Tag: Health Care

Why Is There So Little Price Competition among Prescription Drugs? Call It “Erectile Pricing.”

The latest article in the Kaiser Health News/NPR “Bill of the Month” series tells the story of Shereese Hickson, a 39-year-old disabled Medicare Advantage enrollee whose hospital charged $123,019 for two infusions of a multiple sclerosis drug:

Even in a world of soaring drug prices, multiple sclerosis medicines stand out. Over two decades ending in 2013, costs for MS medicines rose at annual rates five to seven times higher than those for prescription drugs generally, found a study by researchers at Oregon Health & Science University.

“There was no competition on price that was occurring,” said Daniel Hartung, the OHSU and Oregon State University professor who led the study. “It appeared to be the opposite. As newer drugs were brought to market, it promoted increased escalation in drug prices.”

That’s not how it’s supposed to work. New market entrants should bring more competition on price. Drug manufacturers have an incentive to capture market share by reducing their prices. But that seems to be the exception, not the rule. 

In the new Cato Institute book Overcharged: Why Americans Pay Too Much for Health Care, law professors Charles Silver and David Hyman (M.D.) show that this phenomenon occurs because government interference has eliminated incentives for pharmaceutal companies to compete on price:

Why does competition exert less influence in drug markets than it does elsewhere? One likely explanation is “parallel pricing,” which occurs when supposed competitors maintain or raise prices in lockstep. We call it “erectile pricing,” rather than parallel pricing, because we observed it when studying Viagra and other erectile dysfunction (ED) drugs…

Erectile pricing occurs with other medicines too. Insulin is a drug used by millions of Americans afflicted with diabetes. It is off-patent and made by three companies, so it should be reasonably priced. It is not. The past two decades have seen stunning price increases. Short-acting insulin, which cost about $21 in 1996, went for about $275 in 2017. And, just as with ED drugs, the prices went up in lockstep, even though there were two companies making short-acting insulin. Prices for long-acting insulins, which also had two makers, rose in tandem too.

Why does erectile pricing happen in drug markets? Many medicines are made by only a few companies, all of which are repeat players in pricing games and have learned to employ a strategy known as “tit for tat.” Whatever one company does, the others do in turn. When one raises prices, the others follow suit, knowing that if they play follow the leader, they will all get rich. The incentive to steal the market by charging less disappears because every manufacturer knows that other makers will cut their prices too, if it does. An outbreak of price competition would leave all manufacturers poorer—so they all raise prices instead of reducing them.

Ideally, tit-for-tat pricing would be unsustainable, and efforts to keep prices high would collapse, because individual producers could increase their profits by reducing their prices and stealing market share from their competitors. That appears to happen in the pharmaceutical market sector less often than it should.

Third-party payment contributes to this failure of competition. Heavily insured patients who fork over the same copays regardless of which drugs they use will not respond to rising prices by switching to lower-cost alternatives. They will buy what their doctors recommend, and their doctors will not care much about price, knowing that their patients are insured. Third-party payment may weaken drug makers’ incentive to compete for market share.

To purchase Overcharged, click here.

Shulkin Out at VA

President Donald Trump has dismissed Secretary of Veterans Affairs Dr. David Shulkin amid disagreement within the administration over the future of the beleaguered  Veterans’ Health Administration, a single-payer health system whose closest analogue is the United Kingdom’s National Health Service. 

In a farewell printed in the New York Times, Shulkin criticizes proposals to improve health care for veterans by privatizing the VHA:

The private sector, already struggling to provide adequate access to care in many communities, is ill-prepared to handle the number and complexity of patients that would come from closing or downsizing V.A. hospitals and clinics, particularly when it involves the mental health needs of people scarred by the horrors of war. Working with community providers to adequately ensure that veterans’ needs are met is a good practice. But privatization leading to the dismantling of the department’s extensive health care system is a terrible idea. The department’s understanding of service-related health problems, its groundbreaking research and its special ability to work with military veterans cannot be easily replicated in the private sector.

Actually, Shulkin is probably right. The VHA has built expertise in treating the special challenges veterans face (which is not to say the VHA always treats veterans well). If privatization “dismantl[es] the department’s extensive health care system,” it could take the private sector years to fill in the gap. Simply “closing or downsizing V.A. hospitals and clinics” could well be “a terrible idea.”

Fortunately, that is not what privatization means. To privatize does not mean to dismantle. It means to transfer ownership of a resource from the government to private individuals. 

