Topic: Cato Publications

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.

Poll: The ACA’s Pre-existing Condition Regulations Lose Support When the Public Learns the Cost

Days before the 2018 midterms, 68% of voters say that health care is very or extremely important to how they plan to vote in this year’s elections, according to a new Cato 2018 Health Care Survey of 2,498 Americans. These numbers are driven primarily by Democratic voters with 86% who say this issue is especially important to them—in fact, 56% say the issue is “extremely important” to them. Independent (33%) and Republican voters (21%) are far less likely to say this is an “extremely” crucial issue for their vote this Tuesday.

 FIND FULL POLL RESULTS HERE

These results are consistent with analysis of 2018 campaign ads, which finds Democrats have made healthcare the centerpiece of their case to voters. About half of Democratic ads have featured health care issues compared to less than a third of Republican ads. At the core of the debate is what to do with pre-existing condition regulations embedded in the Affordable Care Act (ACA) that prevent health insurers from denying coverage or charging higher premiums to people with pre-existing conditions. Much of the public debate centered on pre-existing condition protections assume that these regulations enjoy widespread public support. However, these protections lose public support when voters learn about their costs, finds the Cato 2018 Health Care Survey.

The survey first replicated the results from myriad other surveys finding a majority (65%) of Americans favor regulations that prohibit insurance companies from refusing to cover, or charging higher premiums to, people with pre-existing conditions, while 32% oppose. However, support plummets when Americans are faced with likely consequences of these regulations. 

Support drops 20 points to 44% in favor and 51% opposed if pre-existing condition protections limited people’s access to medical tests and treatments. Similarly, 44% would favor and 50% would oppose if these regulations harmed the delivery of high-quality health care. Support drops 18 points to 47% in favor and 48% opposed if these regulations limited people’s access to top-rated medical facilities and treatment centers. Some may dismiss these potential costs as improbable; however, research finds these are likely consequences from the incentives these regulations create for the health care industry. It is for this reason that we investigate how the public evaluates these costs.

Compared to quality reductions, Americans are more prepared to pay higher taxes or premiums in exchange for keeping regulations that prevent insurers from denying coverage or charger higher premiums to people with pre-existing conditions. About half (51%) would favor and 44% oppose if these regulations raised taxes and 49% would favor and 47% would oppose if they drove up premiums. 

These results follow a familiar pattern identified in the Cato 2017 Health Care Survey that asked about each of these pre-existing condition protections separately. However, in this year’s survey we improve the desirability of these regulations by offering them as a bundle. Even still, when faced with the realistic costs of these mandates, public support plummets. 

Taking a look among partisans, we find that without any mention of costs, 83% of Democrats, 55% of independents, and 52% of Republicans initially support pre-existing condition protections. However, independents and Republicans turn against these regulations if they increase the cost of health insurance (66%, 55%), reduce access to medical tests and treatments (59%, 58%), harm the quality of health care people receive (57%, 55%), reduce access to top-rated medical facilities and treatment centers (57%, 55%), or increase taxes (57%, 57%). Democrats are less swayed by these trade-offs; however, they are least willing to sacrifice the quality of health care in exchange for keeping the pre-existing condition regulations (42%). Instead, majorities of Democrats are willing to have less access to medical tests (57%), or top-rated medical facilities (61%), or pay higher premiums (67%) or taxes (72%). Some differences in how partisans answer these questions may depend, perhaps, on how believable these costs seem to respondents rather than how acceptable they are. For instance, since Democrats are most enthusiastic about these regulations, they may be less likely to believe that they could harm the quality of care.

Higher-income Americans are more willing than low-income Americans to make trade-offs, such as shouldering higher premiums or having less access to top-rated medical facilities, to keep the pre-existing condition regulations. For instance, 61% of Americans earning more than $80,000 a year say they’d pay higher premiums to keep these regulations. In contrast, about a third (38%) of Americans earning less than $40,000 a year agree; instead, 56% oppose paying higher premiums for this reason. Nearly 6 in 10 (57%) of people earning more than $80,000 a year say they’d accept having less access to top-rated medical facilities compared to 35% of Americans earning less than $20,000 a year.

Short Term Plans

The survey also asked Americans about new federal rules that allow consumers to purchase alternative health insurance plans that don’t comply with ACA-mandates. The survey finds that majorities support new federal rules that allow consumers to purchase alternative plans, like short-term plans, even when confronted with likely trade-offs.

