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Competition as a Strategy for Controlling Healthcare Costs
AEI
2024.06.03
The high cost of health care is a burden for patients, workers, and the government alike. Government spending on public programs, such as Medicare and Medicaid, creates budgetary pressures on state and federal governments, stressing tax bases and crowding out other potential uses of government revenues, especially in states with balanced budget requirements. High costs in the commercial market are similarly consequential because they erode potential wage growth of employees, increase premiums and out-of-pocket spending, and reduce income tax revenues. Moreover, these costs increase the federal government’s outlays for subsidies to purchase insurance on the individual market. Thus, slower growth in health spending has broad potential benefit.

Evidence suggests that a significant portion of health care expenditures reflect market inefficiencies owing to factors that include limited competition, moral hazard (because insurance protection can make individuals less sensitive to costs), or a lack of information. In some cases, these inefficiencies represent natural features of health care markets (e.g., medical emergencies limit the ability of consumers to shop for the best care). In others, they are the result of government policies (e.g., those that reduce cost-sharing requirements for some patients, making them less likely to shop for lower prices).

Policymakers can take multiple approaches to address high costs that are divorced from value. One approach is to regulate outcomes that stem from market inefficiencies, such as high price. Another is to attempt to address the market imperfections, such as limited competition or opaque pricing, that underpin inefficiently high spending. This paper focuses on the latter approach, highlighting policies that help improve the underlying functioning of markets.