Privatization of the VHA need not dismantle any aspect of that unique system. All that privatization would or need do is transfer ownership of VA hospitals and clinics–of all the system’s physical capital–to the people that system exists to serve: veterans. The VHA would continue to exist as the nation’s largest integrated health system, and would preserve its capacity to meet the unique needs of veterans, but under the control of veterans themselves rather than politicians who persistently renege on the commitments they make to veterans.

Cato Vice President for Defense and Foreign Policy studies Christopher A. Preble and I explain in the New York Times how privatization can have bipartisan appeal:

The alternative system we propose combines the universal goal of improving veterans’ benefits with conservative Republicans’ preference for market incentives and antiwar Democrats’ desire to make it harder to wage war. 

Read more about this bipartisan VA privatization proposal in Chapter 14, Veterans Benefits of Cato’s Handbook for Policymakers (8th ed.).

Survey: What Turns Democrats against the Affordable Care Act’s Core Regulations?

The 2010 Patient Protection and Affordable Care Act, also known as Obamacare, may perhaps be the most contentious and polarizing law we’ve seen enacted in the past several decades. For seven years, Democrats have remained convinced they like it and Republicans confident that they don’t.

But once we get past the partisanship and polarization, what do Democrats and Republicans think about the fundamental regulations that constitute the core of Obamacare? These core regulations include pre-existing conditions rules that require insurance companies cover anyone who applies (guaranteed issue) and charge people the same rates regardless of pre-existing conditions (community rating).

All government policies and their ostensible benefits come with a price. What are Americans willing to pay?

As I’ve previously written, the Cato Institute 2017 Health Care Survey found that while Americans initially support core Obamacare regulations of community rating and guaranteed issue, support plummets if such regulations harm access to high quality medical services, require higher premiums or higher taxes. That being said, Americans appear to care more about their access to high quality medical services than they care about higher taxes, higher premiums, or universal coverage for those with pre-existing conditions.

Democrats are unique, however. They are the only group who says they’d be willing to pay more if it guaranteed coverage to those with pre-existing conditions. Six in 10 Democrats say they’d be willing to personally pay higher taxes and 58% say they’d pay higher premiums so that insurance companies wouldn’t charge people higher rates based on pre-existing conditions (community rating). Similar shares say they’d pay higher taxes (60%) and premiums (51%) so that insurance companies would cover anyone who applies (guaranteed issue).

Large Majorities Support Key Obamacare Provisions, Unless They Cost Something

A new Washington Post/ABC News poll finds that Americans say they support Affordable Care Act regulations that require health insurance companies in all states to cover a particular set of services (62%) and prohibit insurers in all states from charging higher prices to people with pre-existing conditions (70%).

However, the poll did not find out what Americans would be willing to give up to obtain these regulatory benefits.

Fortunately, a recent Cato Institute/YouGov health care survey investigated how Americans make trade-offs when it comes to their health care. In short, support for once popular regulations plummets as soon as voters consider their costs.

At first, and similar to the Washington Post/ABC poll, the Cato survey found by a margin of 63% to 33% Americans support prohibiting insurance companies from charging higher premiums because of pre-existing conditions—also known as “community rating.” But support flips, and majorities come to oppose community rating…

  • if it limited access to medical tests and treatments: 66% oppose, 27% support
  • If it limited access to top rated medical facilities and treatment centers: 62% oppose, 31% support
  • If one had to wait several months before seeing a specialists for necessary care: 65% oppose, 25% support
  • if premiums increased: 55% oppose, 39% favor
  • if taxes increased: 53% oppose, 40% favor

Could Trump Turn Democrats Against Single-Payer Health Care?

A new Reuters/Ipsos poll examines how Donald Trump impacts Democrats’ and Republicans’ conventional public policy opinions. The survey asked Americans to evaluate a series of questions related to statements Donald Trump has made on public policy. However, the poll only told half of the respondents that Trump had made the statement, the other half were simply asked if they agreed or disagreed with the position. Sure enough, the “Trump effect” turned Democrats’ away from single-payer health care and got Republicans somewhat less convinced of their opposition.

The survey asked respondents how much they agreed or disagreed with the following statement made by Donald Trump: “When it comes to health care, the government should take care of everybody and the government should pay for it.” However, only half the sample were told Trump made the statement, the other half were simply asked if they agreed or disagreed that government should pay for everyone’s healthcare.

At first, 68% of Democrats agreed that government should pay for everybody’s healthcare. However, this share drops 21 points to 47% among Democrats who were told Trump thought government should pay for everyone’s healthcare. Republicans’ support increased, but by 6 points, from 33% to 39%, among those who were told Trump made the statement. Initially, 61% of Republicans disagreed with the idea of single-payer, but opposition declined to 50% among those who learned Trump favored it.

