Health Care Price Controls May Backfire, Experts Warn : Policy: The Administration is considering the idea, but economists say it could actually increase costs.

Price controls did not work for Presidents Jimmy Carter, Richard Nixon and Franklin D. Roosevelt--or even for the ancient Babylonians. And if President Clinton tries to use them to curb the rise in health care costs--as some of his advisers are suggesting--he is also likely to meet with failure.

That is the almost unanimous judgment of economists and market experts. Although the idea of mandating an end to runaway health care costs is tempting, it is a siren’s song that will lead to chaos, massive evasion of the rules and--ultimately--to even higher costs, they say.

While its final plans will not be announced until early May, the Administration is known to be considering a proposal to impose controls on the prices charged by doctors, hospitals, insurers and pharmacies--at least for a few years, until other reforms take hold.

Vice President Al Gore said earlier this week that without price controls, health care costs would surely rise from 14% to 20% of the gross domestic product by the year 2000. “That’s why cost controls represent such an important part of reform,” Gore said.

In remarks following an address to the American Business Conference on Monday, Ira Magaziner, the Adminstration’s chief health care adviser, acknowledged that price controls are “unpleasant policies . . . fraught with difficulties” and said efforts to use them during the Nixon Administration were ineffective.

While he said no decision had been made to institute such controls, Magaziner called the likelihood that health care costs would grow 11% a year without them an unpleasant alternative.

But even Gore’s and Magaziner’s apparent willingness to consider price controls has stunned not only many of the Administration’s allies in Congress but economists from all across the political spectrum.

Some have speculated that perhaps the Administration’s real strategy is simply to threaten controls in an effort to gain voluntary price restraints.

“I can’t believe they are going to do it. I can’t believe they are that stupid,” said Barry Bosworth, who was the mastermind of Carter’s unsuccessful effort to restrain prices. “The health care industry is the best example of an industry where price controls won’t work.”

Bosworth is not the only one-time proponent of price controls who has spoken out against them in recent days. C. Jackson Grayson, who chaired Nixon’s price commission between 1971 and 1973, wrote a piece for the opinion page of the Wall Street Journal saying: “Price controls will make things worse. Believe me, I’ve been there.”

To many liberal and conservative economists alike, history demonstrates that price controls do little or nothing to restrain inflation, are not easily enforced, require an unwieldy government bureaucracy and always end up distorting the markets they are intended to control.

“Almost by definition, if you believe price controls will work, you are not an economist,” said Edmund F. Haislmaier, a policy analyst at the Heritage Foundation, a conservative think tank, who has studied the history of controls. “If Clinton’s advisers decide to do this, it will show that they’ve learned nothing from history.”

The first known experiment with general wage and price controls occurred in ancient Babylonia under the Code of Hammurabi. As demonstrated by the more recent examples of general price controls under Nixon and Carter, they have always been blamed for fueling inflation instead of restraining it.

Yet despite the unpromising history of controls, polls show that a majority of Americans would like to see restraints imposed on fees charged by doctors and other health care providers. A recent Louis Harris poll published by the Kaiser Family Foundation found that 76% of Americans favor short-term controls.

Sen. Bob Kerrey (D-Neb.), who made health care reform the centerpiece of his failed 1992 presidential bid, said he fears that Congress and the President will respond to public sentiment and ignore the experts.

“It’s possible for us to pass a piece of legislation and make things worse,” Kerrey said. “That’s particularly true if you listen to the polls. . . . Price controls are very popular today.”

Insiders said Clinton and his top advisers are considering price controls because they see no other way--short of raising taxes--to realize the $50 billion in savings necessary to finance health insurance coverage for all Americans without raising taxes.

“There aren’t any other options for controlling prices in the short term,” said Bill Custer of the Employee Benefit Research Institute.

Because Administration officials are considering imposing price controls at the same time they are revamping the health care system, they argue that historical comparisons do not apply. In all other instances, they said, prices skyrocketed when controls were lifted because the market was fundamentally unchanged.

According to White House sources, the President’s health reform advisers are considering three alternative means of restraining health care prices: an outright freeze on all prices at existing levels, a cap on insurance premiums combined with a rule prohibiting insurers from cutting benefits, or a decree that health care providers must charge all patients the same fees that they now receive from the government for treating Medicare patients.

While all the alternatives would have profound consequences, economists said an outright freeze would be the most difficult to enforce. Inevitably, it would require a massive government bureaucracy, they say.

“To price regulate one-seventh of the American economy is not an easy thing,” said Uwe Reinhardt, professor of economics and public affairs at Princeton University and a member of Clinton’s health care reform task force. “It will quickly turn into a nightmare. Before long, they will be issuing a new regulation every day.”

But economists also said they see problems with the other two approaches. Medicare reimbursement rates are artificial and bear no relationship to actual costs, they argue, and a cap on insurance premiums would surely drive some insurers either out of the business or into bankruptcy.

According to Bosworth, price controls can only be effective in an industry with a clearly defined product and a long pricing history. And, he noted, health care is a field of rapid innovation where most services can be defined in many different ways.

If the government sets fees for a visit to a doctor’s office, for example, economists predicted that doctors will simply require patients to make more appointments, thus defeating the purpose of price controls. If the government sets drug prices, they predicted, pharmaceutical companies will make minor modifications in their products to justify raising prices.

Reinhardt questioned why the Administration does not simply require doctors to publicly disclose their fees, which would encourage patients to chose cheaper physicians and discourage price increases. Currently, he noted, patients have no idea what they will be charged before they visit a doctor.

Whether all this criticism will deter the Administration remains to be seen. “Some kids can’t be told not to touch the stove--they have to touch the stove to learn that it’s hot,” Haislmaier said.

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