Resurrecting Health Care Rate Regulation
59 Pages Posted: 25 Mar 2015 Last revised: 8 Jan 2016
Date Written: March 24, 2015
Our excess health care spending in the United States is driven largely by our high health care prices. Our prices are so high because they are undisciplined by market forces, in a health care system rife with market failures, which include information asymmetries, noncompetitive levels of provider market concentration, moral hazard created by health insurance, multiple principal-agent relationships with misaligned incentives, and externalities from unwarranted price variation and discrimination. These health care market failures invite a regulatory solution. An array of legal and policy solutions are typically advanced to control our health care prices and spending, including: (1) market solutions that focus on transparency and consumerism to discipline health care prices; (2) antitrust enforcement to promote competition in the provider market; (3) consumer protections that protect individual uninsured or underinsured patients from unfair prices; (4) health care payment and delivery reforms that alter financial incentives of health care providers to reduce overutilization and improve efficiency; and (5) direct regulation of provider payment rates. The literature on these health care policy approaches reflects the fragmentation of the U.S. health care system, typically considering each approach in isolation, and it is difficult to make sense of an a la carte menu of approaches. This article sets forth an analytic framework to simultaneously and comprehensively evaluate all the policy solutions to discipline health care prices by measuring each solution for its ability to address the health care market failures. Applying this policy-against-market failure analysis leads to the following conclusion: only one solution -- direct rate regulation -- is capable of addressing the widespread and growing provider monopoly problem. More politically popular market approaches such as price transparency and payment and delivery reforms can correct the market failures from information asymmetries and principal-agent problems, but because they do not address the market power of providers, they will be ineffective to control health care prices and spending without accompanying direct rate regulation. It is time to resurrect rate regulation and place it squarely in the center of any policy strategy to control health care prices and spending.
Keywords: health care, health care finance, health insurance, health care cost, healthcare, health care prices, regulation, rate regulation, healthcare rates, healthcare system, health care system
JEL Classification: I11, I18, K19, K23, K32
Suggested Citation: Suggested Citation