With health insurance premiums surging again, a growing chorus of economists and policymakers has settled on a cure for American health care: Cap what hospitals, drug makers and insurers can charge. The idea shows up in many forms, including Medicare drug price negotiation, proposals to limit private hospital prices to multiples of Medicare rates, and calls for public plans that pay providers at government-set rates.
Their diagnosis is half right. Prices are high, opaque and frequently baffling, and they often do not reflect superior quality or convenience.
But it does not follow that the government can fix the problem by replacing current prices with government-set ones, whether through hospital price caps, drug price limits or ceilings on insurance premiums. A price cap isn’t merely a limit on what can be charged; it’s a claim that regulators know what the maximum price should be, and that they can keep that judgment from being manipulated by the very industries it is meant to discipline. On both counts, the confidence is misplaced.
The economist Friedrich Hayek’s insight was that the knowledge needed to coordinate a complex economy is dispersed, local and often tacit. It cannot be extracted from a database by a bureaucrat or a health economist. Prices, for all their imperfections, carry information about what people value, what providers can supply, where capacity is scarce and what alternatives are available.
Yes, health care prices are badly distorted by insurance, regulation and market power. But the fact that a signal is distorted doesn’t mean a central authority can easily replace it with a better one. Price controls substitute administrative confidence for decentralized knowledge.
When a hospital charges a high price, it may be the result of monopoly power. It may also reflect the cost of maintaining emergency capacity, training future doctors or delivering better care. Centralized price setting requires reducing all those factors to a single, static number. The number may look precise, but that doesn’t mean it’s optimal.
Price controls are especially crude when quality differs. Consumers willingly pay more for convenience and superior performance, and health care is no exception. Yet traditional Medicare generally pays the same for a service whether it is delivered by an exceptional provider or a mediocre one. Medicare tries to adjust payments for quality and safety, but its formulas cannot capture all the reasons patients may value one doctor or hospital over another. Some sought-after doctors respond by taking fewer Medicare patients or charging membership fees for extra access and services that Medicare does not cover. Government-imposed prices rarely reward excellence.
Over time, price caps also weaken incentives to make costly investments whose payoff is uncertain. Advanced imaging was expensive and rare at first, then dropped in price as more doctors and patients took advantage of it. Robotic surgery requires a significant investment, but per-case costs can fall as surgical teams gain experience. If price controls limit the returns from new technologies, some innovations may arrive more slowly or never arrive at all. Patients may miss out on treatments that would have improved care.
Nor do price controls suppress market behavior. They redirect it. When prices are capped, care can become harder to get in other ways: longer waits, less convenient scheduling and greater restrictions on which patients get served. Canada illustrates the issue. Its provincial health systems set prices and operate within fixed budgets, and patients often pay with time rather than money. According to one estimate, the median wait from referral by a family doctor to treatment was 28.6 weeks in 2025.
Fixed prices can also create a stronger incentive for doctors to avoid patients who are sicker, poorer or more costly to manage. The burden falls on the patients least able to navigate scarcity. A policy sold as protecting vulnerable patients can make care less accessible.
The impulse to cap prices is understandable given its seeming simplicity and visibility. But it’s not even clear that lower prices will bring down the cost of care. Providers may compensate by performing more procedures, which may be duplicative or of low medical value.
Government-set prices also create their own political economy. Providers, insurers and suppliers do not simply live under reimbursement rules; they try to shape them. Medicare illustrates this at scale: Once Washington sets prices for thousands of services, every detail becomes worth fighting over. The American Medical Association committee that advises Medicare on physician payments is perennially divided over which medical specialties should be paid more — often seeming to reward a specialty’s bargaining power over anything else. These fights are largely invisible to patients, but their costs reappear as higher insurance premiums or co-payments, larger public deficits and more administrative complexity.
A better agenda would attack the causes of unjustifiably high prices. That means blocking hospital mergers and contracts that hinder competition, and fewer rules that protect existing providers from new rivals. It also means giving patients and employers real choices: transparent pricing and insurance designs that reward consumers who discover more affordable care. When patients who choose lower-priced care can share in the savings, they put pressure on prices in a way no bureaucracy policing thousands of services can match.
Price caps do not curb the costs of delivering care. They merely shift those costs to places that are harder to see. The answer is not price by decree. It is institutions that help patients, providers and payers discover better prices and better care.
Lorens Helmchen is an associate professor of health policy and management at George Washington University. Tony LoSasso is a professor of public affairs at the University of Wisconsin, Madison.
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