First, the survey presented respondents with only the anticipated benefits of the new federal rules. Doing so finds that 77% of Americans support new federal rules that allow consumers to purchase health insurance plans that cost 50% less and offer greater choices of hospitals and doctors than current plans and would cover 2 million more uninsured people. 

Support drops to 64% in favor and 31% opposed if these rules meant that some people would purchase insurance policies that cover fewer services than current plans. For instance, these new plans would not be required to cover services like mental health and prescription drugs. 

One reason why such plans have lower premiums is they do not have to comply with ACA pre-existing condition regulations and thus may exclude people, or offer limited services to people, with expensive medical conditions. These lower premiums could draw people who use fewer medical services out of the ACA-compliant plans and thus increase premiums for those who remain in those plans and are not eligible for subsidies. Nevertheless, the survey finds that 59% would continue to favor while 35% would oppose these new rules if they caused premiums to rise for some people who purchase insurance plans in the individual market.

These rule changes are popular among partisans with 77% of Democrats and 86% of Republicans in support. Majorities of Democrats and Republicans continue to favor allowing people to purchase non-ACA compliant plans even if doing so means people would not have as many services covered (58% and 71%) or if doing so increased premiums for unsubsidized people in the individual market (63% and 65%).

The Path Forward

The survey also asked Americans how they felt policymakers should approach health care reform going forward. A majority (55%) of Americans believe that the “better way” to sustainably provide high-quality affordable health care is through expanding free-market competition among insurance companies, doctors, and hospitals. Thirty-nine percent (39%) think that more government regulation of insurance companies, doctors, and hospitals is more likely to provide affordable coverage. These numbers are virtually unchanged from last year’s health care survey.

Independents (54%) and Republicans (79%) agree that more free-market competition rather than more government management of health care is more likely to lead to affordable coverage. However, a majority (60%) of Democrats think more government management is the key. Despite these partisan differences, majorities or slim majorities of whites (58%), African Americans (53%) and Hispanics (51%) believe more free market competition can better provide affordable health care than more government control.

Implications

These results do not support the widespread misperception among the political punditry that pre-existing condition regulations are necessarily and universally supported by voters across the political spectrum. Voters like benefits but not costs. And some costs are more acceptable to voters than others. Democratic accountability demands that we understand if voters are willing to bear the necessary trade-offs and costs in exchange for establishing a new policy, regulatory protection, or social program. But first, pollsters have to ask.

 
 
The Cato Institute 2018 Health Care Survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online October 26-30, 2018 from a representative national sample of 2,498 Americans 18 years of age and older. The margin of error for the survey is +/- 2.66 percentage points at the 95% level of confidence.

 

Impeach Justice Kavanaugh?

If the Democrats take the House, they’ll impeach Justice Kavanaugh, President Trump warned at a mass rally in Iowa last week. “Impeach, for what? For what?” Trump demanded. For perjury, most likely: “If we find lies about assault against women,” says Rep. Luis Gutierrez (D.-Ill.) one of several House Judiciary Committee members calling for renewed investigation, “then we should proceed to impeach.” 

I’m not the newly-minted Justice’s biggest fan. From the start, I thought Kavanaugh was a lousy pick for the Court: weak on the Fourth Amendment and unreasonably fond of extraconstitutional privileges for the president. I’ve also argued, at great length, that we ought to impeach federal officers more frequently than we do. That goes for Supreme Court Justices as well. The Framers thought impeachment could serve as a valuable check on abuses of judicial power: that we’ve managed to impeach just one member of the “high court” in 230 years is pretty anemic. 

All that said, I find the case for impeaching Justice Kavanaugh uncompelling, for the reasons that follow.

It’s true that there’s ample precedent for impeaching federal judges for perjury. Our last five judicial impeachments were based on charges of lying under oath. 

Here’s a brief rundown of each case: in 1986, the House impeached, and the Senate removed, Judge Harry E. Claiborne (D. Nev.) for filing false tax returns under penalty of perjury (Claiborne had been convicted of those offenses earlier that year, becoming the first sitting federal judge to be incarcerated). Three years later, the Senate removed two more judges for lying under oath. One, the inauspiciously surnamed Walter L. Nixon (S.D. Miss.), was serving five years in prison for lying to a federal grand jury about his attempt to influence a drug smuggling prosecution. The other, Alcee L. Hastings (S.D. Fla.), had been prosecuted for soliciting a $150,000 bribe in exchange for reducing the sentences of two mob-connected developers who’d robbed a union pension fund. He beat the rap in court, but lost his post when the Senate voted to remove him for the bribery scheme and perjuring himself at trial. (Hastings bounced back pretty quickly, however, winning election to the U.S. House of Representatives in 1992. He currently represents Florida’s 20th congressional district.)

