This econtalk episode[1] provides some interesting background on how this happens with medication. There are man-in-the-middle companies (Pharmacy Benefit Managers - PBM) that negotiate plans with pharma companies. These companies get paid a commission based on the delta between list price and the deal they got. The Pharma companies need these deals, so both benefit by the pharma company increasing list prices every year and then cutting better deals to those PBMs. If someone is offering a generic that's cheaper, there is less incentive for PBMs to add them to their plan, because the prices are too cheap to begin with and they have a smaller market share initially. It's all a giant Rube Goldberg machine of a mess.
EDIT: One more interesting detail from the podcast and the book it's based on: Those deals between PBMs and pharma companies are secret. Not even the insurance companies know the details of what's in there.
It's also fun to point out that typically this is everyone involved in a consumer getting their drug:
* the consumer
* the consumer's employer who selects the insurance
* the insurance
* a PBM who get a Pharma benefit plan for the insurance
* the Pharma company that manufactures the drug
* the pharmacy you actually buy the drugs.
On top of that the actual payment apparently happens often months after you received the drug.
When my father was in the hospital and had a hard time eating, they told us we couldn't bring in anything and he could only eat food from inside the hospital. I asked his lead doctor if he had any special nutritional needs, and he said no, he just needed to eat anything he could get down. But when we asked if we could bring anything in, they said we had to talk to the nurses and see if it was allowed. I checked with a friend of mine who had privileges at the hospital. He got back to me and said the outside food ban was normal, but enforcing it wasn't. The hospital had a hospitality and vending machine contract that required them to train all the staff in being firm, explicit, and proactive about the no outside food policy.
Of course the vending machine was full of junk food, and the contract was with the same company that controlled the pharmacy. These people need to be put out of business.
"Those deals between PBMs and pharma companies are secret."
In some cases pharma co.'s created their own PBMs.
There is a long and storied history of litigation on American drug pricing. If you want to understand the Rube Goldberg machine, I recommend searching the keywords "Average Wholesale Price" or "AWP".
In terms of consumer protection, some states are better than others. Maine was a leader in this area. However it looks
like the pharma industry has prevailed.
Yeah but then there's drug rebates, cash discounts for medical services, and costs negotiated down after services. The whole thing is a clusterfuck and 10 patients likely pay 10 different prices for the same thing.
These things happen all the time in real world free unregulated markets. The seller looks at you, tries to understand how much you can afford and what are your alternatives right then, and to get the highest price possible.
If you are desperate and your life is at risk, they can literally strip you naked - just see how many unscrupulous people become rich during wars.
When you are in a medical emergency, and you need a treatment right there and right then - no time to shop around - why should an unregulated, shareholder value maximising business, not extract from you as much as you can afford?
>When you are in a medical emergency, and you need a treatment right there and right then - no time to shop around - why should an unregulated, shareholder value maximising business, not extract from you as much as you can afford?
In a free market, you'd also have choice via competition to drive that price down. Right now, hospitals can literally veto their competition by claiming "there isn't enough demand to justify another hospital in this area". So bing, no new hospital, no competition.
And of course, this assumes your provider is out to screw you at every turn. This turns out to not be the case for obvious reasons; your provider still wants your business in the future. In the case of a single hospital/provider (a la regulation) they've got your business no matter what.
Competition is a key force in markets, and regulation in the medical industry provides huge barriers to competition.
> In a free market, you'd also have choice via competition to drive that price down
Not really though. Like, if I am having a heart attack the correct answer to "Which hospital do I go to?" is always going to be "The closest one equipped to handle it". Well technically the one I get can to the fastest that can handle it but you see my point.
This kind of choice via competition would work for things like optometrists and GPs (assuming you live in an area with more than one general practice) but just plain doesn't for emergencies.
Yeah, the moment you have a heart attack is not the time to start comparison shop. This is the argument everyone always brings up all the time, because it's so obvious.
An because it's so obvious, people will want to be prepared for it. By having insurance (real insurance, not the bizarre "health insurance" construct we have today), or subscribing to some service like you do for when you car breaks down etc.
I'm not sure what exactly would happen, but I'm certain it won't be that people will just never think about this until they all, one by one, have a medical emergency and have to unexpectedly pick a hospital on the spot.
