DHS Proposes Illegal H-1B Reforms Which Could Cut Entries

In an end-run around Congress, the Trump administration has proposed a revision to the H-1B work visa program, which provides temporary visas to skilled foreign workers. The Department of Homeland Security (DHS) states that it is issuing the visas pursuant to President Trump’s “Buy American and Hire American” Executive Order, which vaguely requires agencies “to protect the interests of United States workers in the administration of our immigration system.”

One important aspect of this new 139-page proposal flatly contradicts the scheme that Congress created, and for this reason, it may never take effect. The stated goal of this particular portion of the regulation is to “prioritize petitions filed on behalf of beneficiaries who have attained a master’s or higher degree” (p. 44), but the specific changes that it makes contradict the intent of Congress and would have—in earlier years—reduce the total number of H-1B visas. 

Under current law, H-1B visas have a quota of 65,000 (8 U.S.C. 1184(g)(1)(A)(vii)). However, there are several categories of H-1Bs who are exempt from this quota—college professors, nonprofit researchers, and those with a master’s degree or higher for a U.S. university (8 U.S.C. 1184(g)(5)). The master’s degree holder exemption, however, has a separate cap of 20,000. Once the number of visas for master’s degree holders reaches 20,000, any additional count against the overall cap (8 U.S.C. 1184(g)(5)(C)).

DHS’s new revision to the H-1B program, however, would first count master’s degree holders against the overall H-1B cap of 65,000 and only then count them against the master’s exemption, the opposite of what the law requires. DHS comments (pp. 10-11):

Changing the order in which USCIS selects beneficiaries under these separate allocations will likely increase the total number of petitions selected under the regular cap for H-1B beneficiaries who possess a master’s or higher degree from a U.S. institution of higher education each fiscal year … Conversely, this process will likely decrease the total number of petitions selected for H-1B beneficiaries with less than a master’s degree …

In recent years, the H-1B cap is filled immediately, so DHS puts all the applications in two lotteries. First, the master’s degree holders are selected, and then after that, any master’s degree holders who aren’t selected are placed in the second lottery. Inverting the order increases the probability of master’s degree holders being selected in the initial allocation.

The problem here is twofold. First, the statute clearly prohibits counting master’s degree holders against the overall H-1B cap until after the master’s exemption is filled. To quote the statute (8 U.S.C. 1184(g)(5)(C)) directly:

(5) The numerical limitations contained in paragraph (1)(A) shall not apply to any nonimmigrant alien … who … (C) has earned a master’s or higher degree from a United States institution of higher education (as defined in section 1001(a) of title 20), until the number of aliens who are exempted from such numerical limitation during such year exceeds 20,000. (Emphasis added)

DHS cannot legally count master’s degree holders against the overall H-1B quota before the master’s exemption is filled. In other words, Congress did not want to increase the probability of master’s degree holders being selected in the overall H-1B cap. It just wanted to provide a guarantee of 20,000 visas for master’s degree holders. Not only does DHS not address the statutory issue here, it never even quotes the statute directly. On this point, it merely states (p. 11):

DHS believes that amending its regulations in this manner would increase the chances that beneficiaries with a master’s degree or higher from a U.S. institution of higher education would be selected under the H-1B regular cap, which is generally consistent with congressional intent in enacting section 214(g)(5)(C) to prioritize these workers … (Emphasis added)

I find the use of the word “generally” here to be a telling admission. Either this change is consistent with congressional intent or it is not. It cannot be “generally” consistent. “Generally” implies that in some respects, it may not be consistent.  Whoever chose to include that word must have known that it was not, in every respect, consistent with the law.