More recently, we have the grotesque behavior of Judge Samuel Kent (S.D. Tex.), impeached in 2009 for sexually assaulting two court employees and lying about it to federal investigators. (Kent resigned before completion of his Senate trial.) Finally, there’s Judge G. Thomas Porteous (E.D. La.), impeached and removed in 2010 for “a longstanding pattern of corrupt conduct,” including kickbacks from attorneys, perjury in his personal bankruptcy filing, and “knowingly ma[king] material false statements about his past” to the Senate Judiciary Committee “in order to obtain the office of United States District Court Judge.” 

In principle and in practice, then, perjury is an impeachable offense. That obviously includes lying under oath to gain confirmation to higher office. In Monday’s Wall Street Journal, David Rivkin and Lee Casey insist that “Justice Kavanaugh cannot be impeached for conduct before his promotion to the Supreme Court,” including “any claims that he misled the Judiciary Committee.” But that’s nonsense. Misleading the Judiciary Committee about prior conduct was precisely what was at issue in the Porteous impeachment. 

And yet, the cases outlined above differ from Brett Kavanaugh’s in at least one crucial respect: in each of them, Congress had overwhelming evidence of impeachable falsehoods. Claiborne, Nixon, and Kent were already in federal prison when the House voted to impeach. Hastings and Porteous were removed after exhaustive investigations pursuant to the Judicial Conduct and Disability Act convinced their colleagues impeachment referrals were warranted. Indeed, despite Hastings acquittal in his criminal trial, a Judicial Investigating Committee concluded there was “clear and convincing evidence” he lied and falsified documents in order to mislead the jury.

Is the Stormy Daniels Payoff an Impeachable Offense?

As you’ve no doubt heard by now, on Tuesday, Michael Cohen, President Trump’s erstwhile “fixer,” pled guilty to, among other charges, making an illegal campaign contribution in the form of a $130,000 “hush money” payment to adult film star Stormy Daniels. That payment was made, Cohen affirmed, “at the direction of a candidate for federal office”—Donald J. Trump—“for the principal purpose of influencing the election.” 

If that’s true, would Trump’s participation in that scheme rise to the level of “high Crimes and Misdemeanors”? Maybe: you can argue it both ways, so I will.

The case against the Stormy payoff as impeachable offense would characterize it as the sort of de minimis legal violation impeachment isn’t concerned with. Just as you don’t need a crime to have an impeachable offense, the commission of a crime doesn’t automatically provide grounds for impeachment. Murder is a crime and an impeachable offense—even according to Rudy Giuliani—but you wouldn’t impeach a president for, say, importing crocodile feet in opaque containers or misappropriating the likeness of “Smokey Bear,” because those offenses don’t speak to his fitness for high office.

Impeachment opponents can argue that the criminal offense alleged here depends on a contested application of the Federal Election Campaign Act. In the 2012 prosecution of John Edwards, three former FEC commissioners testified that third-party payments to Edwards’ pregnant mistress would not have been considered campaign contributions.

The president’s defenders can also—though this may be awkward for some—compare Trump’s troubles to Bill Clinton’s two decades ago: unlawful acts committed as part of a scheme to conceal a private sexual affair. Though many of them sang a different tune in the ‘90s, they can appeal to the dominant historical consensus that impeaching Clinton for that was like wheeling out the proverbial hundred-ton gun to blast a squirrel.

The case that the Stormy payoff is an impeachable offense depends on a different, but equally plausible framing. In Trump’s case, the unlawful act quite plausibly affected the outcome of the 2016 election. Cohen made the payment less than two weeks before Election Day, in what turned out to be an extraordinarily close contest. As Laurence Tribe and Joshua Matz note, the Framers repeatedly identified “corrupt acquisition of the presidency as a paradigm case for impeachment.” One of the Framers’ key concerns was the possibility of a candidate bribing the Electors—an imperfect analogy to what’s alleged in Trump’s case. But impeachment advocates might also point to our most recent impeachment case: Judge G. Thomas Porteous, removed by the Senate in 2010, in part for corrupt acquisition of his post. Article IV of the Porteous impeachment charged the judge with lying to the Senate about his past in order to secure confirmation to the federal bench, thus “depriv[ing] the United States Senate and the public of information that would have had a material impact on his confirmation.”

