Competition can help fix what’s ailing American health care

There is a gap between what needs to happen and what is happening.
There is a gap between what needs to happen and what is happening.
Image: Reuters/Aaron P. Bernstein
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Republicans are back at efforts to eliminate health insurance for millions of Americans by repealing and replacing the Affordable Care Act. The Graham-Cassidy legislation in the Senate will lead to higher costs for the most vulnerable Americans at a time when they can afford it the least. Instead of dismantling our health care system and creating a tragic world of health care have and have nots, Congress should focus on improving the quality of health care and lowering health care costs for all Americans by increasing competition in the health care marketplace.

By any reading of the evidence, there is less competition in the health care market today than 10 or 20 years ago. Since 1998, more than 1,400 hospitals have merged. Half of all hospital markets are now highly concentrated. Large health systems are rapidly acquiring formerly independent physician groups. Likewise, one or two health insurers control most of the market in forty-five states, with concentrations even more pronounced locally. And just this week, over my objections, Walgreens acquired nearly 2,000 Rite Aid stores—potentially leading to higher drug prices and a deterioration in non-price competition.

These weakened competitive forces on both the provider and payer sides have several harmful consequences. First, the cost of care increases. For example, when a hospital provider market moves from four hospitals to three the prices of hospital services to health insurers increase 5% to 10%. If that market becomes even more concentrated, prices can rise an additional 20%. Consumers feel these costs in higher premiums, fewer providers accepting Medicare and Medicaid, and even the loss of insurance coverage altogether. And when health care providers face little or no competition, patients experience worse outcomes, health care workers’ wages fall, and providers innovate less.

These trends pervade the pharmaceutical industry as well, as manufacturers resort to anticompetitive practices to maintain monopoly market power. Indeed, stories like the $600 EpiPen packs confirm what so many Americans suspect when they visit the pharmacy—drug prices are too often artificially inflated.

“Pay for delay” agreements, in which a manufacturer pays a generic competitor to stay out of the market, rob consumers of the benefit of competition and cause billions of dollars in overpayments. Similarly, tweaking a drug’s formulation or delivery method just before a generic competitor’s entry into the market—product hopping —prevents pharmacies from automatically substituting the cheaper generic, preserving the incumbent’s market power. While high-priced biologics (medical products made from living cells) represent a growing share of the pharmaceutical market, they face only negligible competition so far from the limited entry of less expensive biosimilars (products shown to be highly similar to an FDA-approved biologic). These and other anticompetitive exercises of market power contributed to the 29% growth in pharmaceutical spending from 2011 to 2015, despite sales remaining constant.

We can take concrete steps to counteract these trends and foster competition. First, the United States needs to update existing laws that grant insurers immunity from federal antitrust laws in some cases. New laws are required in other areas where companies have long profited from regulatory gaps, such as “pay for delay” agreements. Comprehensive legislative proposals to ban these agreements would prevent settlements that keep dozens of less expensive generics out of the market.

Similarly, some manufacturers take advantage of restrictions on drug distribution to prevent generic competitors from accessing drug samples or systems necessary to obtain FDA approval. Passing the proposed CREATES Act, a bipartisan effort that explicitly prohibits this anticompetitive practice, would fix this issue.

Second, the FDA must use its existing authority to ensure that incumbent and generic drugs compete on a level playing field. Manufacturers should be required to make certain distribution systems more readily available to generics. This would address some of the regulatory gamesmanship branded drug companies use to thwart generic competitors from getting necessary FDA approvals. The FDA should also prevent drug manufactures from exploiting the citizen petition process, originally meant as a way for interested parties to request action by the FDA, to delay the entry of cheaper generics.

There is more that the FTC and DOJ can do to promote vibrant and competitive health care and pharmaceutical markets in the meantime. On the strength of recent successes, the antitrust agencies should continue to intervene in proposed mergers that would harm consumers. For example, the FTC recently prevented the merger of the two of the largest health care providers in Harrisburg, Pennsylvania over concerns that the combination would substantially reduce competition, raising prices and lowering quality for area residents. The DOJ has similarly blocked two health insurer combinations, including Aetna’s proposed acquisition of Humana, which saved consumers and taxpayers up to $500 million a year in increased prices for health insurance.

The FTC can also police some drug pricing schemes. In Questcor, the FTC secured a settlement from a manufacturer that had raised the price of an infant seizure disorder treatment from $40 to $34,000 after it acquired the rights to its nearest competitor.

The FTC must also continue to advocate against state policies that restrain competition. For example, a West Virginia law gave antitrust immunity to “cooperative agreements” between providers, which allowed two hospitals located just miles apart to merge and capture 75% of the local market.

Concentration in health care markets, whether through hospital mergers or mergers between major insurers, raises prices for consumers and reduces the pressure to invest in delivering innovative and quality care. Meanwhile, anticompetitive practices in the pharmaceutical industry result in high-cost drugs and fewer generic alternatives. As health care plays an increasingly dominant role in the modern American economy, these impediments to competition demand a strong response.