Why Price Controls Don’t Work

Published August 30, 2002

State efforts to rein in health care spending by imposing price controls on pharmaceutical manufacturers are not the first time price controls have been suggested in the health care reform debate. In 1993, the Clinton administration promised the business community its reforms would rein in the cost of employee health insurance and reduce waste and unnecessary administrative expenses. But as details of the Clinton plan became public, it became clear the plan would increase, not decrease, the financial burden on business. Recognizing that it risked losing whatever business support it had for its plan, the administration said it would consider placing temporary price controls on health care providers and insurers. It would have been a tremendously costly mistake.

Price controls, C. Jackson Grayson, Jr. wrote at the time, “have not worked in 40 centuries. They will not work now.” Grayson, who was chairman of the Nixon Price Commission between 1971 and 1973, went on to present seven reasons why price controls wouldn’t work in health care. They still make a compelling case against price controls.

1. “Getting into controls is a lot easier than getting out of them.” Once in place, price controls make “fixing” the original problem even more difficult. Politicians soon fear that lifting the controls will result in a price explosion . . . which it invariably does.

2. “No matter how clever the price control designers, they cannot prevent distortions.” Cost-shifting, unbundling services, black markets, shortages . . . these and more resulted from price controls in the ’70s and are likely to be repeated if price controls are tried again.

3. “Quality does not improve with controls.” What we want is greater efficiency and higher quality for the dollars we spend on health care. What price controls deliver is temporarily lower prices at a steep cost in lost quality.

4. “Cost controls actually increase costs.” The cost of enforcing and complying with price controls would be massive. Doctors, hospital administrators, and insurance companies are already buried with paperwork; price controls would double or triple that burden.

5. “Controls breed more controls.” The Nixon price controls started with 3-1/2 pages of regulations and ended with 1,534. Every decision on how the price controls applied to one product or service led to the need for new decisions on other goods and services . . . ad infinitum.

6. “Voluntary becomes mandatory.” The record of voluntary price controls is very poor, and they are usually only a prelude to mandatory controls. Recommending voluntary controls, therefore, is not a prudent compromise or accommodation; it is a definite step toward mandatory price controls and all the costs that will follow 7. “Global budgets don’t work.” There is no way to enforce global budgets because there is no political will to counter the interest groups that support higher spending. Spending doesn’t stop when a budget ceiling is reached.

Source: C. Jackson Grayson, Jr., “Experience Talks: Shun Price Controls,” The Wall Street Journal, March 29, 1993.