Healthcare / Regulation

How to Lower Health Care Costs: A Webcast from The Hamilton Project

The goal of this webcast, held on March 10, 2020, was to explore how competition, regulation, and reduced administrative expenses can help lower health care costs, strengthen the health care sector, and drive economic growth in the United States. In the United States health care sector, administrative costs are high and competition is generally low— a feedback loop that continues to drive the health care sector further into trouble. Beginning with opening remarks from Jay Shambaugh, Director of the Hamilton Project at The Brookings Institution, the webcast first examined how the ongoing coronavirus outbreak has revealed the pitfalls of the health care sector, including problems related to access, cost, and insurance coverage. The webcast then included two roundtable discussions, which bookended a research presentation from David Cutler of Harvard University. For the sake of concision and analysis, however, this blog post will focus only on the first discussion.

The first roundtable discussion in the webcast addressed the question: What is the best way to directly regulate prices to lower health care costs? Furthermore, how do we control spending and prices without limiting quality and access?  Both Leemore Dafny of Harvard Business School and Michael Chernew of Harvard Medical School advocated for a relatively extreme proposal that would cap health care prices, cap price growth, and implement flexible regulatory oversight. The proposed price caps would be based on commercial prices in the local market area, ideally set at some multiple of the 20th percentile price for each service. In order to implement these price caps and monitor price growth, they proposed the creation of a regulatory committee. It would be made up of appointed federal authorities who would monitor commercial insurance claim data and react if implemented regulations don’t produce the desired effects. This regulatory proposal isn’t tied to Medicare prices, like many health care price cap proposals are, however, in an attempt to still rely on and promote market competition rather than solely use the government to determine prices.

Dafny and Chernew advocate strongly for price regulation, claiming their proposal is aimed specifically at the most extreme prices, but will still allow for competition and private insurance. Amitabh Chandra from the Harvard Kennedy School of Government argued otherwise. He brought up significant challenges of price caps on health care services, including difficulty deciding what the right price multiple is in each market, how such price caps will affect quality, and how/if the price caps would affect market consolidation. Chandra says it’s impossible to know if the quality of care would be the same with or without the price caps, stating that the higher the price cap multiple, the more likely providers are to cut quality. Obviously if it was known that quality would be the same no matter the price cap, then the proposal should be implemented— but we don’t know that for certain. Instead of a proposal as strong as Dafny and Chernew’s “regulatory hammer,” Chandra argues that the market should continue to promote patient choice through narrow networks and/or referenced pricing. Yet still, these solutions face criticism for stifling innovation and opening the door to government controlled health care.

In conclusion, Dafny and Chernew acknowledge the benefits of patient choice in health care, but also argue that there isn’t any time to wait for the market to cooperate before price increases continue without restraint and lead to mergers. Chandra disagrees with their price cap proposal, insisting that there are too many unknowns to proceed. The rest of the webcast addressed similar questions surrounding health care affordability: How can we lower administrative costs? How can increased competition reduce health care costs? Ultimately, it concluded that we need to address the underlying cost structure of healthcare and find flexible ways to balance regulation and competition in the diverse health care markets across the United States.

To watch the webcast: