Testing Health-Care Providers' Threshold for Pain

Regulators have been playing a vast and costly game of whack-a-mole since the creation of Medicare and Medicaid 40 years ago. Regulators decide we’re spending too much on something, and reduce or disallow that spending. That budget line item duly drops, and yet health-care spending does not, because some other category has risen to compensate. Cut hospital spending, and doctors’ bills rise; disallow hospital readmissions, and hospitals start refusing to admit patients, instead putting them on “observation” status so that another crisis will not result in an unbillable “readmission.” This dynamic is a source of great frustration to health-care wonks, who are forever coming up with new policies to combat it. These methods are announced with great fanfare, rolled out … and gee, how come we’re still spending so much money on health care?

The latest hotness in cost control is called “all payer.” The idea is that without such a system, hospitals and doctors exploit pricing disparities between various categories of payer, with governments generally paying less and private insurers paying more. This causes various sorts of problems.1475254660705 It also, people argue, makes it harder for anyone to get health-care prices under control. You cannot jam Medicare and Medicaid rates down to where technocrats would like them to be, because there’s still a lot of private insurance around, which means that if you set the government rates too low, doctors and hospitals have the option of saying “Thanks but no thanks, we’re not going to participate in your program any more.” Private insurers have similar problems: As long as there are other options in the market, the insurers' negotiating leverage with providers is limited.