic and treatment procedures, equipment, immunology, informatics and genetics will be brought more efficiently to patient care, without being inhibited by burdensome and needless financial regulations. The relationships between physicians and patients will improve as patients  choose physicians with whom they are comfortable.

Fraud and abuse in billing, encouraged by the complex controls, will decrease along with the police state mentality they foster and the FBI agents, auditors and bureaucrats they require. Physician’s  administrative costs will decrease significantly and the resulting savings can be passed on to the patient/consumer. Simple disclosure rules can make sure physicians do not abuse their freedom by overcharging patients.

Physicians should be required to post their fee schedules for the services they provide. If they charge more than the posted amount,without securing the informed consent of the patient, the procedure would not be a legally enforceable debt.  With these safeguards, physicians should be allowed to “balance bill” for the part of their fees not reimbursed by insurance. This limits the cost to the government programs and would be insurable. Patients can make their own decisions based on informed consent (posting of fees) and physician qualifications and reputation.

Fortunately there is ample evidence that these benefits will occur based on the experience in places where price controls did not or do not exist. The first is the history of our own country before price controls. Medical bills were paid the same way as any other bill. For those in need, physicians would discount or forego their fees and the quality of care was comparable to that of privately paying patients. Refusal of care for inability to pay, age, or perceived economic value to the community, determined by a government board, was unheard of.

Other examples are Dentistry and Veterinary Medicine where there are ample practitioners and none of the problems that medical care faces.  Without controls, laser corneal surgery and cosmetic surgery costs have decreased,  patients know their total cost and can freely shop among many practitioners.

A current example of success in removing price controls is the Netherlands, where general public disgust, particularly long waiting lists, led to defeat of the government coalition in the 2002 elections. The new government removed the price controls, which cut waiting times for cataract surgery from 16 weeks in 2000 to 6 weeks in 2011. Mortality rates also improved, especially for the elderly.

Any new legislation should clearly separate repealing price controls from all other issues, including finance, insurance coverage, taxes etc. As a specific single subject this offers hope for a bi-partisan approach. Physicians make no distinction between Democrats, Republicans or any other non-medical characteristics of their patients, and medical care should never be a partisan political issue!

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