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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.
Drug prices have always been a tiny part of it. The big ones are the obvious cartel-like behavior, restricting the supply of trained doctors and approved facilities. But one of the biggest issues is still price transparency. It's what makes this market feel different to people. Compare to complaints that housing is "unaffordable". Well, the market for housing is abundantly transparent. In most places, people can just go look at the market prices, and they'll see a spectrum of prices from quite high to remarkably low. And they'll notice that when folks complain about "unaffordable housing", they really mean that they just want newer, nicer, bigger housing in better locations for less money. Moreover, because the market is transparent, they can see just how much local government housing policy can restrict/enable supply, pushing prices up/down. So the movement has rightly been able to focus on the underlying issue of restricted supply.
In healthcare, the shell game of price hiding is so advanced, people can't even notice what's going on. The process is, "People go about normal life; sometimes, that involves going to the doctor; poof! Some amount of money is gone. How much? Who knows? Maybe nobody can know." That's what's plaguing the PBMs - everything is predicated on playing "hide the paper". If they keep everyone in the dark about what the numbers mean, they can play four square all the way home to piles of money. And it's what's plaguing the hospitals, too. Of course they want to charge high "facility fees"; these are almost certainly hidden fees! Hidden fees rub a lot of people the wrong way. They feel like when you're in one of those countries where the guy acts like because you touched his product, the culturally-mandated thing is that you've already bought it and have to pay for it. What's the price? You didn't know, could be anything! But you're either a sucker for the paying the number he pulls out of his ass or you're a dick for arguing back.
Healthcare is entirely about hiding every fee possible. So while many people may have experienced a healthcare purchase that turned out to be a little cheaper than their wild-ass guess of what it might be, they've probably also experienced the opposite. And you know they're going to 1000% remember the time they felt they got screwed over wayyyyy more, even if they thought they got okay deals most of the rest of the time. People want a "deal" 100% of the time. They want some amount of "consumer surplus". That's kind of the definition. We turn down buying stuff every day that doesn't give us consumer surplus; we don't say those things are "unaffordable". They just don't bring me, personally, sufficient value right now. But for every single trade I willingly engage in, even if I don't think I got a "great" deal, I think I got more value than I spent. To have a transaction... and then to find out later that it was more expensive than you thought... enough more expensive that, had you known, you wouldn't have agreed to the transaction in the first place? That pisses people off. That makes people say that healthcare is "unaffordable". (That is probably what causes people to go bankrupt; most people don't willingly engage in many transactions that they know will bankrupt them; they have to be blindsided into it.)
I'm becoming more and more obstinate on this point for healthcare. The shell game is too entrenched. The "let's force prices onto the internet" tack didn't work. They're still too good at making it impossible to understand or impossible to access/figure out at the time that you need it. Nobody's going to be sitting in a doctor's office, trying to decide what to do, and say, "Gimme a second, I need to look up on the internet what the price is here and at other locations and.... oh shit, I need to write a JSON parser to figure that out?" Nah. At this point, I can't imagine there's anything we can do besides simply mandate that every single provider of healthcare services must give every single patient a written price prior to performing the service. (Assuming, of course, they're conscious, etc.)
How would price transparency even look if it's not just "Medicare for all, you pay taxes, we provide healthcare"?
And even that might not work. As an example, a few weeks ago I finally decided to do something about my nasal congestion.
I went to a private ENT doctor my wife had heard good things about.
The price was communicated up front, but how could I choose a different ENT?
There could be a big-ass site where all the doctors would be listed and I could sort and filter them
What would I sort them by? Price? Rating?
If it's rating, how can I trust it?
If it's price, how can doctors who have this cool expensive video probe explain to customers that their diagnostic tools warrant a higher price?
The ENT took a look at my cavities with his cool expensive video probe and said he needed a CT scan
Now I had two options: pay for this visit, shop for the cheapest CT, pay for another visit or do the CT in the same clinic right now and continue.
I could've shopped around for a "ENT visit + CT scan" combo in advance, but how can a patient know in advance what kind of tests and treatments they will require?
The ENT took a look at my CT, gave me a list of tests and a recommendation to see an allergologist.
Tests are easy, since they are standardized by definition
Shopping for an allergologist is basically another repetition of step 1.
And I was not in a real hurry doing all that. If you're hospitalized with a medical emergency, there's simply no time to shop around. It's not like you can go, "you know what, thank you for stemming the blood flow, but I've taken a look at the total price you're suggesting, and Google says there's a hospital two counties over that can do the rest for $1200 less. Even if I hire an ambulance for $600 to take me there, it's still worth it. Will the stitches hold?" And then you go to hospital B, spend a few days there, and the doc says, "actually, the tests show you'll need another surgery, that'll be $5000 more".
This seems like it would actually be the opposite of price transparency, at least from the perspective of consumers. Each item of healthcare would still have a price, but they would be totally and completely oblivious to it. It would be entirely up to bureaucrats to look through the prices and decide what procedures seem to be worth it.
Concerning (1), selection of a doctor is approximately as difficult as any other selection of a good or service. There are a variety of solutions other industries have used. Branding, reviews, spec sheets, etc. Compare your ENT to very similar services that don't get to play the "insurance made me do it" shell game, like lasik or cosmetic surgery. Since they have to actually convince you to pay a real sticker price, they're vastly more open about it. They usually have free consultations; they tell you on their website what cool expensive tech they use; if you're the type of person who wants to shop around, ask questions, and figure out who you're comfortable with, you can do it. Some people are still going to view it as, "Well, you just go, do the thing, and pay whatever price," but if you want to be more informed, you at least can. You can at least usually get them to not lie to you and say that it's impossible to know what the price will be.