The second problem with this change is that it is a clever effort to decrease H-1B admissions. DHS writes (p. 26):

USCIS is proposing to count all registrations [including master’s degree holders] toward the H-1B regular cap projections first, even in years when a random selection process [i.e. a lottery] at the end of the initial registration period may not be necessary. (Emphasis added)

In years where the cap is not immediately filled, the new scheme could thwart the intent of Congress in another way: by reducing the overall number of visas available. Suppose 20,000 master’s degree holders apply during a year, while 65,000 bachelor’s degree holders apply. There should be enough visas for everyone under Congress’s scheme. But under DHS’s regulation, the 20,000 master’s degree holders would be counting against the 65,000 cap throughout the year. Once that’s hit, then there’s maybe 5,000 master’s degree holders left and 15,000 bachelor’s degree holders. But only the 5,000 can get visas under the master’s exemption, resulting in a 15,000 visa cut to the H-1B program. Something like this situation would probably have occurred during the FY 2011 allocation, which took 10 months to fill.

DHS never even acknowledges this issue, implying that the change could never matter to the overall numbers. The Trump administration has once again disguised a potential cut to legal immigration as a “merit-based” immigration reform, and it has done so in violation of the law. While the president has thwarted the plain meaning of other statutes in the past in order to cut immigration, the statute is so clear that he might just lose this time.

Share Buybacks: Mismeasured and Misunderstood

In March of this year, Forbes published an article with the following lede:

The Economist has called them “an addiction to corporate cocaine.” Reuters has called them “self-cannibalization.” The Financial Times has called them “an overwhelming conflict of interest.” In an article that won the HBR McKinsey Award for the best article of the year, Harvard Business Review has called them “stock price manipulation.” These influential journals make a powerful case that wholesale stock buybacks are a bad idea—bad economically, bad financially, bad socially, bad legally and bad morally.

There is no shortage of hand-wringing over “excessive” stock buybacks, either in the academic literature or in the popular media. Such criticisms are misguided in two crucial ways. Methodologically, they overstate the scale of the problem (such as it is) by observing gross payouts instead of payouts net of issuance, and by neglecting the extent to which firms are simply substituting low-interest debt for equity financing. Second, while accusing shareholders of myopia and executives of cupidity, such critics are not taking a properly panoptic view of the function that buybacks serve in the broader equity ecosystem.    

I.

A 2018 report by the Roosevelt Institute cites a statistic that lies at the heart of alarmism over the size and scale of stock buybacks:

Over the last decade-and-a-half, firms have sent 94 percent of corporate profits out to shareholders, in the form of buybacks, as well as dividends, leaving companies to argue that there is little available for employee compensation or investment.[1]

But other recent research dramatically qualifies such despair. Harvard researchers Jesse Fried and Charles Wang offer a persuasive rejoinder to concerns over the scale of equity outlays:

During 2007-2016, S&P 500 firms distributed to shareholders more than $4.2 trillion through stock buybacks and about $2.8 trillion through dividends. These cash outflows, totaling $7 trillion, represented 96% of these firms’ net income during that decade. But during this same period, S&P 500 firms absorbed, directly or indirectly, $3.3 trillion of equity capital from shareholders through share issuances. Net shareholder payouts from S&P 500 firms were therefore only about $3.7 trillion, or 50% of these firms’ net income.[2]

Moreover, this figure pertains only to those firms listed on the S&P 500, which are relatively mature, vs. publicly traded firms not listed on the index. When accounting for unlisted public firms, who are net importers of capital, the share of corporate income channeled into buybacks and dividends falls further, to 41%.[3] Yet net equity outlays don’t necessarily translate into a reduced cash position. Low-interest rates mean that firms can afford to reorient their balance sheets away from equity and toward debt financing. In fact, in the years 1989-2012, fully 42% of equity payouts were offset by a debt issuance that same year.[4] In a recent working paper, Mark Roe takes direct aim at this argument:

Low interest rates pushed corporate America to substitute low-interest debt for stock. Viewed as a capital structure decision, the double trend—more low-interest debt, less equity—fits the short-termist critique poorly. Overall, public firms have more cash, not less.[5]

Not only do public corporations retain more of their earnings than is indicated by gross equity outlays (including debt financing, total corporate cash balances rose from $3.3 to $4.5 trillion between 2007-2016[6]), there is evidence to suggest that this extra liquidity is flowing into long-term investments such as R&D. Again quoting from Fried and Wang:

Further, we show that public firms deployed much of this capacity for investment in R&D and CAPEX. In absolute terms, total investment (R&D and CAPEX) rose to a record level. And relative to revenues, total investment rose to levels not seen since the late 1990s economic boom.