Right, but what I'm saying is even if I did my comparison shopping before hand it doesn't matter because unless I stay within a certain radius of the hospital I've chosen I can't then it is kind of moot.
Because if hospital B isn't my choice but I'm closer to it when the emergency happens I am going to hospital B
> These things happen all the time in real world free unregulated markets. The seller looks at you, tries to understand how much you can afford and what are your alternatives right then, and to get the highest price possible.
But that is not at all what I'm asking about. You clearly didn't read the post I commented on.
If my basement is flooding and I sound rich and dumb to the plumber I call, I might get quoted triple the price of one of his regular customers, sure.
But there won't be a Plumbing Benefit Manager company as a middle man that has a "negotiated special hourly $800 rate" with the plumber so I don't have to pay the "official $9340 rate".
That sort of complex plunder reeks of regulation to me. I can't imagine how it arises. Which is why I asked.
So what looks bad to you isn't the fact that a medical company will try to get all your money when you're most vulnerable, but the fact that they need to resort to a middle man to be able to do that in the face of regulation? Cool.
That herring is so red it may as well be a cooked lobster. The overwhelming majority of medical care is not urgent care. The overwhelming majority of medical costs are costs that can be foreseen long enough in advance to shop around. Even if you think you might have skin cancer you're still in a position to choose where you go to get your tests.
There's regulations that prevent them from being undercut by entities that are willing to have transparent pricing. The problem here is not lack of regulation. It is a lack of competition. Regulation forces providers to adopt a particular business model and that model allows the kind of pricing shenanigans we see. At the end of the day everything comes down to dollars and a lack of pricing information means it is not possible to compare like services across providers. Being able to compare supposedly interchangeable goods/services is a core part of the free market and it is missing from healthcare in the US.
Fortunately there’s a natural experiment of precisely this: drug ads targeting consumers were illegal until 1985. The result has been an explosion in drug prices; the ads were used as a way to try to go around any pricing constraints.
I worked for a time in pharma and believe me direct to consumer was seen as a boon to profit margins, not a constraint.
I'm talking about grocery store ads selling baby back ribs for 2.99/lb not "got milk?" ads by the milk board.
Public transparent pricing that will drive consumers to pick and choose their health care providers would do great things for the ridiculous situation we are in.
That is an entirely predictable result when you have direct-to-consumer advertising but not direct-to-consumer supply. You just get all the demand the pharmaceutical companies can manufacture without any competition on the supply side to drive down prices.
Sounds about right. Extending this, and considering employer-provided health insurance as effectivly a tax on your income, and suddenly the US is heavily taxed.
I'm sure this analysis[0] has plenty of critique waiting to pounce, but it's something to consider.
The evidence from health care systems in other countries suggests that this type of excessive rent seeking does not exist in regulated markets. It’s the lack of regulation in the US that is the problem, not the other way around.
I think a more nuanced explanation is that the problem isn't the amount of regulation but the nature of the regulation. If we simply add up all the rules, healthcare is probably more regulated in the US than anywhere else in the world. The difference is that in other countries the rules are designed with the intention of making healthcare accessible to everyone. In the US, the rules are designed to maximize profits.
A less nuanced explanation is to agree that in an unregulated market, this type of excessive rent seeking would not exist. The old and sick would simply die in the streets. (Actually that's not quite fair since in an unregulated market we wouldn't have streets.)
Policies can always be improved but the relationship between stronger regulation in health care and more access (lower cost) is pretty robust across the world. Nobody openly argues for policies that will lead to higher cost and less access.
EDIT: One more interesting detail from the podcast and the book it's based on: Those deals between PBMs and pharma companies are secret. Not even the insurance companies know the details of what's in there.
It's also fun to point out that typically this is everyone involved in a consumer getting their drug: * the consumer * the consumer's employer who selects the insurance * the insurance * a PBM who get a Pharma benefit plan for the insurance * the Pharma company that manufactures the drug * the pharmacy you actually buy the drugs. On top of that the actual payment apparently happens often months after you received the drug.
Edit2: Clarifying "PBM"
[1]http://www.econtalk.org/robin-feldman-on-drugs-money-and-sec...