Picture of Anthony M DiGiorgio, DO, MHA, FAANS

Anthony M DiGiorgio, DO, MHA, FAANS

Economic Concepts in Neurosurgery Price Controls

In the ideal scenario of a truly free market, prices naturally settle at an equilibrium. This market-clearing price is the sweet spot where the supply of goods perfectly meets consumer demand. It’s the gold standard for market efficiency, fostering innovation, efficiency, and freedom.

However, enter the realm of administrative pricing, where the government, often swayed by lobbying forces, dictates prices. Such interventions are widespread across the U.S. economy, from rent controls and minimum wage regulations to agricultural subsidies. The consequences? A departure from equilibrium, with markets distorted and natural incentives skewed.

Consider the impact of a government-imposed price ceiling. At a superficial glance, it might seem like a win for consumers—until the inevitable shortages materialize. The lobby for equitable access to hamburgers convincse legislators for a maximum price on hamburgers.  Burger joints are forced to cap prices at $2 per burger and most will fold, unable to cover costs. This will lead to a shortage in ground-beef-based sandwiches.  This scenario mirrors rent control, where limits on rent lead to housing shortages, deteriorating property maintenance, and a slew of unintended consequences, such as long wait times, black markets, and bizarre sublease agreements.

On the flip side, price floors, like those underpinning U.S. sugar subsidies and minimum wage laws, generate surpluses—of unsold goods or unemployed workers.  Minimum wage laws particularly affect the low-skilled, who find themselves priced out of the labor market. Data suggests that a 10% increase in minimum wage decreases employment in these groups by 1-3%.  The price floor on labor creates a surplus of labor that cannot be employed. 

Of course, that leads us to healthcare…

CMS directly controls healthcare prices for the 60ish million Americans who have Medicare part A & B.  They set a price for a service and that’s it.  A 10 minute physician office visit gets about $50 via the RVU conversion factor for CPT code 99212.  Indirectly, CMS sets prices for millions of other Americans that have Medicare Advantage, Medicaid, and even private insurance (nearly all use the relative values set by CMS). 

We don’t even know if these price controls act as floors or ceilings.

There are certainly shortages of some healthcare services.  Primary care is extraordinarily hard to come by.  In fact, that’s one area where a true free market is emerging with concierge care and direct primary care.  These are downstream effects of persistent shortages.  Wait times for specialists are as bad as for primary care.  Again, there are pockets of true free market, such as cash pay surgery centers.  The market will find a way.

The worse the price floor gets with respect to the true clearing price, the worse the non-monetary costs to those seeking care.  If reimbursement was slashed in half across the board, many physicians would retire, move overseas or transition to non-clinical jobs.  Wait times would worsen.  Those with means would travel overseas for care, pay cash, or otherwise find a way to get the services they want. 

Ultimately, there must be some administrative pricing in healthcare.  A social safety net, operated by government, is expected in a wealthy society such as ours.  More free-market influences determine equilibrium prices.  Equilibrium prices help ensure a just, fair distribution of resources. 

That’s what we all want in the end.