Jerry Ford went too far when he said that an impeachable offense is “whatever a majority of the House considers it to be at a given moment in history.” Still, the scope of the impeachment power is much broader than is commonly recognized. It covers what Hamilton described as “those offenses which proceed from the misconduct of public men, or, in other words, from the abuse or violation of some public trust.” As the legal scholar Frank Bowman sums up: “‘high crimes and misdemeanors’ are serious offenses that either endanger the political order or demonstrate an official’s manifest unfitness to continue in office.” That leaves ample room for argument and interpretation. Moreover, while legal analysis may be able to tell you when impeachment is permissible in a given case, it can’t tell you whether it’s a good idea.

The fact that Michael Cohen has potentially implicated Donald Trump in a felony violation of federal election law has increased the president’s chances of facing a serious impeachment effort after November. But if impeachment is about guarding the public from officials dangerously unfit to wield power, “broke the law to pay off a mistress” has to be pretty far down the list behind, say, “makes off the cuff threats of nuclear annihilation.” That any impeachment inquiry will likely spend more time parsing the intricacies of federal election law than examining the president’s public conduct is yet another reason to rue the “Overcriminalization of Impeachment.”

U.S. Maritime Sector Among the Jones Act’s Biggest Victims

Monday of this week marked the Day of the Seafarer, an occasion meant to recognize the critical role played by mariners in the global economy. American seafarers, however, increasingly find little to celebrate. A large source of their travails is the Jones Act. Signed into law 98 years ago this month, the law mandates that cargo transported between two domestic ports be carried on ships that are U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-crewed.

The harm caused by this law is well documented. By reducing competition from foreign shipping options and mandating the use of domestically built ships that are vastly more expensive than those constructed elsewhere, the Jones Act has raised transportation costs and served as a de facto tax on the economy.

Too often overlooked is that the Jones Act has also presided over the decimation of the U.S. maritime sector, the very industry whose fortunes it was meant to promote (an age-old story in the annals of protectionism). The numbers speak for themselves. Since 2000 the number of oceangoing vessels of at least 1,000 tons which meet the Jones Act’s requirements has shrunk from 193 to 99. A mere three U.S. shipyards are capable of producing oceangoing vessels for commercial shipping, and one of them, the Philly Shipyard, is facing a possible shutdown. Europe, in contrast, has roughly 60 major shipyards capable of building vessels of at least 150 meters in length, while the United States has a total of seven such shipyards when those producing military vessels are included.

Both the declining number of Jones Act ships and the struggles of the shipyards that build them are in large part explained by the vastly inflated cost of ships constructed in the United States. According to the Congressional Research Service, American-built coastal and feeder ships—the types of ships commonly used in domestic sea transport—cost between $190 and $250 million, whereas similar vessels constructed in a foreign shipyard cost about $30 million.

One unsurprising consequence of such stratospheric costs is a reluctance on the part of domestic shipping firms to invest in new ships, with U.S. seafarers forced to work aboard vessels that are significantly older than those found in other countries. Excluding tankers (these vessels were subject to a requirement in the wake of the Exxon Valdez oil spill that they be double-hulled by 2015, thus encouraging the purchase of new ships and decreasing their average age), the Jones Act fleet averages 30 years of age—fully 11 years older than the average age of a ship in the merchant fleet of other developed countries. For context, the maximum economic life of a ship in the world market is typically 20 years

International comparisons of specific ship types are even more eye-opening. Jones Act containerships, for example, average more than 30 years old. The international average is 11.5. The only two bulk ships in the Jones Act fleet average 38 years old, while the international average is 8.8. General cargo ships average 34 years of age compared to an international average of 25.2.

Struggling shipyards, a dwindling fleet of old ships, and fewer jobs are now the order of the day in the maritime sector. As Mark H. Buzby, head of the U.S. Maritime Administration, testified before Congress earlier this year, “over the last few decades, the U.S. maritime industry has suffered losses as companies, ships, and jobs moved overseas.” Also addressing members of Congress, one senior union official admitted that “the pool of licensed and unlicensed mariners has shrunk to a critical level.”

This is not a new story. During Operations Desert Shield and Desert Storm, the United States was so desperate for civilian mariners to crew transport vessels that it enlisted the services of two octogenarians and one 92-year-old. Its search for ships was equally frantic, resulting in two requests to borrow a ship from the Soviet Union—and two rejections. Notably, during this conflict a much larger share of U.S. military equipment and supplies was carried by foreign-flagged vessels (26.6 percent) than U.S.-flagged commercial vessels (12.7 percent).