If anything, these large gross capital movements, and net equity outlays, are a sign of economic efficiency, not destructive short-termism. As John Cochrane explains in the Wall St. Journal, if Company A is short on investment ideas but long on cash, and Company B is facing the opposite situation, a share buyback allows investors to reallocate their capital to its higher-value use (in the hands of Company B).[7] Nonetheless, critics maintain not only that the scale of buybacks is immense, but that their influence is malign.

II.

i.

Share buybacks, to the extent that they are in fact occurring, are highlighted as one of many symptoms of a greater pathology plaguing our economy: short-termism.

Contra the proponents of the efficient markets hypothesis, who argue that prices on the stock market incorporate all extant information about a firm’s current and expected future profits - discounted accordingly - there exists a considerable economics literature that grants the premise that shareholders are rational, but that posits that this individual shareholder rationality does not aggregate to rationality at the market level. One such market failure is said to obtain in publicly traded equities, known variously as “short-termism, “quarterly capitalism”, or, more formally, the “myopia hypothesis.”

While accusations of stock-market short-termism are intellectually buttressed by different arguments[8], the most common strain of the “myopia hypothesis” proceeds as follows: the managers of publicly traded firms, whose shares trade in deep and liquid markets, are hostage to the over-diversified and under-informed marginal shareholder, who moves the share price not in response to new information about a firm’s fundamentals, but in response to the latest, easily digestible quarterly earnings report. Instead of undertaking investments in the present that might have a substantial return several years down the road, managers are induced to mimic the priorities of transient shareholders uninterested in a firm’s long-term strategy. Future-oriented firms that resist this temptation will be penalized, finding it more difficult to raise capital. This will in turn affect their bottom line, jeopardizing their ability to even survive to the point at which they would reap the returns from their long-term investments.

The seeming insuperability of such incentives has led to calls for a variety of legal remedies: from relatively minor vesting restrictions on executive stock options to a wholesale paradigm shift from our free-wheeling “liberal market economy” to a Franco-Germanic-Japanese style “coordinated market economy” in which patient, farsighted institutional bloc-holders substitute for a dispersed set of myopic, over-diversified shareholders.[9]  While few policymakers have the stomach to commit hari-kari on our institutional innards in such a wholesale fashion, more “modest” proposals are advanced (and often achieved) by figures such as Barack Obama and Elizabeth Warren on a routine basis, but without the redeeming Swiftian irony or humor.[10] One such cure proposed for the short-termism disease is a restriction on share buybacks. I will spend the remainder of this post summarizing why critics find buybacks to be problematic, countering this diagnosis with arguments as to the important role that buybacks play in equity markets, and will suggest that this proposed “cure” is likely to be iatrogenic.

Will Progressives Vote for Trade Liberalization?

At the G20 meeting in Buenos Aires today, the renegotiated NAFTA – in the U.S., the new agreement is referred to as the United States - Mexico - Canada Agreement, or USMCA – was signed by the three parties. The big question now is, what will Congress think of the agreement as it decides whether to ratify it? One aspect of this question is, what will the Democrats who now control the House think of it? And to get even more specific, I’m very curious to see what progressives think of it. While she is in the Senate rather than the House, Senator Elizabeth Warren may be a good indicator of what many progressives think. Yesterday, Senator Warren gave a speech at American University in which she set out “her vision for a progressive foreign policy that works for all Americans.” She covered a lot of ground, and I won’t go through all of it, but here is a key bit on trade policy:

By the time the 2008 global financial crash came around, it only confirmed what millions of Americans already knew: the system didn’t work for working people - and it wasn’t really intended to.

And it’s still not working. Tomorrow, the Trump Administration will likely sign a renegotiated NAFTA deal. 

There’s no question we need to renegotiate NAFTA. The federal government has certified that NAFTA has already cost us nearly a million good American jobs - and big companies continue to use NAFTA to outsource jobs to Mexico to this day.

