It is time to consider more price adjustments in health care American Enterprise Institute

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Recent efforts to control costs, including accountable care organizations, value-based payments, and high-deductible health plans, have emphasized models of optimizing the use of health services. The next wave of cost control efforts is beginning to focus on pricing. Under the American Savings Plan Act, the Medicare Part D program will, for the first time, regulate the prices of 10 costly pharmaceutical drugs. On the health care services side, a recent bipartisan Health Affairs Council on Cost and Value calls for regulation of for-profit hospital rates in markets with insufficient competition.

It is well known that high prices are the main reason that health care spending per person in the US is well above the levels of other countries.^1,2 However, policymakers have been understandably reluctant to directly address US health care prices. In competitive markets, setting prices below market equilibrium levels is usually considered a bad idea because consumers demand more goods and services when prices fall, but producers become less willing to supply those goods and services, leading to absence. If so, price regulation lowers health care spending, but at the expense of inclusive access.

However, this logic does not apply when suppliers (eg, manufacturers of off-patent drugs, hospitals facing little local competition) are able to charge prices that are significantly higher than their costs of producing additional units. In such situations, price regulation can expand markets. Lowering prices lowers out-of-pocket co-pays and premiums for patients, causing them to seek more services, and as long as the new adjusted prices don’t fall below the cost of covering this increased use, drugmakers and hospitals will provide what is needed to meet this increased demand. Standard economic theory explains that price regulation in markets where suppliers have monopoly power in the short run, especially market power that is entrenched where competitors cannot enter, is efficient and beneficial.³

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1. Anderson GF, Reinhardt UE, Hussey PS, Petrosyan V. It’s the prices, the bullshit: why the United States is so different from other countries. Health Aff (Millwood). 2003; 22 (3): 89-105. doi:10.1377/hlthaff.22.3.89PubMedGoogle ScholarCrossref
2. Glied S. Reinhardt Lecture 2021: Health Care Prices as Signals. Health Serv Res. 2021; 56 (6): 1087-1092. doi:10.1111/1475-6773.13878PubMed
3. Robinson J. The economy of imperfect competition. 2nd edition. Palgrave Macmillan; 1969. doi: 10.1007/978-1-349-15320-6