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Cutting health care spending is not hard—if you’re willing to accept the pain of price controls

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Cutting health care spending is not hard—if you are willing to accept the pain of price controls. Charles Blahous of the Mercatus Center estimated this week that Bernie Sanders’s proposal for “Medicare for All” would add $32.6 trillion to the federal budget over 10 years. Blahous also projected that the corresponding reductions in private health care spending would produce a net reduction in national health expenditures of $2 trillion over the period. Sanders himself touted that finding as a validation of his plan.

While the plan’s approach to cost reduction might fail, the bigger problem is that it might succeed. Bennedic Ippolito explains:

In an effort to be as favorable to the Sanders plan as possible, Blauhous’ primary estimates assume the federal government would successfully impose a provision requiring providers to accept Medicare payment rates for treating all patients. That represents about a 40 percent reduction from what privately-insured patients currently pay. Assuming this reduction in the prices paid by some 175 million privately-insured Americans nets the proposal over $5 trillion in 10 years.

The desire to reduce health care prices makes sense — our relatively high prices are largely the reason American health care is so expensive. But the sheer size and consequences of these proposed price reductions, if attempted, would raise political and economic hurdles.

For one, charging a single agency tasked with setting the correct price of any given medical service, procedure, etc. for all consumers is a daunting task. Those prices have profound implications for quality of care, health outcomes, access, investment in new medicines and technology, and so much more. Earlier this year Jeffrey Clemens and I summed this up whendiscussing a related price-setting proposal in California:

Economists typically balk at this kind of highly regulated price setting. When markets work well, prices serve as signals of evolving costs, needs and wants: information even the most competent and benevolent regulator cannot feasibly possess. Indeed, evidence from Medicare suggests that regulated prices tend to adapt very slowly to evolving conditions. This blunts the incentives of providers to improve or even maintain their quality, and generally fails to encourage high-value care.

[Benedic N. Ippolito, “An Amuse-Bouche to the Impending Single Payer Debates,” American Enterprise Institute, August 3]

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