The Great Reversal

by Thomas Philippon

  Of course, concentration on one side of the market gives ammunition to the other side to do the same. The CVS pharmacy chain, which recently bought health insurer Aetna for $70 billion, plans to continue buying physician practices.

  Restricted Contracts

  Anticompetitive behavior is ubiquitous in the health-care industry and is often embedded in contracts between health-care providers and insurance companies. Let’s review a few examples of contracts used to decrease competition.

  Forced Inclusion

  Hospitals often have contracts that force insurers to include them in any plan that the insurers might offer. This can prevent insurers from offering cheaper contracts. For instance, the insurance company Cigna and the health provider Northwell wanted to develop an insurance plan for low-cost coverage by excluding certain health providers. It was blocked because of a separate contract between Cigna and New York Presbyterian, which is a rival of Northwell. The existing contract prevents Cigna from offering a plan that does not include New York Presbyterian.

  In Charlotte, NC, the Justice Department is suing Atrium Health, a system with huge market share in the area, arguing that the hospital operator “uses its market power to impede insurers from negotiating lower prices with its competitors and offering lower-premium plans.” The California attorney general is suing Sutter Health, a twenty-four-hospital operator in Northern California, citing anticompetitive practices.

  Antisteering

  Another competition-reducing element of health-insurance contracts is a provision that prevents insurers from steering patients to less expensive or higher quality health-care providers. Forced inclusion prevents insurers from keeping high-cost providers out of the system. In tandem, antisteering provisions block insurers from creating incentives for patients to use less expensive or higher quality health-care providers.

  In September 2018, the Wall Street Journal reported that Walmart sought permission from the insurers that provide coverage to its employees to remove the worst-performing 5 percent of providers from their networks. The three insurers—Aetna, Arkansas Blue Cross & Blue Shield, and United Healthcare—informed the company that their contracts with provider networks would not allow it.

  Opacity

  In the finance industry, investment advisers have always fought hard to keep their fees hidden. So do health-care providers. Another provision in many contracts allows providers to restrict access to information about pricing.

  When insurers offer online price-comparison tools to their customers, in other words, this means that they must allow some providers to opt out of making that information available. The contract literally prevents the patients from seeing the prices they will be charged. As of this writing, the US administration is considering issuing an executive order that would require insurers and hospitals to disclose their prices. Let us hope that they follow through with this idea.

  Regulatory Capture

  If you’ve read the section above and thought, “Why haven’t regulators done something about this?” then you’re on to another aspect of the problem: regulatory capture.

  In the US, insurance is regulated at the state level, meaning that across the country there are state insurance commissioners charged with overseeing the industry. These posts are extremely influential even though the actions of regulators fly below the radar of most news media. But if the general public pays little attention to insurance commissioners, insurance companies more than make up the difference.

  In a report issued in 2016, the Center for Public Integrity found evidence of intensive campaigns by insurance firms, usually including lavish entertainment, trips, and other benefits, to influence insurance commissioners (Mishak, 2016). In one example uncovered by CPI, Arkansas insurance commissioner Julie Benafield Bowman met multiple times with United Healthcare lobbyists for drinks, meals, and more while adjudicating a hospital billing dispute involving the company. “I had a blast with you Monday night,” she emailed one United Healthcare attorney. “Thank you so much for entertaining us.” It may come as no surprise that she ruled in the insurance firm’s favor—a decision that held up for two years before the courts intervened, overturning the ruling because of the “appearance of impropriety.” By that time, though, Bowman had left her position to take a job at—you guessed it—United Healthcare.

  The Opioid Epidemic

  Regulatory capture can have more sinister consequences. Some of the worst have manifested during the opioid epidemic, which has been spreading rapidly through the US since the early 2000s. The opioid epidemic is the worst overdose epidemic in US history. Overdose deaths from prescription opioid pain relievers nearly quadrupled between 1999 and 2010, exceeding the death rate during the crack epidemic of the 1980s. Mortality due to crack was two per hundred thousand. Mortality due to opioids is ten per hundred thousand and has reached forty per hundred thousand in West Virginia.

  The opioid epidemic has a demand side and a supply side. The demand side has been attributed to social and economic conditions in the US and thus cannot be blamed on deficiencies in the health-care system. But the supply side has been strengthened by failures within the health-care system. The evidence suggests that incentives and regulatory capture were aligned to foster overprescription. Both supply and demand matter. The “deaths of despair,” to quote Case and Deaton, existed long before OxyContin, but overprescription certainly made them worse.

