Healthcare Cost Control at the Crossroads

John McCracken, PhD

The cost of healthcare dominates today’s political discussion; the public consistently ranks it as the number one issue they want government to address.  So far, the discussion has centered on two polar opposite avenues of approach:

  • greater government control thorough various flavors of Medicare for All; or
  • unleashing the forces of market competition through greater healthcare price and quality transparency.

These two approaches to controlling cost are mutually exclusive.  Which one will prevail is presently in doubt, but the resolution may not be long in coming. 

Medicare for All is a central theme for a majority of the Democrats running for President.  Candidate proposals range from a single government payer and the elimination of private insurance at one extreme (Sen. Sanders) to allowing people age 50-64 the option of buying into Medicare, with premium and cost-sharing subsidies for lower income people (Sens. Booker, Harris, Gillibrand and Klobuchar).  Polling by the Kaiser Family Foundation shows that 77% of the public favors a Medicare purchase option, while 56% say they favor a national plan in which all Americans would get their insurance through a single government plan. 

Whatever Democratic consensus finally emerges, it’s likely to be accompanied by an expansion of the federal government’s role in setting clinical prices and an attempt to restrain total spending through global budgets.  It’s this prospective government control over healthcare price setting—not financing—that has the potential to have the most perverse economic effect. 

Government price setting would freeze relative prices of medical services.  In a well-functioning market, relative prices of complimentary or alternative services are free to adjust to reflect constantly changing technology and consumer demand, facilitating optimal supply and the flow of resources into their most efficient use.  This is impossible when relative prices are prospectively set either by the Federal government or a large Medicare managed care plan. 

In contrast to Medicare for All, there have been two recent policy initiatives to restrain spending by promoting greater competition through provider price transparency.  In early March the Department of Health and Human Services indicated that it was considering a rule requiring healthcare providers to publicly disclose the secretly negotiated rates they charge insurers.   This was followed in June by a presidential Executive Order directing HHS to draft a rule that would require hospitals and the physicians they employ to publicize information on their negotiated rates with insurers for common and shoppable procedures. 

The outcry from the healthcare industry has been swift and predictably fierce.  The industry lobby is powerful—in 2018 (a non-election year) it spent more than $558 million in lobbying, more than any other U.S. industry—and has advanced the counterintuitive argument that price disclosure would raise prices, not lower them.  There is certain to be considerable opposition as well as litigation as industry groups representing hospitals, physicians and insurers attempt to derail the initiative.  

A second initiative has come from the powerful Senate Health, Education, Labor and Pensions (HELP) committee in the form of a propose Lower Health Care Costs Act of 2019.  Title III of the Act would ban gag clauses in contracts between providers and health plans that block consumers and employers from seeing actual cost and quality data on providers.  It also would prevent anti-tiering and anti-steering clauses that restrict payers from directing patients to the most cost-effective providers. 

While the healthcare industry has marshalled its considerable resources to slow the movement toward true cost and quality transparency, employers—who sponsor insurance for 158 million Americans and thus have a vested interest in the outcome—have been notably silent.  Whether through indifference or simple inertia, employers have not been a vocal force for greater industry transparency.   

Some industry participants argue that the combination of high deductibles and value-based payments—even in the absence of price and quality transparency—eventually will suffice to restrain costs. But, without knowledge of binding prices and robust data on quality of care, it is impossible for patients to shop for cost-effective care.  Relying on high deductibles and value-based payments alone to contain costs is like trying to talk a cat down out of a tree. 

Which is it going to be that finally restrains healthcare inflation: government administered prices or market competition?  Only the heavy hand of government or the competitive forces of informed patient demand ultimately are capable of restraining the growth of healthcare inflation.  The stakes are high and the jury is still out. 

John McCracken is Director of the Alliance for Physician Leadership, an educational partnership between the University of Texas at Dallas and The University of Texas Southwestern Medical Center which offers an MS/MBA program in healthcare leadership and management exclusively for physicians.