The idea that government should fix the price for third-party reimbursement is increasingly popular. For Medicare patients, the federal government already fixes prices for hospital services and is in the process of doing so for physicians' services. Two things can go wrong when government arbitrarily fixes prices. If it sets the price too high, it encourages overprovision. If it sets the price too low, it encourages underprovision.
Price controls tend to become a vehicle for health care rationing.
The tendency is to set the price too low, in order to control spending. As a result, price controls tend to become a vehicle for health care rationing. Take Medicare, for example. A survey of 21 medical conditions for which an implanted medical device is indicated found that for 18 of them the government's payment was well below hospital cost, and in more than half of the cases Medicare patients did not receive the device. For example, blacks and Hispanics have more severe illnesses, longer hospital stays and higher hospital costs than white patients, on the average.