But as it’s currently written, Trump’s deal won’t stop the serious and ongoing harm NAFTA causes for American workers. It won’t stop outsourcing, it won’t raise wages, and it won’t create jobs. It’s NAFTA 2.0.

For example, NAFTA 2.0 has better labor standards on paper but it doesn’t give American workers enough tools to enforce those standards. Without swift and certain enforcement of these new labor standards, big corporations will continue outsourcing jobs to Mexico to so they can pay workers less.

NAFTA 2.0 is also stuffed with handouts that will let big drug companies lock in the high prices they charge for many drugs. The new rules will make it harder to bring down drug prices for seniors and anyone else who needs access to life-saving medicine.

And NAFTA 2.0 does little to reduce pollution or combat the dangers of climate change - giving American companies one more reason to close their factories here and move to Mexico where the environmental standards are lower. That’s bad for the earth and bad for American workers.

For these reasons, I oppose NAFTA 2.0, and will vote against it in the Senate unless President Trump reopens the agreement and produces a better deal for America’s working families.

How can we make the system fair for working Americans? Lots of ways.

  • We can start by ensuring that workers are meaningfully represented at the negotiating table and build trade agreements that strengthen labor standards worldwide.
  • We can make every trade promise equally enforceable, both those terms that help corporations and those that help workers.
  • We can curtail the power of multinational monopolies through serious antitrust enforcement.
  • We can work with our international partners to crack down on tax havens. 

Those four changes would fundamentally alter every trade negotiation. 

I disagree with most of her views on the impact of NAFTA, but putting that aside, what I’m curious about here is what it would take to get her to support the new NAFTA. I’ve read through her remarks a couple times now, and I still can’t figure out precisely what changes she wants and expects in NAFTA 2.0 in order to vote for it. First of all, the tax haven and monopoly issues are not likely to be addressed seriously through a trade agreement anytime soon, so we can ignore that part. On the other hand, the labor protections and worker issues are already in the new NAFTA, and the Trump administration pushed for changes in this area that gave labor groups far more than President Obama’s Trans Pacific Partnership did. So what is Senator Warren’s goal with these statements? Is she laying the groundwork for a “no” vote on the agreement, regardless of any additions to the agreement the Trump administration might accept? Or are there changes on labor rights that would satisfy her and get her to vote in favor?

My instinct is that she will not vote for any trade agreement negotiated by Trump, but we’ll see. Perhaps there is more potential with the younger progressives in Congress who are not as wedded to the economic nationalist views of senior Democrats. Has anyone asked Alexandria Ocasio-Cortez what she thinks of trade liberalization and whether there is a trade agreement she could support? I’m curious whether she and other young progressives who are open to immigration could also be open to trade. I’ve seen her sound skeptical about trade deals on Twitter, but now she will be governing rather than campaigning, and that could make her think more deeply about whether blocking trade with people in other contries is really a good policy.

Topics:

Callous Ideologues: Illinois Legislators Pass Law to Punish Patients with Preexisting Conditions

The Illinois legislature has enacted a law, over the veto of Gov. Bruce Rauner (R), that will strip consumer protections from patients with preexisting conditions, throw them out of their health plans, deny them health care, and expose them to bankruptcy. Naturally, it did so in the name of…helping patients with preexisting conditions. 

The new law imposes limits on so-called “short-term” health plans. Federal law exempts short-term plans from ObamaCare’s costly and punitive health insurance regulations. As a result, short-term plans allow enrollees to purchase only the coverage they value, frequently cost half as much as ObamaCare plans, and offer broader choice of providers than ObamaCare plans. Thanks to new federal rules, short-term plans can last up to 12 months, be renewed for up to 36 months, and can enable enrollees who fall ill to keep paying low, healthy-person premiums indefinitely, making access to care more secure for the sick. Critics acknowledge the new rules could extend health insurance to 2 million previously uninsured Americans.

