Price controls can never work. This is a basic tenant of microeconomics that any economist worth their salt, regardless of their value judgments or politics, can agree upon. I have argued for years that price control schemes in Medicare and Medicaid (with fancy titles like DRG, RBRVS, PPS, blah, blah, blah…) can never be at the market clearing level. The results are surpluses, shortages and incorrect signals that render the delivery of health care inefficient. The most obvious “market” where this shows up is in Medicaid.

A few years back, John Goodman of NCPA, Ron Lindsey (former director of Texas Medicaid) and I wrote a report offering suggestions on dealing with Ohio’s Medicaid challenges. The basic finding was that Medicaid needed to be turned into a defined contribution program where beneficiaries could buy the care they needed with risk-adjusted credits. Based on this, Governor Taft and the legislature created a Medicaid Reform Commission which studied the plan and came up with reform proposals.

The legislature then passed some “reforms” based on the commission’s findings. For example, they changed the nursing home reimbursement formula from a cost-based methodology to a more “prospective” system. This upfront system was supposed to encourage nursing homes to operate more efficiently since reducing operating expenses would flow to their bottom line. The formula actually isn’t that “prospective” but the idea sounds good.

I wrote at the time that the cure might be worse than the disease. The payment is not determined in a market but, rather, is a bureaucratic concoction. Just another price control. It is also a budgeting tool. The Strickland Administration has advocated freezing the rate as part of their budget plan. I am now getting letters from nursing home owners asking my thoughts on where this whole scheme is headed. Basically, they are telling me that they may have to sell before they end up going broke. New owners can get a higher “normalized” rate so they may be interested in buying. So the government price control scheme saves no money but forces businesses to sell. Will we never learn?