Harris Sherline: Health-Care Price Controls Won’t Work

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By Harris R. Sherline

Price controls have a history of failure, which would only continue if added to reform proposals working their way through Congress

One of the key elements of the proposals for reforming America’s health-care system is the use of price controls, which have been employed by Medicare. Since 1984, the government has established, at its sole discretion, a schedule of fees it pays hospitals and doctors for their services. Hospitals are paid 80 percent of the scheduled fee that is set by the government, regardless of the actual cost to the provider. That’s price control, and the result is that the Medicare program now has an unfunded liability in excess of $11 trillion.

Price controls have never worked — ever — as far back as 4,000 years ago in Babylon. In a 2005 post to the Mises Daily, Thomas DiLorenzo noted: In Babylon, “the Code of Hammurabi was a maze of price-control regulations.”

Price controls also failed in ancient Greece and again during the third century B.C. in Egypt. In Greece, price-control laws were routinely ignored, in spite of the death penalty being imposed for failure to observe them.

In 301 B.C., Roman emperor Diocletian (244-311 A.D.) issued an Edict on Maximum Prices, in an attempt to curb the inflation caused by his overspending. The law was quickly ignored.

Price controls are invariably imposed by people who are woefully ignorant of the most basic economic principles, a mistake that has been repeated throughout history. The current crop of U.S. politicians is no exception. Does anyone really believe that House Speaker Nancy Pelosi, D-Calif.; Senate Majority Leader Harry Reid, D-Nev.; President Barack Obama; or other like-minded politicians in Congress are so brilliant that they have the ability to decide how much everything should cost?

What such leaders invariably fail to take into account is that people react to laws and regulations and modify their behavior accordingly.

DiLorenzo also noted an early example of this when ancient Egyptian farmers “became so infuriated with the price-control inspectors that many of them simply left their farms.” By the end of the century, the “Egyptian economy had collapsed, as did her political stability.”

The health-care proposals working their way through Congress all rely on some form of price control in the mistaken belief that it will reduce costs. However, to reduce costs, it would be necessary for the government to set prices at every level of production and distribution, which is virtually impossible considering the billions of buy-sell decisions that are made throughout a society literally every day. There are plenty of examples of the failure of that sort of thinking, the most notable being the Soviet Union, which collapsed after 70 years.

In a 2005 article, economist Thomas Sowell commented:

“People who want the government to control the prices of pharmaceutical drugs seldom, if ever, raise the question of what actually happens in places and times when government has controlled the prices of pharmaceutical drugs. Canada and other countries do it. What consequences have there been? One major consequence is that Canada and other countries do not create nearly as many of the new lifesaving pharmaceutical drugs as the United States does. These other countries live off the results — the medicines — produced by the enormously costly research that ‘obscene’ pharmaceutical profits finance in America.”

Other instances of the effects of price controls include the Revolutionary War, when George Washington’s army nearly starved to death because of controls on food that were imposed by Pennsylvania and other colonial governments. And, in 1793, French politicians passed the Maximum Price Act, which imposed price controls on grain and other items and caused starvation in some towns.

In 1971, President Richard Nixon’s wage and price controls failed to lower the rate of inflation and were abandoned in 1974.

In 1979, President Jimmy Carter’s price-control policies caused oil and gas shortages, and in the 1990s, California’s energy crisis was caused by price controls on retail prices (but not on wholesale prices).

In spite of clear evidence that price controls have never worked as planned, Obama and Congress continue to press for a health-care plan that would make substantial use of them. If they succeed, they will have unintended consequences that are likely to cause major shortages of health-care services and ultimately will lead to rationing.

Sowell’s 2005 article concluded, “Costs don’t go away because you refuse to pay them, any more than gravity goes away if you refuse to acknowledge it. You usually pay more in different ways, through taxes as well as prices, and by deterioration in quality when political processes replace economic process. ... But the lure of the free lunch goes on.”

[Noozhawk’s note: On a 220-215 vote Saturday, the Democratic-controlled House of Representatives passed a 10-year, $1.05 trillion health-care bill — the biggest expansion of health-care coverage since Medicare’s creation in 1964.]

— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his blog, Opinionfest.com.

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