Consumers appear to value the broader choices that the new rules offer. The web site eHealth reports that the share of unsubsidized insurance purchasers who chose a short-term plan over an ObamaCare plan rose from 56 percent during the last enrollment period to 70 percent during this enrollment period. (See graph.)

Voters appear to believe the benefits of these new rules outweigh the costs. Polling shows voters support the new rules by nearly a two-to-one ratio–even if purchasers choose less coverage than ObamaCare requires, and even if ObamaCare premiums rise as a result. (See chart nearby.) There is reason to believe the new rules will reduce ObamaCare premiums. (See below.)

Illinois legislators, responding to critics who complain short-term plans are “junk” insurance, have decreed that short-term plans can last no longer than six months and that enrollees whose short-term plans expire must wait 60 days before purchasing a subsequent plan. The Sargent Shriver National Center on Poverty Law tweeted about the new law, “GREAT NEWS! SB1737 is law, and Illinois will now protect healthcare consumers with pre-existing conditions.”

That is exactly backward. The new Illinois law does not protect patients with preexisting conditions. It does not outlaw “junk” insurance. It creates junk insurance by taking protections away from short-term plan enrollees and exposing patients with preexisting conditions to denied care and bankruptcy.

Under prior law, short-term plans could provide many Illinois residents with seamless coverage. Residents could purchase short-term plans that could cover them indefinitely, but at least until the next ObamaCare open-enrollment period, at which point they could enroll in an ObamaCare plan without facing medical underwriting or denials of coverage. 

The new law outlaws short-term plans that last more than six months. Now, by law, short-term plan enrollees who develop cancer or other expensive illnesses will lose that coverage when their plan reaches the six-month limit. This ban will not affect healthy consumers. When their six-month plans expire, healthy consumers can just wait the required 60 days and purchase a new six-month plan. The ban will instead hurt patients with preexisting conditions–specifically, those who fall ill while enrolled in a short-term plan or during the 60-day waiting period. The new law will throw those patients out of their plans, leaving them with preexisting conditions and no health insurance at all for up to 12 months. 

As a direct result of the new law:

  • Any Illinois resident who purchases a short-term plan on January 1, 2019 and subsequently gets a cancer diagnosis will lose that coverage on June 29 and face six months of expensive medical bills with no coverage. She will not be able to obtain a new short-term plan, because her cancer will be a preexisting condition. She also will not be able to get coverage through ObamaCare for six months–i.e., until January 1, 2020. Yes, ObamaCare prohibits insurers from denying coverage on the basis of preexisting conditions, but it also generally denies coverage to everyone outside of a six-week open-enrollment period at the end of each year.
  • The same fate will befall any Illinois resident who gets a cancer diagnosis during the 60-day waiting period. By law, they will face months and months of expensive medical bills with no coverage. They will be unable to purchase another short-term plan, and they will be locked out of ObamaCare. 

This is exactly what happened to Jeanne Balvin. Similar rules imposed by the Obama administration threw Balvin out of her short-term plan, leaving her with $95,000 in medical bills and no insurance to help pay them. (The new federal rules supersede the Obama-era rules.) 

Had Illinois legislators just done nothing, or even just upheld Rauner’s veto, short-term plans could have covered Illinois residents throughout ObamaCare’s entire coverage-denial period. Instead, Illinoisans with preexisting conditions will face months and months of expensive medical bills with no coverage at all.

This is perverse. Illinois legislators knew that canceling short-term plans hurts patients with preexisting conditions. We know they knew, because they included a provision in the new law that forbids insurers from canceling short-term plans  “before the expiration date in the policy, except in cases of nonpayment of premiums, fraud,” or at the option of the enrollee. And yet the legislature will now rescind short-term plans from patients with preexisting conditions within six months of their diagnosis, no matter how much human suffering it may cause.

