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Notes -
Consolidated Markets in Healthcare
In the old place we talked about doing regular analysis of emerging legislation / happenings on the Hill, so this piece is in that spirit. Yesterday the Ways and Means Health Subcommittee had a hearing on “Why Health Care is Unaffordable: Anticompetitive and Consolidated Markets.” This isn’t a major hearing or anything, it’s just a topic I’m interested in so I thought I’d share it here.
If you’ve never watched Congressional hearings I actually recommend it. When I started I was surprised how generally intelligent and reasonable most Congressmen appear, even the ones who act like clowns on social media, how much they tend to ask the kind of questions you would want them to ask, how often Republicans and Democrats actually agree. The panelists are listed below, hyper linked with their written testimonies. Q and A is in the video.
Dr. Barak Richman, Professor, Duke Law School
The Honorable Glen Mulready, Commissioner, Oklahoma Insurance Department
Mr. Joe Moose, Owner, Moose Pharmacy
Mr. Frederick Isasi, Executive Director, Families USA
Dr. Benjamin N. Rome, M.D., M.P.H., Instructor in Medicine, Harvard Medical School
It probably needs no introduction how borked the US healthcare system is, but a few stats from the hearing: according to the Kaiser Foundation 30% of Americans say they didn’t pick up pharmaceuticals because of cost, almost half of all Americans must forego broader medical care due to cost, and over 40% of Americans live with medical debt. Other countries often pay half or less of what we do.
Panelists attribute this to anti-competitive practices coming from consolidation in three interconnected markets: pharmacy benefit managers, pharmaceutical manufacturers, and hospitals.
PBMs
Pharmacy Benefit Managers, or PBMs, are middlemen companies that represent a bunch of healthcare customers collectively in negotiations with pharmaceutical companies. On net PBMs are believed to decrease drugs costs, but there is no way for PBM customers to see what prices were negotiated, and frequently rebates aren't passed onto consumers. In Ohio for instance PBMs passed on the full difference of what they paid pharmacies to Medicaid managed plans, and in Delaware PBMs overcharged the State by $24.5 million. The latter practice is called “spread pricing” and has become increasingly common as PBMs buy up pharmacies themselves.
Currently three PBMs - CVS Health, Cigna, and United Health Group - control 80% of the market, with zero pay transparency.
Pharmaceutical Companies:
Often drug prices are pretty arbitrary themselves because brand name drugs make up 75-80% of costs, and patenting laws allow pharma companies to raise those prices as high as the market can bear. One panelist cites that in 2015 over $40 million was spent on drugs that big pharma held excessive patents on, and that the top 12 drugs have over 120 patents for 38 extra years of exclusivity.
Clearly some degree of patent protection is reasonable, but I’m not sure why i.e. the 12 year biologic patent period Trump created offered anything better than the previous 8 year period. Also, see one of my favorite old Scott posts, “Busiprone Shortage in Healthcaristan,” for stories of Sanofi protecting nominally off-patent Insulin by issuing 74 patents for the biological processes to create insulin - not to use these processes themselves but just to prevent any competitor from ever using them.
The Inflation Reduction Act changed Medicare’s ability to negotiate prices somewhat, but pharma companies still get their market exclusivity and even then Medicare can only negotiate the 20 highest cost drugs. Giving Medicare greater ability to directly negotiate prices would likely help quite a bit; this is the model practiced in much of the world and by the US Veterans Administration, which also pays about half of what everyone else does.
For context though, pharmaceutical prices are, shockingly, only about 8.9% of healthcare spending...
Hospitals
...with physicians and hospitals making up over 50%. The hospital panelist thought it was funny the PBM folks were complaining about there only being three major market players. Most hospitals don’t even have one competitor!
According to Representative Claudia Tenny from New York, from 1983 to 2014 the percentage of physicians practicing alone has fallen by half, while the rate of physicians joining practices of 25 or more people has quadrupled. Often when hospitals acquire these physicians they charge high facility fees for seeing doctors “off-campus,” even though the services are the same. The very fact that hospitals can get away with doing this only further encourages consolidation, because they know they can mark up prices for any new acquisitions. Representative Kevin Hern from Oklahoma proposed in the hearing a bill that would supposedly combat this practice.
Hospitals typically make physicians sign non-competitive clauses, meaning they can’t leave and work for a competitor, even in areas as large as the entire state. From 2007-2014 hospital prices increased twice as fast as inpatient physician’ salaries and four times faster than outpatient physician’ salaries.
Often hospitals also lobby State Legislatures for monopolist laws. Nineteen state have Certificate of Public Advantage laws allowing hospitals to evade anti-trust laws and merge in already-concentrated markets. Another Thirty-five states (and DC) have Certificate of Need Laws forcing providers to obtain regulatory permission before they “offer new services, expand facilities, or invest in technology”. These laws act as huge regulatory barriers to entry for small competitors trying to challenge major hospital systems, and the DOJ and FTC have long condemned them for their anticompetitive nature.
Interested to hear people’s thoughts and would love if we could get a regular thing going.
So like, where is the money going? If healthcare costs so much in the US, who is getting paid more? Who is getting paid to do irrelevant work? Who is getting massive returns on investment?
I couldn't say for everywhere, but in hospitals, the largest driver of healthcare spending, at least, a lot goes to administrative bloat: "A Harvard Business Review analysis shows the healthcare workforce has grown by 75 percent since 1990 . . . But there’s a catch. All but five percent of that job growth was in administrative staff, not doctors."
For the broader healthcare sector including VPBs and Pharma, as with all rent seeking systems, a fair amount presumably also goes to shareholders (excluding nonprofits) and top line executive compensation.
Sweden has a growing cost/efficiency problem with our healthcare system as well and the identified main cause is growing administrative bloat.
The interesting thing is that while documentation requirements have gone up (partially and possibly mainly due to privatisation) that isn't perceived as the main driving factor to the bloat.
The main driving factor is that the administrative department isnt doing administrative work related to the hospital care. They are engaged in more prestigious make work they create for themselves, like creating "strategic communication plans", leaving the health care professionals to deal with the actual administration despite massive administrative departments.
This is perceived as a black hole that can consume an endless amount of resources without ever helping the core business.
See also: American universities.
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