  Even in the midst of the opioid crisis, drug makers were busy lobbying against prescription limits. For instance, the Pain Care Forum spent about $740 million over a decade lobbying federal and state legislatures against limits to opioid prescriptions (Perrone and Wieder, 2016). Julianna Goldman and Laura Strickler reported for CBS News in January 2018 that “donations from drug companies to political associations for state attorneys general have risen in the past three years, totaling almost $700,000 to Democrats and $1.7 million to Republicans.” Today the manufacturers of opioids are lobbying for protections from being sued over their role in the epidemic. Goldman and Strickler add, “The contributions are legal, but they allow companies to gain access to the attorneys general at exclusive meetings, golf outings and high-end dinners.” Tom Marino, who was President Trump’s nominee to become the US drug czar, was forced to withdraw his candidacy after a report by the Washington Post and CBS’s 60 Minutes highlighted his role in forging legislation that hinders the US Drug Enforcement Administration’s ability to move against drug distributors or pharmacies dispensing opioid painkillers. “The drug industry, the manufacturers, wholesalers, distributors and chain drugstores, have an influence over Congress that has never been seen before,” Joseph T. Rannazzisi, head of the DEA’s drug regulation division until 2015, noted in the Wall Street Journal. “I mean, to get Congress to pass a bill to protect their interests in the height of an opioid epidemic just shows me how much influence they have” (Higham and Bernstein, 2017).

  And once the spread of opioids was underway, it was difficult to reverse. US authorities tried to limit access, but abuse had become so pervasive that restrictions led to widespread substitution of other drugs, such as heroin. An attempt was made to limit the misuse of opioids by introducing an abuse-deterrent version of OxyContin in 2010. Several groups of researchers have found that the new abuse-deterrent formulation led many consumers to substitute heroin, however.d Today more than half a million Americans are addicted to heroin, and 80 percent of these abused opioids beforehand.

  A Failure of Public Policy

  The dynamics of concentration in the US health-care industry are worrisome. If the players had to appear in a dramatic reading, their script might be:

  HOSPITALS:  We want to consolidate so that, like the banks, we are also too big to fail. Then we can treat our patients like the airlines treat their customers.

  INSURERS:  We need to consolidate. Then we can negotiate better with hospitals and big Pharma.

  BIG PHARMA:  We are already concentrated, but why not continue? Especially if thes
e hospitals and insurers start merging.

  Delivering health care efficiently is a global fight. All countries struggle with this issue, not just the US. In emerging countries underfunding, lack of infrastructure, and lack of qualified personnel lead to poor quality of care and frequent misdiagnosis. Rich countries struggle with excessive costs, overmedication, and overuse of expensive procedures. Even in this diverse landscape, however, the US is an outlier. It has by far the highest cost of health care, but its results are below average. One would think that American policy makers would be busy trying to fix what looks like a massive failure of public policy. Unfortunately, it seems almost impossible to have a rational debate about health care in the US.

  All countries have their irrational sides. France believes its social model is the envy of the world. The UK believes it has a special relationship with the US. When a country is stuck in this mindset, rational debate is nearly impossible.e No matter how much evidence one brings to bear, nothing changes. In the US, one of these issues is health care and the other is gun control. Gun control is not the topic of my book, and I was definitely planning to avoid the issue, but an article recently published in a medical journal forced my hand (Schuur, Decker, and Baker, 2019). It turns out that PACs affiliated with physicians’ organizations donate more money to political candidates who oppose gun safety legislations—such as background checks—than to candidates who support these legislations. This appears to contradict the public stance of several groups of physicians who have publicly called for stronger gun safety laws in the US. It seems plausible that these PACs support candidates who oppose health-care reform, and that these candidates also happen to oppose gun safety laws. When you mix economic rents and politics, the results never fail to surprise.

  When I hear some of the arguments used in the American health-care debate, I have to admit that my head spins a bit. Let me highlight two of them. One argument I hear often is that the US is a country of free markets where people do not want the government to run their health system. Let’s talk about it. First of all, the government is already involved in health care: it’s called Medicare. Second, you don’t have to look very far to find another major market where the government is deeply involved, even though it should not be: housing. The US government insures trillions of dollars of mortgages via inefficient and badly run companies (Fannie Mae, Freddie Mac).

  Now ask yourself: which market is more likely to experience market failures that justify government involvement? Health care or mortgages? Yes, this is almost a rhetorical question because the answer is obvious. The health-care market is “Exhibit A” for externalities, adverse selection, and market failures. This should be obvious to everyone. In fact, it is obvious to everyone outside the US, and that is why all governments around the world are involved in some way in health care.

  On the other hand, most countries have a private mortgage market. Denmark has a liquid, efficient private mortgage market, and a state-run, efficient health-care system, not the other way around. In France, when you buy a house, you get a private loan from a private bank. Poor households get subsidies—often inefficient, by the way—but the loan market is private. The US has an inefficient semi-private, semi-public health-care system and a distorted mortgage market subsidized by taxpayers. The idea that Americans are fundamentally against government intervention in markets does not withstand scrutiny.

