Letter from Washington: When fee schedules are the best imperfect option

by Eli Lehrer on November 22, 2011

Heartland recently started work on a project in Michigan where many of the people on the same side as us want to create a fee schedule on automobile insurance claims. We’re also considering another project in another Midwestern state that also involves a fee schedule.  Clearly, fee schedules can be forms of price controls and, in general, price controls are a bad idea. Just as clearly, it’s difficult to reconcile fee schedules of any kind with a purist libertarian outlook on the economy. But we’re not purist libertarians—we’re pragmatists with a strong libertarian bent—and, in  some cases, in some places, fee schedules may make sense for at least three reasons.

First, fee schedules work best for things that people can’t shop for but must consume nonetheless. Critical medical care fits this definition. Individual economizing may well be able to reduce the costs for routine care and even treatment costs for chronic conditions. But for treatment after serious workplace or automobile accidents? Shopping around is literally impossible and almost always unwise. Quite often, an injured person must get treatment at the closest place that can do it. Thus, fee schedules may be a reasonable system for medical claims in the areas of workers’ comp and mandatory personal injury protection automobile insurance.

Second, opposing all fee schedules, when so many already exist, is an example of letting the good be the enemy of the perfect.  I’d like to see a medical system where most people own their own healthcare coverage, where subsidies are targeted on those who really need them, and where there’s more shopping and individual decision-making when it comes to procuring routine medical services. But we’re a very long way from a system like that. Right now, our medical system is rife with implicit cross-subsidies that make no sense on their surface. The current system favors bigger businesses and those on Medicare while hurting smaller businesses and those on Medicaid. Fee schedules, currently, are a way of pushing back against cross-subsidies for certain types of injuries. They aren’t a long-term solution but they can fix temporary, localized problems.

Finally, high medical costs are driven, to a large extent, by very high provider costs. Wages and benefits throughout the medical sector are a lot higher than they are in any other sector after one adjusts for education and just about anything else else. Costs overall will not be controlled until provider costs are controlled and fee schedules can help do that.

The bottom line is that I don’t love fee schedules. I don’t favor them ideologically. But, in some cases—particularly when it comes to certain types of injury insurance—they may be justified.


A federal balanced budget amendment failed to get the votes it needed to advance in Congress. I’m happy enough since I don’t think that such a provision could have done anything.  In a press release,  nearly all of my colleagues at Heartland had negative things to say about the proposal. I agree with nearly everything they say and I’d add two points.

First, as I write about here, no national government in any other wealthy democracy has a balanced budget provision in its constitution. Second, amending the constitution is nearly impossible. Since World War II, all of the amendments to the Constitution that have been proposed and ratified have dealt with only two topics: voting and becoming president. (The most recent amendment, XXVIII, which deals with Congressional pay, was proposed in 1789 but not ratified until 1992.) By the time all of these provisions passed, furthermore, they were essentially non-controversial. The closest precedent for a balanced budget amendment—a significant change in national policy made by changing the Constitution—is probably the 18th amendment which, of course, established alcohol prohibition. And we all know how well that worked out.


I’m beginning the very early stages of work on Green Scissors 2012, and would love suggestions from just about anybody as to programs that are both wasteful and environmentally harmful. Our current list is here.  And I’d love more suggestions as to what you think we’ve left out. The federal government does so many things with potentially harmful environmental impacts that it’s almost impossible to catalog all of them.

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