Another Reason Why Third Party Payer Health Care Must End

With the demise of the GOP “repeal and replace” effort, I thought it would be a good time to (finally) post something on this blog and chime in on the health care dilemma.

Free market economists and commentators have long held that the third party payment system of our health care market is the primary reason health care is prohibitively expensive for many Americans. Procedures that are paid for out of pocket, for example, have become cheaper over time. Abortion, for example, is not covered by insurance. It is paid for directly by the consumer. Prices have stayed the same over time, and in some cases has fallen. Cosmetic surgeries and elective lazer eye surgeries have also become cheaper over time.

The typical explanation for this is that, when someone else is doing the paying — in this case, a private insurance company or a government agency — there is no incentive to shop around for a better price. When someone else is paying, it is easiest to just opt for convenience, or simply go for the best care possible. There is no balancing act between cost and quality; there is, in essence, no true competition because prices are not transparent.

An interesting study on taxi drivers could potentially have some influence on the health care debate. An interesting new study sent researchers on 400 different taxi rides in Athens, Greece. The passenger would always tell the driver that they were unfamiliar with the city, but half the time, they would tell the driver they were the ones paying. The other half told the drivers that it was their bosses that were paying. For the second group, they were charged 7 percent more than their self-paying counterparts. Why? Because the drivers knew they could overcharge their business account without the passenger noticing, all because prices are not transparent when a third party is paying for the expense.

The taxicab market is similar to the health care market in that, in situations where a third party picks up the tab, prices are higher. The GOP’s replace plan was destined to lose, even if it passed, in the long term because it did little to tackle the actual problem with the health care system. It catered towards moderates who won’t vote to repeal the ACA anyway. The GOP needs to begin advocating for market-based solutions that drastically reduce the amount third party payers pay for health care, and they need to keep pushing for that until it becomes a mainstream idea. Until they do that, the health care system will continue to be as broken as ever.

As for political advice (and not just policy), it might be best for them to just let Obamacare fail, as Trump suggested (before again pushing for a repeal and replace reform), because Obamacare failing might be the best shot the GOP has to implement real free market reforms. Hopefully, the moderate would support such a plan if the system they have been shielding from reform ceases to exist under its own weight.

Stop Blaming Capitalism For Drug Price Increases

EpiPen has made headlines recently, putting pharmaceutical prices at the top of the political agenda. When Martin Shkreli hiked the price of Daraprim, progressives were outraged. “Capitalism is evil” was the leftist battle cry.

Now, with EpiPen raising its prices, progressive hero Bernie Sanders has criticized the company for valuing profits over people. Hillary Clinton, who comes off as a lifeless and heartless reptilian, even released a statement condemning the price increase.

But does the EpiPen and Shkreli scandal prove that capitalism is destroying our health care system? Ironically, it proves the opposite.

In my first day of introductory microeconomics, the teacher said that greed is never the problem. Whether our government is small or large, socialistic or anarchistic, tyrannical or benevolent, people are always as self interested as they always have been. Of course, we aren’t reptilian beings (like Hillary Clinton), and some individuals do have altruistic streaks. But, the simple fact is, humans usually look out for themselves (and those close to them) over a random person off of the street.

What really makes greed a good thing or a bad thing, the professor said, was institutions. In a world where the government is small and protects us from others–not ourselves–greed works out pretty well. In a world where there is stable money, freedom to trade, and a rule of law, greed works out great.

And we see this with drug prices. The problem is not that EpiPen is greedy or that Shkreli wants to make an extra buck; the problem is that the government has bad institutions–bad policies–that have constricted competition and made it easier for these individuals to hike prices.

A new article in the Wall Street Journal lays it out pretty clearly:

In a health care system notoriously resistant to cost-containment, generic drugs are an exception. Americans enjoy a huge range of generic medicines at-ever declining prices, largely thanks to robust competition among multiple manufacturers.

In 1984, the Waxman-Hatch Act slashed the regulatory hurdles for generic copies of patented drugs. Since then, generics have risen from 19% to 84% of all prescriptions. Their prices have fallen 70% over the past eight years, while branded prices have risen 164%, according to Express Scripts, a pharmacy benefit manager.

The main driver of those price declines is competition. A 2010 study found that within three years of the first generic launch, the average generic has 12 competing suppliers and its price has fallen 94%.

In the generic world of prescriptions, prices have fallen dramatically because of free market competition. The WSJ accompanied this article with the following graph:

Indeed, the generic market has a lot of competition and lower prices. The brand name market has no competition and thus has rising prices. Why is there no competition?

In large part due to the government. We have very strict approval rules, which makes it hard for generics to become commonplace. This is why many economists, like Alex Tabarrok, support reciprocity. What is reciprocity? According to Tabarrok, reciprocity is “if a drug is approved in Europe it ought to be approved here. … [all reciprocity does is allow the importation] of any generic approved as such in Europe to be sold in the United States.”

Essentially, he wants free trade in the realm of drugs to make it easier for more generics to enter the market more quickly, which forces both domestic and brand name medicines competing in the same market to slash costs. Reciprocity would dramatically reduce costs. In fact, Senators Ted Cruz and Mike Lee have been proponents of reciprocity for a long time now.

Of course, we shouldn’t allow reciprocity with every nation. I don’t trust the Chineese or Somalian approval process, for example. But we should make reciprocity agreements–like trade agreements–with nations who have a proven track record of approving safe drugs (e.g. Most of Western Europe, Canada, Australia, Japan, Korea, etc.)

Essentially, if you want lower drug prices, support more competition. The reason EpiPen and Daraprim cost so much is because they have no competitors, which makes it easy to hike the price with no consequences. Induce competition–in other words, let the market work–and drug prices will fall.

The Affordable Care Act Isn’t So Affordable

Business Insider has a new interesting article summarizing the results of a recent Urban Institute report. The results shouldn’t surprise those on the political right, because it confirms what we have been saying all along: The Affordable Care Act (ACA) hasn’t made healthcare any more affordable.

The following image comes directly from the article.

obamacare premium map

While some states, including the state in which I currently reside (New Mexico), have seen a decline in premiums, the overall trend seems to be up. The average increase, according to the report, is 20%. 12 states have seen increases above that average, and sometimes significantly so (AK at 40%, OK at 41%, and TN at 38% are the most extreme examples).

The results of the report are similar to studies emanating from the Manhattan Institute, which also finds large increases in health care costs (see here and here).

The authors of the Urban Institute study conclude that the wide range of price changes can be explained by differences in competition. Business Insider writes,

“However, the most important factors associated with lowest-cost silver plan premiums and premium increases are those defining the contours of competition in the market,” the report concluded. “Rating areas with more competitors had significantly lower premiums and lower rates of increase than those that did not.”

Indeed, conservatives have a solution to this: By empowering the consumer and reducing barriers to competition, we can usher in a period of health care cost reductions while maintaining state of the art medical care.

An advanced copy of a new study by Dr. Scott Atlas has been released by the Hoover Institution. The report explains how to do just that: empower the consumer and increase competition.