  A second argument I often hear is that US companies are responsible for a large share of global research and development of health-related products, which is why prices are so high. US households, by paying high prices, are willingly subsidizing worldwide research on new drugs, which in turn benefits everyone on earth. Beyond being suspiciously self-serving, this argument defies credibility. Why would American citizens subsidize people who enjoy a longer life expectancy? To accept this argument, you have to believe that US politicians and regulators are somehow willing to hurt their citizens to subsidize the rest of the world. It is true that the National Institutes of Health is the largest funder of basic medical science, but that does not justify high drug prices in the US.

  Early in this book we discussed the need to reassess our prior assumptions when confronted with evidence disproving them. Nowhere is that more necessary than in the US health-care debate. True, one size does not necessarily fit all. Countries are different and make different choices. But a rational decision maker can see that virtually all other advanced countries have adopted systems of health-care delivery that are different from the US model and that these countries produce better outcomes at a lower cost.

  And keep in mind that this does not require a single-payer system. The goal should be universal coverage, that is, a system that provides quality medical care to all citizens. The way to achieve this goal, however, should be open for debate. Many countries reach universal coverage without a single-payer system. In most of Europe, for instance, there are regulated private insurance markets where residents must select a basic package from private insurers. Many of these countries also have private for-profit hospitals, and they accept patients with public insurance.

  If the goal is to avoid increasing the footprint of the government in the economy, a rational deal could involve the closing of Fannie Mae and Freddie Mac against some combination of Medicaid, Medicare, and regulated private insurance that achieves universal coverage. That would keep the government out of a market where it does not belong and improve the efficiency of a market that badly needs to be fixed.

  * * *

  a  In 2016, 40.6 million people, or 12.7 percent of the US population, were “poor,” as defined by the official poverty measure, which is 6 million fewer people than at the peak of 46.7 million in 2014. The official poverty measure is determined by a household’s pre-tax income; for example, in 2016, a family of four earning less than $24,339 would be considered poor. Poverty measures are complicated because they often do not properly account for social transfers. Bruce Meyer and James Sullivan explain that “the debate over inequality relies almost exclusively on income data that indicate that inequality has increased sharply in recent decades. It turns out that these data paint an incomplete and at times distorted view of how inequality in economic wellbeing has changed in the US.” See Meyer and Sullivan (2018). I focus on life expectancy and child mortality because they are easier to compare across countries.

  b  See Papanicolas, Woskie, and Jha (2018). They use international data over 2013–2016 for eleven high-income countries: the US, the UK, Canada, Germany, Australia, Japan, Sweden, France, Denmark, the Netherlands, and Switzerland.

  c  In the language of public health professionals, morbidity and mortality are two separate conditions. Morbidity is the condition of being ill. Mortality is the condition of being dead.

  d  Abby Alpert, David Powell, and Rosalie Liccardo Pacula attribute a substantial share of the dramatic increase in heroin deaths since 2010 to the reformulation of OxyContin. They find that states with higher pre-2010 rates of OxyContin misuse experienced larger reductions in OxyContin misuse, but also larger increases in heroin deaths immediately after reformulation (Alpert, Powell, and Pacula, 2018). William N. Evans, Ethan Lieber, and Patrick Power (2019) also attribute much of the quadrupling of heroin death rates to the reformulation of OxyContin: “Opioid consumption stops rising in August, 2010, heroin deaths begin climbing the following month, and growth in heroin deaths was greater in areas with greater pre-reformulation access to heroin and opioids.” The reformulation did not generate a reduction in combined heroin and opioid mortality—each prevented opioid death was replaced with a heroin death.

  e  In France, it is nearly impossible to have a rational debate about two economic issues: state-imposed reductions in hours worked and productivity in the public sector. Many people think that forcing people to work fewer hours can solve the unemployment problem. Many people (often the same ones) also refuse to see that it is often possible to cut costs and jobs in the public sector without destroying the enti
re social model.

  CHAPTER 13

  Looking at the Stars

  Are the Top Firms Really Different?

  I thought what was good for the country was good for General Motors and vice versa.

  CHARLES WILSON

  LET US TALK about the stars of the internet economy: Google, Amazon, Facebook, Apple, and Microsoft, or the GAFAMs for short. I need to say a word about acronyms here. In Europe, these firms are calls GAFAs. In the United States, they are called FAANGs. I find both misleading. Both acronyms dismiss Microsoft, presumably because it is older than the others, but Microsoft is—and will remain—a major player of the digital economy, on a par with Apple and the others. The FAANG acronym includes Netflix, but the market capitalization of Netflix is one-third of that of Facebook, which itself is only about half that of Apple. Moreover, Netflix is now a major content producer, so I am not sure I see the point in comparing its business model to that of Facebook. I will therefore focus on the GAFAMs.

  Everyone seems to have an opinion about the GAFAMs. Some think they are the greatest companies ever. Some think they are a threat to democracy. What everyone seems to agree on, however, is that these companies are fundamentally different, and that the old rules of capitalism simply do not apply to them. Is that really true?