Merger Enforcement Stops Price Hikes Before They Start

October 20, 2016

Earlier this week, I happened upon this article about patients who are struggling to afford their insulin. This personal account of what it’s like for a real person to interact with our complex health care system is important. It’s stories like these that light a fire under lawmakers to act to make our system better. But one quotation caught my attention because it spoke to a dark suspicion many people probably hold about big healthcare.

 

"I know that every spring," she said, "underwriters at every insurance company sit around in Louisville or Minneapolis or wherever they meet and look for the particular kind of usage patterns that are driving up their costs. Then what they'll do is change the benefit pattern and increase the premiums."

 

This could be a misinterpretation, but it would appear that she is describing a conspiracy between health insurance companies to fix prices. While this type of collusion does happen in business, it’s hardly widespread and the consequences for companies who get caught are steep. What people have to worry about is tacit collusion - a phenomenon that drives up prices in a lockstep pattern - which is not illegal per se.

 

Since the article is about insulin, let’s look at the insulin market. It happens to be a textbook example of tacit collusion. When a market is run by a few dominant players, known as an oligopoly, their behavior runs counter to what we learned in econ 101. This is especially true for pharmaceutical drugs, where the forces of supply and demand are simply different. When one competitor raises prices, the other follows.

 

Shadow pricing or tacit collusion should be more alarming than the idea of a conspiracy to fix prices, because it isn’t rare and it isn’t typically illegal. So how do we stop or prevent shadow pricing? We have to increase competition and thankfully, we know how to do that.

 

We have to make sure that already concentrated markets do not become more concentrated through mergers and acquisitions.

 

We have to clear the path for generics to enter the market.

 

We have to enact reforms like PBM and manufacturer transparency so that consumers can identify when they are being gouged.

 

We have to ensure that other parts of the supply chain, like PBMs and insurance are competitive as well.

 

There isn’t a grand conspiracy to fix prices in for pharmaceutical drugs. There is, however, a constant and concerted effort by companies to control as much of the market as they can. We know how to help markets thrive and avoid problems like shadow pricing. We just need to have adequate resources and pursue stronger enforcement.

 

The phenomenon is also known as shadow pricing and is represented in the graph below.

 

 

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