Hospital Wage and Price Controls: Lessons from the Economic Stabilization Program

By Ozminkowski, Ronald J.; Gaumer, Gary et al. | Health Care Financing Review, Winter 1994 | Go to article overview

Hospital Wage and Price Controls: Lessons from the Economic Stabilization Program


Ozminkowski, Ronald J., Gaumer, Gary, Coit, Anne Jenny, Gabay, Mary, Health Care Financing Review


INTRODUCTION

Two of the health care reform bills considered recently by the Congress (the President's plan and the Wellstone/ McDermott/Conyers plan) list specific efforts to control the rising costs of medical care, including global budget limits, fee schedules for hospital or physician care, drug price limits, health maintenance organization (HMO) capitation rates, insurance premium caps, or negotiation strategies (Citizen Action, 1993). The President's plan also called for a voluntary cost-containment program for all health care sectors to limit the growth in medical care and insurance prices.

In September 1993, President Clinton said that mandatory wage and price controls are not necessary to control costs. He justified his position on mandatory controls by noting that drug companies and other segments of the health care industry have volunteered to keep prices within the overall inflation rate for the next 2 years. If voluntary price controls do not work in the short run, however, White House Press Secretary Dee Dee Myers indicated that "a variety of actions" would be considered (Bureau of National Affairs, 1993). Presumably, these actions would include mandatory wage and price controls.

How effective would mandatory controls be? While the answer to this question involves a good deal of speculation, history may help. The last time a price freeze for health care services was applied at a national level was during the first phase of the Nixon Administration's ESP, from August-November 1971. ESP began as a result of Congressional and other pressures to control costs. Before ESP, President Nixon steadfastly refused to consider wage and price controls as inflation control policy (Dornbusch and Fischer, 1981).

We reviewed the available evidence to describe the impact on hospital behavior of the ESP wage and price freeze and subsequent wage and price controls. Examples from the health services and economic literature are used for two purposes in this article. First, along with neoclassical theory, the literature is used to help present a brief rationale for regulating hospital behavior and for promoting hypotheses of the effects of ESP on hospitals (after we describe the features of that regulatory program). These hypotheses are followed by a discussion of descriptive trends in prices for hospital services, the expenses involved in producing hospital care, and hospital utilization before, during, and after ESP The second use of the literature is to facilitate the interpretation of the general trends we present. By focusing on the literature which accounts for a variety of factors that influence hospital behavior, we are better able to ascribe changes either to ESP or to other factors. Afterwards, we provide a discussion of the effects of ESP on hospitals and offer some thoughts on the usefulness of price controls in current health care reform efforts. Finally, we offer a summary and conclusions about the effects of wage and price controls on hospitals.

WHY CONTROL WAGES AND PRICES?

Neoclassical economic theory makes a strong case against any type of wage and price controls in competitive markets, and some leading economists strongly criticized the Nixon Administration for instituting such controls (Friedman, 1971; Reynolds, 1971). Mandatory wage and price controls are problematic in competitive markets for several reasons:

* Monetarist economists (Friedman, 1971; Reynolds, 1971; Alchain and Allen, 1972) argue that the major cause of inflation is the oversupply of money relative to the desire for goods and services. This oversupply increases disposable income, resulting in substantially increased demands for goods and services, thus driving up prices. Wage and price controls do not address the underlying cause of inflation and hence cannot remove inflationary pressures.

* Reynolds (1971) argued that much of the inflation in the medical sector was due to the implementation of the Medicare and Medicaid programs, which drastically reduced out-of-pocket prices for the elderly and poor and hence drove the demand for medical care upward. …

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