Want to win votes from members of Congress to pass a health law? Add government spending programs that benefit hospitals represented by those members. Want to extend the windfall for those hospitals? Increase campaign contributions to their representatives in Congress. A new study by Yale professor Zack Cooper and his coauthors reveals the intriguing interplay between politics and federal healthcare spending.
Published in the Journal of Health Economics, the study found that: (1) hospitals represented by members of Congress who voted “yea” on the 2003 Medicare Modernization Act were more likely to receive Medicare payment increases (the Section 508 program); (2) this program was designed to be manipulatable for political benefit; and (3) campaign contributions from individuals affiliated with these hospitals to the hospitals’ representatives increased both before and after Congress extended the program.
This politically motivated spending program, as the authors wrote, “did not simply lead to a reallocation of care across hospitals; it increased aggregate health spending.” Members of Congress aim to be re-elected. This aim is not necessarily aligned with fiscal responsibility toward taxpayers. It is no coincidence that hospitals experienced higher profits and lower credit risk as a result of the Affordable Care Act.
Broadly speaking, due to the political dynamics involved in creating laws and regulations intended to shape healthcare prices and behaviors, unintended consequences are common. Recent economics studies have provided compelling examples:
Many countries have adopted cost-effectiveness thresholds to determine the coverage and pricing for prescription drugs. These bureaucratic decisions encourage collusive, anticompetitive behaviors among incumbent drug manufacturers, thereby limiting patient access. They also disregard the diverse value propositions and preferences across individuals, deterring innovation that is particularly valuable to sicker patients.
When it comes to the quality of care, strict hospital treatment guidelines—by ignoring comparative advantages across hospitals—caused inefficient care. In contrast, hospitals exposed to market competition proactively reduced their all-cause mortality rates and length of stay.
Certificate of need laws, which require government approval before healthcare providers can enter a market or offer new services, have been found to increase heart attack mortality. On the other hand, policies that prevent hospital exit from a market would impose significant costs on taxpayers without providing mortality benefits.
Economists have also provided evidence on competition-oriented, patient-empowered approaches, some of which may initially seem counterintuitive: High-deductible plans can reduce overall healthcare spending, especially on low-value outpatient services, and greater patient cost-sharing can lower both out-of-pocket spending and premiums. These benefit designs limit patients’ moral hazard, including care overutilization and price insensitivity.
Additionally, narrow network insurance plans can steer patients to low-cost providers, containing premiums. Price transparency can reduce prices because some patients actively use such information, motivating providers to adjust their prices.
Almost all health rules and regulations have commendable intentions; however, the opaque policymaking process—vulnerable to political motivations and industry capture—frequently compromises efficiency, distorts incentives and subdues competition, ultimately harming the very individuals the policies are intended to help.
Our nation hasn’t experienced meaningful health improvement since 2010, as evidenced by life expectancy. As the University of Chicago economists Kevin Murphy and Robert Topel analyzed, the societal economic gains from health improvement are enormous. The best health policies to take us there might be the ones that rely on the market the most.