Concerning (2), this is obviously a more difficult one. Let's scope out a bit and consider a comparison with a hypothetical ENT who doesn't have access to their own CT. My experience has been that with someone like this, they send you out with orders to get a CT from somewhere and have the results sent to them. But then, when you come back, usually, you don't pay for an "additional" visit. Instead, it's treated as an extension of the original visit, which needed to be interrupted because of the need for a test. There is a true tension here that is hard to resolve. For legacy reasons, we don't just pay doctors by the hour, we pay them by the service. If we paid them by the hour, it wouldn't matter whether we got the CT there or somewhere else; that doctor is still just spending the time of "make recommendation for CT + evaluate result of CT", and those things are just more or less stretched out across different days.
The fundamental thing happening here is some sort of bundling. Bundling often makes sense. I had a dental implant, and there were multiple visits. Several were just, "Let's follow-up in two weeks; I want to see how it's healing to make sure there aren't any issues." Every one of those was bundled with the price of the original service, not charged as an "additional visit". Honestly, I was naive at the time, didn't ask a lot of questions, and sort of didn't know that they were bundled until after the follow-up appointment was finished, asked if I needed to pay anything, and they said no. This sort of bundling makes tons of sense. Other times, people don't bundle. I got stitches for a cut one time, and when I went to get them taken out, I had no idea whether this <5min followup was going to be bundled or not. Turns out it wasn't. Honestly, if I had known that it wasn't bundled, I probably wouldn't have spent the money for them to use scissors for 10 seconds. Again, we can compare to lasik. I haven't had it yet, but I've looked at websites. They often publicly state that certain follow-ups are bundled, because that is valuable price information for consumers.
In any event, the extent to which a service is bundled/unbundled is also usually not transparent. Are you sure you'd have had to pay for an additional visit if you had the CT done elsewhere? Did you ask? I'm not 100% against the idea that they might want to essentially give you a discount on the evaluation of the CT if you have them do the CT, but I want them to have to tell you this explicitly. "If you get the CT done here, we will bundle the price of the next step where we evaluate the result of the CT and decide what to do next. Alternatively, if you get a CT done somewhere else, we will not bundle it, and you'll have to pay extra for that." Most critically, I think this should not be a pressure tactic. It shouldn't be, "If you just sign on the dotted line RIGHT NOW, we'll give you a GREAT DEAL on this
new carCT follow-up!" Like, if they're bundling, they're probably not bundling strictly based on things happening right now. What if it's the end of the day; the guy in the office who actually runs the CT machine is about to go home; maybe it'll be better if you come back in the morning; "we'll do the CT first thing and then evaluate the results immediately after". Do they still bundle the follow-up? I'm guessing probably. So, there shouldn't be any difference between that and if you go home, shop around, then decide to have them still do the CT a few days later. If they're still going to bundle in this situation, I think we've gotten most of the benefits that we're going to get.So in sum on this point, I just want them to have to be more explicit about what is/isn't bundled. When they say, "We should do a CT; we can do it today," they should have to follow it up with, "Here is our price for a CT. That price includes the follow-up evaluation of the results. That price is good even if you shop around and then decide to have us do the same CT service tomorrow or next week. You can get a CT somewhere else if you want, but then we won't bundle the follow-up evaluation of the results, and it'll be an additional charge of $X." At least then, we can see what they're doing. We can see how their price is structured and make comparisons. It's still a bit anti-competitive to be integrated in this fashion and to have this type of preference for their own product. Honestly, anti-competition cases have been brought on less in other industries. I don't even think we need to get there now. Just get the prices and what is/isn't included out there in the open. Then, when people actually see what's happening under the hood, when they're actually seeing what games are played where and what things cost, they can decide which games they're willing to play and which prices they're willing to pay.
Finally, I also agree that true emergencies are tough. Sometimes, health situations naturally create their own pressure tactic. I don't have great solutions for this. I also think that true, really time-critical emergencies are far far more rare than most people think. Probably more than 90% of healthcare transactions simply won't matter that much if it waits a day or even a week. Don't stop us from putting good rules in place to improve the 90% just because those rules may not help the small minority. Even if we just exempt the small minority from the rules, we've made nothing worse (the small minority is in the same situation it was before), and we've made the 90% better. That's a pareto improvement.
But I do think that they should still have to be transparent if it's possible. Yeah, some people might take a risk in going to another hospital, hoping the stitches hold. Some people might even get burned by their choice (that's the nature of risk). Maybe they'd have needed the extra surgery a few days later at the first place, too. Lots of ways it could play out. I'm not saying my solution makes literally 100% of situations/choices turn out 100% optimal and that there is never a case where something bad/expensive happens. Literally no solution can accomplish that; again, that's the nature of risk. But I would rather be informed of the price and be able to make my own choices concerning my personal risk tolerance than not. Maybe the difference is $60, so I don't think the risk is worth it. Maybe the difference is $600, and I'm indifferent. Maybe the difference is $6000, and I think the risk is worth it. Someone else may be really risk averse and still pay the extra $6k. Yet someone else may estimate the risk differently and want to save the $600. Which of us made bad choices? Which of us got burned? Which of us came out ahead? Nature decides that, and no policy that either of us comes up with can possibly guarantee that no one will ever get burned. I just want people to be able to have the information and be able to make their own choice.
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