Is it better to spend a lot of money on healthcare, and not get great results, or it is better to not spend a lot of money on healthcare, and not get great results?
The United States of America tries to generate data that answers at least the first half of that question:
The country spends about $4.3trn a year on keeping citizens in good nick. That is equivalent to 17% of GDP, twice as much as the average in other rich economies. And yet American adults live shorter lives and American infants die more often than in similarly affluent places.https://www.economist.com/business/2023/10/08/who-profits-most-from-americas-baffling-health-care-system
And if you are even remotely interested in the question of healthcare and how to get it to work for a country, you know, of course, about pharmaceutical firms and hospitals in America. But in a fascinating article, The Economist tells us about the middlemen in America’s healthcare system.
What do middlemen do? At their best, they can literally create markets. They can provide useful information to market participants, they can make markets more efficient by reducing search and transaction costs, they can lower risk and they can provide additional services. Has AirBnB made travel easier because of all of these factors? That’s what a middleman can do. So both this post and The Economist article aren’t a complaint about middlemen.
But that being said, the dose does make the poison. If middlemen make the markets more efficient, their revenue expressed as a percentage of national health expenditure shouldn’t be going up much, right? It certainly shouldn’t be nearly doubling!
So what’s going on?
- What does the healthcare market consist of? Doctors and patients, of course. But what connects, enables and facilitates interactions between both sides of the market? That’s the “plumbing” of this market – the middlemen. These are the insurance firms, the chemists, the drug distributors and the pharmacy benefit managers (PBM’s). As The Economist puts it, these entities don’t make drugs, and they don’t treat patients.
- And yet, they got to keep about 45% of America’s “health-care bill”. Those must be some fancy pipes!
- So here’s what happened. Back in 2010, the American government said to insurers that they could no longer eat away at all those dollars in America’s healthcare system. No more than 15% to 20% of collected premiums can end up in your pockets as profits. A measure (profitability) became a target (market efficiency to be defined by limiting profits).
- And in these parts, we know what comes next, correct?
- “But it imposed no restrictions on what physicians or other intermediaries can earn. The law created an incentive for insurers to buy clinics, pharmacies and the like, and to steer customers to them rather than rival providers. The strategy channels revenue from the profit-capped insurance business to uncapped subsidiaries, which in theory could let insurers keep more of the premiums paid by patients.”
- And well, these middlemen went out and bought these “uncapped subsidiaries” – some $325 billion worth of them. Or a 130 different mergers and acquisitions, if you like more than one metric.
- So now your healthcare market looks like this: patients go to get treated by doctors. Patients are “connected” to doctors via the plumbing provided by middlemen. But now, the plumbing “owns” the doctors!
- Which is when, as an economist, you should want to use the “i” word. What will be the incentive of the doctor? To give you the best treatment possible, or to reduce costs as much as possible for their corporate structure? If they can choose only one among these, which are they likely to choose?
“For example, many studies have found that after hospitals acquire physician practices, prices increase but quality of care does not. A health-care company that controls many aspects of patient care could raise prices for rivals wishing to access its network. Some also worry about physicians being nudged towards offering the cheapest treatment to patients, lowering the quality of care.”
- One shouldn’t throw around such claims or hypotheses without backing it up with data. Is it actually the case that these middlemen are earning excess returns?
“America’s health-care intermediaries are indeed unusually profitable. Research by Neeraj Sood of the University of Southern California and colleagues found that intermediaries in the health-care supply chain earned annualised excess returns—defined as the difference between their return on invested capital and their weighted-average cost of capital—of 5.9 percentage points between 2013 and 2018, compared with 3.6 for the S&P 500 as a whole.”
- Maybe these excess returns will attract competition, and maybe competition will make markets better? Paging Amazon!
“Perhaps the biggest disruption to big health could come from Amazon. In 2021 its health-care ambitions suffered a setback owing to the closure of Haven Healthcare, a not-for-profit joint venture with JPMorgan Chase, the biggest bank in America, and Berkshire Hathaway, the biggest investment firm. Haven had aimed to cut health-care costs for the trio’s own staff. But despite Haven’s failure, Amazon is still expanding its health-care business. Last year it paid $3.9bn for One Medical, a primary-care provider. It runs Amazon Clinic, an online service offering virtual consultations, and RxPass, which lets members of its Prime subscription service buy unlimited generic drugs for a small fee. John Love, who heads Amazon’s pharmacy business, believes that the tech giant’s focus on customer experience, combined with its vast logistics network, makes it well-suited to shake up the industry.”
- But you’d be surprised at how complex any market can be. And healthcare markets are (trust me on this) a whole other story:
“The entrenched firms have built their networks of doctors, hospitals, insurers and drugmakers over decades. Replicating that takes time and institutional knowledge. Mr Cuban admits that it is difficult to get drugmakers to list branded drugs on his pharmacy, as they are wary of upsetting the large pbms. And without branded drugs and the support of large health insurers, his firm’s reach remains small. The cap on insurers’ profits makes life tough for upstarts in that business, which struggle to compete against the negotiating power of the integrated giants.”
- Designing policy around healthcare markets is, as it turns out, quite the challenge. And it is very likely to be a case of one step forward and two steps back at worst, and two steps forward and one step back at best.
- But it is oh-so-important to take those steps, and having taken them, to ask if they are taking us in the right direction. Onwards!