Supporters claim that crippling short-term plans is necessary to protect patients with preexisting conditions. If short-term plans offer lower-cost coverage to healthy consumers, they argue, healthy consumers will flee ObamaCare plans. ObamaCare premiums would then rise to the point of threatening ObamaCare’s economic and/or political viability, thereby threatening access to care for patients with preexisting conditions currently enrolled in ObamaCare plans. Among the many flaws in this argument is the fact that short-term plans can actually reduce ObamaCare premiums by keeping expensive patients out of ObamaCare’s risk pools. The new federal rules allow short-term plan enrollees to purchase “renewal guarantees” that give them the right to keep purchasing short-term plans at low, healthy-person premiums even after they develop expensive medical conditions. Short-term plans can thus reduce ObamaCare premiums by keeping expensive patients out of those risk pools, just as the pre-ObamaCare individual market kept many expensive patients out of state high-risk pools. The presumed harms that more flexible short-term plans could inflict on patients with preexising conditions in ObamaCare plans are attenuated and uncertain. The harms that the Illinois law will inflict on patients with preexisting conditions who are enrolled in short-term plans are definite, immediate, and concrete.

There is no way to dress up laws restricting short-term plans as anything other than government rationing of care to the sick. The activists and politicians who supported this law are not patient advocates. They are callous ideologues who are willing to deny care to sick patients for the sake of protecting ObamaCare.

U.S. Attorney for Massachusetts Doubles Down on Misguided Prescription Opioid Policy

Conventional wisdom argues that the opioid epidemic has resulted from excessive opioid prescribing, but the evidence shows just the opposite. Restrictions on opioid prescribing have pushed opioid users into the black market, where they overdose on illicit fentanyl, not prescription opioids (mainly because they cannot assess potency).   Reason’s Jacob Sullum has a nice recent piece on this point.

Yet policymakers keep doubling down on the conventional wisdom.  The U.S. Attorney for Massachusetts, Andrew Lelling, has just anounced new scrutiny of doctors who prescribe opioids:

US Attorney Andrew E. Lelling has sent letters to “a number of medical professionals” alerting them that their opioid prescribing practices “have been identified as a source of concern.”

In a statement released Thursday, Lelling said that the professionals who received the warning had prescribed opioids to a patient within 60 days of that patient’s death or to a patient who subsequently died from an opioid overdose.

The letters inform the professionals that it’s illegal to prescribe opioids “without a legitimate medical purpose, substantially in excess of the needs of the patient, or outside the usual course of professional practice.” It acknowledges that the prescriptions may have been medically appropriate, however.

Such actions will scare medicial professionals into even less prescribing, force more patients into the black market, and increase the frequency of opioids overdoses.

Kids in Charter Schools Still Aren’t Getting Equal Education Funding

What a lousy deal. My colleagues at the University of Arkansas and I just released another study examining funding disparities between traditional public schools and public charter schools in 14 cities across the country. The overall finding is clear: families lose a substantial amount of education dollars when they pick charter schools for their children.

Using data from the 2015-16 school year, we find that children in charter schools receive $5,828, or 27 percent, less than their traditional public school peers each year, on average. Put differently, a family forgoes over $75,000 in educational resources for their child’s K-12 education if a charter school fits their needs better than the residentially assigned option. And, unfortunately, the funding inequities are much worse in some cities. As shown in Figure 1 below – and in the original report – children in charter schools in Washington, DC, and Camden, New Jersey receive over $10,000 less than their traditional public school peers each year.

 

But that’s not all. Our team has released four other reports over the past two decades with similar findings. And across the 8 cities with longitudinal data, the funding disparity favoring traditional public schools has grown by 58 percent since 2003 after adjusting for inflation. It’s like a swarm of mosquitoes in the summer. It’s persistent and never goes away.

 

Fortunately, one city in our sample has consistently demonstrated equitable funding across school sectors. In Houston, Texas, students in public charter schools receive only $517, or 5 percent, less than their peers in traditional public schools each year. In other words, equitable public school funding can be achieved if policymakers make the right decisions.

Families shouldn’t have to lose $5,828 each year in educational resources for each child that doesn’t fit into the one-size-fits-all education system. Thankfully, state policymakers have the authority, opportunity, and responsibility to achieve equal total funding of public school students in their states. Policymakers can deliver equitable education funding by revising state funding formulas to allow 100 percent of public education dollars to follow children to whatever school works best for them.

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.