The authorities are less and less hesitant to change prices. The effects of these measures often go in a direction other than desired.
In a country with inflation, an increase in price does not correspond to an increase in value. Let’s not confuse price and value. Charles Gave, president of the Institute of Liberties, recently reminded us: an increase in the price of a house does not necessarily mean that it has increased in value. For example, it is enough for restrictions to prevent the construction of new housing for existing buildings to rise in price without changing their value. This type of monetary illusion is common when currency injections abound.
The change in price does not always reflect a change in the relationship between supply and demand. This is particularly true for prices that depend on government action or are determined directly or indirectly by the state. The latter frequently seeks to reduce prices, or to control them, for example in the housing market. A price cap, however, leads to a shortage. But what about health?
A very interesting piece of research looks at the consequences of a drop in administered prices in medtech, particularly its effects on innovation (The long-run impacts of regulated Price cuts: Evidence from Medicare, Yunan Ji and Parker Rogers , WP 33083, October 2024, NBER).
“Introductions of new “medtech” instruments decreased by 25% and patent filings fell by 75%.”
The health sector is the subject of countless subsidies. American government spending reaches $4.3 trillion per year in this sector. These amounts are so considerable that numerous criticisms have appeared and referred to various “wastes”.
Sharp drop in prices in the United States
Calls for savings in health therefore seem logical. Why not lower prices? The drop in prices analyzed by this study is not insignificant. It results from various reforms that have taken place in recent years, for example in the reimbursement of product purchases. We witnessed both a national price drop of 9.5% in 2009 on the most expensive categories of medical instruments, supply auctions between 2011 and 2016 and a further reduction in prices nationally. in 2016.
In ten years, the prices of certain medical instruments have fallen by 61% with Medicare, according to this study. Consumers of these products (wheelchairs, insulin pumps and other home medical equipment) were undoubtedly delighted. But, according to the study, Medicare’s actions reduce instrument makers’ revenues, product quality and production costs.
This branch of medtech has also benefited from numerous innovations in recent years. The study cites portable oxygen therapy, which has replaced heavy and dangerous oxygen tanks, or continuous glucose monitors without the need to see a doctor.
But innovation suffered from these government price cuts. According to this study, introductions of new “medtech” instruments decreased by 25% and patent filings fell by 75%.
The manufacturers of the products in question have in fact reduced their innovation capacities and carried out production relocations abroad which have resulted in an increase in the rate of defects in these products. According to the work of Ji and Rogers, the value of reduced innovation can fully offset the savings from reductions in administered prices. The authors of the study propose better calibrating the reductions in administered prices so as not to affect innovation. Clearly, the authorities would have to take measures on the instruments which offer the highest profit margins. However, it would be a question of identifying the reasons why certain products offer high margins. If the medical benefit is very high, why penalize the most efficient manufacturers? The question invariably leads to wondering whether it would not be better to trust the competition and the market so that the price plays its rightful role as signal.