Supporters of the Jones Act often claim the law is vital to assure a strong merchant marine capable of answering the country’s call in times of war or national emergency. Should the Jones Act be repealed, they warn that the maritime industry will enter a dangerous downward spiral. But the record clearly shows that their nightmare scenario, in fact, describes the status quo. It’s time for this law to go, or be significantly reformed.

Toward that end the Cato Institute has unveiled its Project on Jones Act Reform, which will feature a series of policy papers exposing the fallacies and realities of this archaic law. The first of these policy analyses, The Jones Act: A Burden America Can No Longer Bear, is now available and provides an overview of the law, its history, and myriad shortcomings. More such policy analyses will follow both this year and next, along with other commentary pieces about this failed law, so be sure to check back for the latest updates. 

The “Success Sequence” - What Does It Tell Us?

One story about poverty in the United States goes like this: Poverty is simple to escape. Finish high school. Get a job, even a menial one. Do not have kids until you’re married. And if you do all these things, you’re pretty unlikely to be poor.

Conservatives like this story because it suggests that no significant social changes are needed to end poverty. On this view, poverty may even be just a personal choice. It’s largely up to you whether you follow the so-called “success sequence” or not.

Critics, though, are quick to point out that the success sequence is much easier described than followed, and that following it is much easier for some people than for others. Failing or dangerous schools offer little reason for students to remain. Getting a job is easier in some places than others, and easier for some types of people than others. In some communities, marriage partners are all too few. And avoiding having children is a lot to ask, because it’s a natural human desire to want to have them.

If the success sequence doesn’t hold up so well, what do we do about it? And what specifically libertarian steps remain to be done to fight poverty?

This month at Cato Unbound, we’re debating the usefulness of the success sequence as a tool for thinking about American poverty. Cato Senior Fellow Michael Tanner has written the lead essay, which I encourage you to read. Comments are open, and we welcome readers’ feedback. Discussion with a panel of diverse outside experts will continue through the end of the month.

Public Schooling Battles: February Dispatch

February is a short month, so March caught me by surprise. Hence the late Dispatch. But if February had 31 days, it would be like this came out on March 11. Not that bad, right? Anyway, on with the February battles, which are heavy on books, slavery lessons, and…dances.

  • Books: February saw three new book challenges: Both The Adventures of Huckleberry Finn and To Kill a Mockingbird were removed from required reading lists in Duluth, MN; Stick was removed from all classrooms and libraries below the high school level in Beaverton, OR; and The Hate U Give was pulled as an assignment in Springfield, MO. Three of these books are not newly contested territory in our public schools’ constant values and identity-based battles. Huckleberry Finn and To Kill a Mockingbird have been flashpoints for decades—and the latter, several times in the last few months—while we saw a battle over The Hate U Give in Texas in 2017.
  • Slavery illustrations: A teacher in Leander, TX, assigned students to draw pictures of themselves as slaves for homework and to “write one sentence that describes your surroundings using each of the 5 senses.” A New York City teacher made her African-American students lie down on the floor and then she stepped on their backs to try to give them a sense for how slavery felt. Needless to say these things disturbed many parents. But they aren’t the first concerning “immersion” assignments—which seem largely intended to help kids get a better feeling for historical events—we’ve tracked. In just the last few months we’ve also seen two in Georgia and one in Massachusetts.
  • Dances: Conflicts over dress codes at school dances are common—the Map has almost 10 such incidents—but in February we saw two dance-related battles that are much less familiar. Unprecedented, at least as far as the Map indicates, was a conflict in Weber, UT, over a policy prohibiting girls from saying “no” to boys who asked them to dance at a Valentine’s Day event. At issue was disempowering girls versus protecting the feelings of potentially rejected boys. The second battle was in Staten Island, New York, where the annual father-daughter dance was cancelled in an effort to end potentially discriminatory “gender-based” activities. There is only one similar dispute I could find on the Map, a 2012 conflict in Cranston, RI.

Of course there were more battles to check out, including over an offensive science project, the National Anthem, and Cool Runnings. Meanwhile, we have continued to post polls on the Battle Map Facebook page, and utterly dwarfed old voting records with a question, in the wake of the horrific Parkland, FL, school shooting, whether teachers should be able to bring guns to work. Around 5,500 people voted, with 85 percent saying “yes” in answer to “Should a teacher’s right to bear arms extend to the classroom?” 15 percent said “no.” Of course this is unscientific, but it certainly suggests that like so many things, non-negligible percentages of the population can have differing, mutually exclusive views on crucial issues. Which is, of course, why school choice is the only system of education consistent with diversity and liberty.

Pages