August 9, 2010 10:54AM

Did ObamaCare Get Medicare’s Price Controls Right?

Congress uses price controls to pay Medicare-participating providers. Those providers invariably complain that Congress sets prices too low, but many are no doubt too high.

Congress chose to pay for ObamaCare’s new entitlement spending in part by ratcheting down many of those prices. That suggests supporters either believe that Medicare’s controlled prices generally exceed the marginal value of the relevant services, or that those prices will begin to exceed marginal value as providers become more productive (i.e., as they learn to provide those services at a lower cost).

Neither assumption is necessarily wrong. Producers operating under price controls nevertheless have an incentive to improve productivity. When costs fall relative to prices, producers get to keep the difference. Ambulatory surgical centers saw a windfall because Medicare took two decades to update those price controls for productivity gains.

Medicare’s chief actuary and many others doubt that providers will realize the productivity gains assumed by Congress. If the assumed productivity gains do not occur, those price reductions would reduce Medicare enrollees’ access to care. Medicare providers and enrollees would likely persuade Congress to block the price reductions. Medicare spending and the federal debt would rise.

Yet even if those productivity gains do occur, ObamaCare’s price reductions would still reduce access compared to a world without them, therefore enrollees and providers may still persuade Congress to eliminate them. Regardless of what happens with productivity, as Tom Daschle notes, the patient‐​provider pincer movement usually carries the day.

This is an inherent defect of Medicare not found in markets. Competitive markets automatically translate productivity gains into lower prices for consumers. Medicare protects providers at the expense of enrollees and taxpayers.

(Cross‐​posted at National Journal’s Health Care Expert Blog.)