Introduction

Recent efforts to control spending, including accountable care organizations, value-based payment, and high-deductible health plans, have emphasized optimizing patterns of health service use. The next wave of cost-containment efforts is beginning to focus attention on prices. Under the American Rescue Plan Act, the Medicare Part D program will, for the first time, regulate prices of 10 costly pharmaceuticals. On the health care services side, a recent bipartisan Health Affairs Council on Spending and Value calls for regulation of commercial hospital rates in markets with insufficient competition.

It is well-know that high prices are the main reason that per person health care spending in the US is well above levels in other countries.^1,2 Policymakers, however, have been understandably reluctant to address US health care prices directly. In competitive markets, regulating 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 shortages. If this is the case, price regulation lowers health care spending but at the expense of comprising access.

That logic does not apply, however, when suppliers (eg, manufacturers of medications under patent, hospitals that face little local competition) are able to sustain prices that are substantially higher than their costs of producing additional units. In such situations, regulating prices can expand markets. Reducing prices lowers the out-of-pocket liabilities and premiums for patients, leading them to seek more services, and as long as the newly regulated prices do not fall below the cost of covering this increased use, drug manufacturers and hospitals will supply what is needed to fill this increased demand. Standard economic theory explains that regulating prices 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, stupid: 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 Economics of Imperfect Competition. 2nd ed. Palgrave Macmillan; 1969. doi:10.1007/978-1-349-15320-6