“If only we….”

Are there really huge monopolies in healthcare?

As an economist, I am very concerned about highly concentrated markets.  Concentration tends to raise prices and block new companies from being able to enter a market.  Because healthcare is one of the inflationary marketplaces, I want to look at market consolidation as one of the primary drivers of the current inflation problem in our country.

We know that at a macro-level there is very little market consolidation in the physician and hospital markets.  Market consolidation in these areas is generally limited to local or regional consolidation.  Price inflation is also not a significant factor at this level.

Let’s move up the chain and look at the insurance and big pharma markets.  First, I want to point out that both industries are easy targets for people who do not fully understand healthcare and health economics.  Usually, these people suggest that “if only we reduced the profits of the insurance and big pharma companies, we could solve all of our healthcare cost problems.”  This is not only naïve but it is also untrue.  The problem with this approach is the combined profits of the insurance companies and big pharma companies are not enough to fix our health care costs and those markets are not quite as consolidated as people think.

If we were able to recoup one hundred percent of the profits from US insurance companies and US pharma companies, it would reduce our healthcare costs by just under $100 billion a year.  Sounds like a lot, right?  Well actually, $100 billion would only reduce our healthcare costs by about two percent.  The problem is that you’re looking at $100 billion of a $4 trillion marketplace.  The other thing to keep in mind is that it would also be impossible to take one hundred percent of the profits from these companies.  US pharma companies would move overseas, and US insurance companies would stop operating in the healthcare industry.

So, let’s go back to market consolidation.  The top five health insurance companies have a combined market share of forty-one percent.  The top five pharma companies have a combined share of twenty-four percent.  While those are not optimal, they are not as highly concentrated as people assume.

The market segment that seems to escape most attention is the Pharmacy Benefits Management (PBM) market.  PBMs have an enormous amount of control and influence over one of the largest and most inflationary parts of healthcare.  They make money regardless of what drug is approved or used. 

They do not develop the drugs we use or administer them.  They are the middleman, and they wield incredible power.  They, unlike big pharma and the insurance companies, are highly concentrated.  The five largest PBMs control ninety-two percent of the market and the top three control seventy-nine percent.  These companies do not finance, produce, administer, or deliver healthcare produce annual profits of over $28 billion.

I am not defending the insurance companies or big pharma; there are issues with each of them that need to be addressed.  I am also not suggesting that solving our healthcare cost crisis is possible solely by attacking the PBMs.  Rather, I want to point out that there is no easy answer to our healthcare problems.  I’ve said this before: there is no one size fits all approach. 

 Just throwing stones at the easy villains like insurance companies and big pharma is not only naïve, it also does nothing to solve the problem.  We need to look broader and deeper.  Solutions will be difficult and multifaceted.  Anyone who suggests otherwise is kidding themselves.