The survey also found that Trump could make Democrats more supportive of the idea of American exceptionalism and turn Republicans against it. At first, a majority (53%) of Democrats agreed that “American exceptionalism—the idea that the USA holds a unique place in history—is insulting to people from other countries.” However, results flip among Democrats who were told that Trump made this statement. Instead, a majority (54%) come to disagree with the statement that American exceptionalism is insulting to people from other countries.  

Republicans operated in reverse. A majority (53%) of Republicans at first disagreed that the idea of American exceptionalism is insulting to people from other countries. However, a plurality (46%) came to agree with the statement when they heard that Trump believes American exceptionalism is insulting abroad.

The survey found several more instances of the “Trump effect” among partisans. Notably, majorities of both Democrats (69%) and Republicans (56%) agreed that “government officials should be forbidden from financially benefitting from their position.” However, when Trump was explicitly identified, only 23% of Republicans believed that “Donald Trump should be forbidden from financially benefiting from his position”—a shift of 33 points.

55% of Americans Say Free Market Competition Offers “Better Way” to Provide Affordable High-Quality Health Care

In his call to repeal the Affordable Care Act, also known as Obamacare, House Speaker Paul Ryan contended “there are two ways of fixing healthcare…have the government run it, ration it, and put price controls…[or] have a vibrant free market where people…go out in a free market place and buy the health care of their choosing.”

A new survey from the Cato Institute finds that 55% of Americans believe “more free market competition among insurance companies, doctors, and hospitals” offers the “better way” to provide affordable high-quality health insurance to people. In contrast, 39% say that “more government management of insurance companies, doctors, and hospitals,” would better achieve this goal.

Full Results

Respondents sort themselves along partisan lines. A majority (62%) of Democrats including leaners think that more government management of insurance companies, hospitals, and doctors is the better approach to health care reform. In contrast, majorities of non-partisan independents (57%) and Republicans including leaners (84%) think free market competition offers a better alternative.

The divide between Republicans and Democrats widens as they attain higher levels of education. Fifty percent (50%) of Democrats with high school degrees believe that free market competition would better provide high-quality affordable health care. However, this share drops to 17% among Democrats with college degrees—a 33-point swing. The share of Republicans who believe free markets better deliver high-quality affordable coverage increases from 81% among those with high school degrees to 94% among college graduates. Non-partisan independents’ attitudes don't change much with education.

These results are consistent with the theory that partisans become more likely to learn about and accept partisan cues on health care policy as they gain more political information. Independents, on the other hand, feel less inclined to accept partisan cues regardless of their political knowledge.

This is not the only survey which finds Americans prefer a free market approach to reducing costs in health care.  A Kaiser Family Foundation survey found that 51% of Americans thought free market competition would better reduce prescription drug prices than government regulation (40%).

For decades Americans have debated how to best provide access to high-quality affordable health care. Some argue that health care markets operate differently and thus require more government management to ensure people get the care they need. Others contend that, just like in other sectors, injecting free market forces into health care would incentivize lower costs, increase quality, and expand access.

These results indicate public appetite for taking a new approach to health care reform: injecting free market forces into the system in order to provide access to affordable high-quality health insurance.

Survey results and methodology can be found here. The Cato Institute in collaboration with YouGov conducted two health care surveys online February 22-23, 2017. The first survey interviewed 1,152 American adults with a margin of error of ± 2.93 percentage points. The second survey interviewed 1,103 American adults with a margin of error of ± 2.85 percentage points. The margin of error for items used in half-samples is approximately ± 5.1 percentage points.

New Cato Survey: Large Majorities Support Key Obamacare Provisions, Unless They Cost Something

Support for the ACA’s community-rating provisions flips from 63%-33% support to 60%-31% opposed if it harms the quality of health care. 55% say more free-market competition not government management would best deliver high-quality affordable health care. FULL RESULTS (PDF)

Most polling of the Affordable Care Act finds popular support for many of its benefits when no costs are mentioned. However, a new Cato Institute/YouGov survey finds that support plummets, even among Democrats, if its popular provisions harm the quality of health care. The poll finds that risks of higher premiums, higher taxes, or subsidies to insurers are less concerning to Americans than harm to the quality of care. 

By a margin of 63% to 33%, Americans support the ACA’s community-rating provision that prevents health insurers from charging some customers higher rates based on their medical history. However, support flips with a majority opposed 60%-31% if the provision caused the quality of health care to get worse.

Majorities also come to oppose the ACA’s community-rating provision if it increased premiums (55% oppose, 39% favor), or raised taxes (53% oppose, 40% favor). However, threats to the to quality of care appear to be a pressure point for most Americans.

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