Market, Heal Thyself
There are reports of new government regulations, which “cap” the costs of certain drugs, and there are additional reports of pharmaceutical companies reducing (out-of-pocket) costs, which are paid by patients, for other drugs, including recently asthma inhalers.
Many persons will be quick to say that this is a necessary “correction” within a flawed “free market” system. However, it is more accurately an indication of why markets fail due to outside involvement and influences (e.g. from government).
In order to be efficient and effective, markets must be fluid so as to be responsive to fluctuations in “supply” and “demand.” Some markets are “inelastic,” in that the demand is “fixed” (or at least relatively constant) and does not immediately change with (modest to moderate) price fluctuations. This phenomenon is often applicable to “necessaries” (e.g. gasoline, utilities, drugs, healthcare, etc.). Additionally, markets may be “unresponsive” if they are artificially manipulated (e.g. monopoly positions, price controls, barriers to market entry, etc.).
The most immediate and effective cost-containment mechanism in any market is the consumer’s ability to pay, which may differ significantly from his “willingness” to pay. Particularly for “necessaries,” a consumer may be willing to pay an “unreasonably high” price so long as he has readily available funds (even if that means prioritizing or redistributing “discretionary” income/funds). However, if the consumer has no additional funds, then there is a firm limit on the price to be paid for commodities, goods, and services (no matter how desirable or even “necessary”).
A producer/provider/supplier has a profit motive; however, if those parties price products or services beyond consumers’ ability to pay, they risk “pricing themselves out of the market” (particularly if the price charged is disproportionate to the incremental cost of production). So long as the market is fluid and there are no (unreasonable) barriers to entry, another producer seeing an opportunity for profit will be motivated to enter the market and will provide the product or service at a reduced price. Ultimately, a freely flowing market will reach equilibrium, at which point most consumers can pay a “reasonable” price relative to the perceived efficacy in relation to viable alternatives and relative to the cost of production. At this point, efficiency and profitability are maximized for both the producer and consumer.
ENTER GOVERNMENT:
In order to “encourage innovation and development,” government provides to inventors and innovators the opportunity to patent their discoveries and inventions. This allows a “temporary” monopoly for the producer, and restricts entry into that market by other producers for a number of years. Pharmaceutical companies (and others — e.g. IT companies) have learned to manipulate the patent process. They continuously “tweak” products for incremental “improvements,” which are sometimes nearly imperceptible, thereby extending the patent terms almost indefinitely.
Also, companies actively discourage competitors from making functionally similar generics (even after patent expiration). Many times, the “old” version or some “off patent” product has similar efficacy, but nearly everyone wants, expects, and demands the “latest and greatest” (particularly if someone else is footing the bill).
ENTER THIRD-PARTY PAYERS (i.e. Insurers and Government):
Historically, the doctor-patient relationship was a one-on-one relationship. The doctor, hospital, or other provider likely had an established fee schedule, but a commitment to the profession (and to the well-being of patients) meant that consideration was given to the patient’s ability to pay (i.e. charity care). Nearly everyone is familiar with the trope of a doctor (or other professional) taking “chickens and eggs” in lieu of cash payments for services rendered.
This was an existing market, which preceded third-party payers. During the 20th century, insurance companies entered into a market, which had established relationships, existing prices, and ongoing market dynamics. The insurance companies provided benefits to providers: a guaranteed source of payment for an agreed-upon amount and the ability to funnel their insureds to a preferred provider. For this, the insurers negotiated “(volume) discounts” from the previously EXISTING “retail” prices.
As the number of insurers multiplied and as they became the primary payer (as opposed to patients themselves), the companies negotiated (or demanded) increasingly greater discounts. The greater the discount the greater is the motivation for the provider to raise the “retail” or base price. Over time, this is the only way that the provider can increase revenues for the same level of services rendered. This also discourages reductions in charges as novel services and treatments become routine (e.g. MRI). Even today, nearly all insurance is paid based upon a “discount” to stated prices. The “discount” is often as much as 67%-75% of the “private pay” rate, but that price is a distortion of reality. It is a fiction. The “retail” price is so disproportionate to the costs of care and to the benefit or efficacy that nearly no one ever pays it.
When government became an additional third-party payer through Medicare, Medicaid, VA, etc., those agencies insisted on discounts even greater than those offered to insurers, but government had the additional benefit of being able to legislate that doctors, hospitals, and other providers have to provide services to patients regardless of the price or ability to pay (and even if there is no appreciable “profit” to the provider). The margin for government services is often so low that providers are forced to make up losses by increasing the charges paid to other patients. Those other patients subsidize the care of “indigent” cases (either directly or indirectly). As the prices rise, the demanded discounts increase. This creates a constant struggle and “game” played between providers and payers.
The result is that insurers and government have been placed in a position to dictate the type and level of care to be provided, and these decisions are no longer exclusively (or even primarily) between the patient and physician. After all: “He who writes the checks makes the rules.”
The other outcome is that medical billing is so confusing and convoluted that nearly no one can possibly understand it … not doctors … and certainly not patients. This is seen by some as a “feature” since it is nearly impossible to complain about something that you cannot understand! Therefore, patients are unable to make informed and effective cost-benefit determinations with regard to medical care.
This brings us to exorbitant drug costs:
Pharmaceutical companies price their products not based upon the end-user’s ability to pay or the cost of production but based upon the relatively unlimited deep pockets of insurers and government. Drug makers drum up demand through advertising: “Isn’t another year/month/week/day/second of life — without discomfort, disability, or pain — worth ANY price?”
Patients demand that insurers and government payers include drugs, treatments, and services that have even the slightest marginal increase in efficacy. Any pushback by insurers or other third-party payers is met with the insincere or at least irrational retort, “You cannot put a price on a human life!” Yes, you can, and we do it every day.
Nevertheless, patients feel “entitled” to the latest and “best” drugs and treatments (even if the fractionally increased efficacy almost certainly would not justify the greatly increased — often times exorbitant — costs were the patient paying the costs directly). The patient contends that, through premiums and/or taxes, he has already “paid” the (full) cost of treatment, but that is irrational and demonstrably false.
If patients, in fact, were willing and able to pay the commanded cost of treatment, this issue would have no relevance. The point would be moot. In this and other areas, parties have been led to believe that they can pay a fraction of the true costs, yet be entitled to the best possible treatment on demand. Parties do not wish to think of themselves as being “charity” cases or on the public dole, but that is certainly the reality for many, if not most.
Ultimately, some other party has to pick up the cost of treatment (i.e. other insureds or taxpayers), or the treatment will be rationed. This is how we get increased costs with lower quality: The pool of patients demanding care is growing dramatically resulting in a similarly dramatic increase in total costs (but without additional or adequate revenues from the patients themselves), and the increased costs are more than can be reasonably passed on to other parties. As providers seek to reduce or contain costs, the quality of care diminishes for all patients and the timeliness or availbility of care decreases. This is our “new normal.” This is the disconcerting reality, within which we now live. This is what happens when government “helps.”
