In health care as in many other things, leverage is the key to getting the best deal. The more leverage you have the more negotiating power you have. The more patients a health insurer can bring to providers, the more leverage it has on the prices charged. The more control a physician group has over doctors the better its position because insurers need participating providers to offer their subscribers. This is little different from the purchasing power of a Wal-Mart that can guarantee volume to vendors who therefore must offer lower prices. But there are some tradeoffs, you can’t include all providers in a network or sell every brand of a product if you are going to keep your leverage.
These limitations represent the most direct impact on consumers, especially when it comes to health care and this point is either ignored or missed by policymakers.
Medicare Part D has long presented a controversy because the law prevents direct negotiation by the government with drug companies for lower prices and rebates; something common in the private sector via pharmacy benefit managers (PBMs). Rather, each Part D provider must negotiate on its own, but with so many vendors offering Part D benefits their negotiating power is limited. In New Jersey for example there are eighteen different vendors offering Part D plans to 1,336,988 Medicare beneficiaries. That is an average of less than 74,277 individuals per vendor (some beneficiaries have private drug coverage through previous employers). How much more pricing leverage would there be if there were only three or four Part D insurers in NJ (or nationally)? In addition, these vendors are prevented from limiting their formulary drugs.
Many classes of drugs have several brand names drugs within that class. For example, the group of drugs that treat high cholesterol contains several brands which essentially treat the condition in the same or similar manner. The manufacturer of one of these drugs offering the best price (and also meeting clinical standards) will be on a drug plans formulary. The others will not.
Having a limited formulary or charging considerably more if a non-formulary brand drug is used is common practice among employer prescription benefit plans because it saves money. Driving more use of the drug on the PBMs formulary allows the PBM greater leverage when negotiating prices and hence that translates to lower prices for employers and employees/retirees.
The downside is less choice for the patient (or higher cost). Needless to say, drug companies do not like the idea of limited formularies because it gives more pricing leverage to the PBMs or the government. Medicare could save billions by utilizing limited formularies and demanding larger discounts and rebates based on increased volume for certain manufacturers and by limiting the number of vendors for Part D thereby giving them greater leverage.
The standard concept of competition does not apply in health care. Three makers of hats in a town will hold down prices, adding more physicians in a town has no affect on prices but rather increases utilization and thus overall costs.
Spreading the pricing leverage among more and more health insurers and Part D vendors merely minimizes their ability to obtain better pricing for the potential patients they insure Add to that restrictions on their ability to use what leverage they do have and you get, well you get the dysfunctional, unaffordable system we have for health care.
Given that Congress passed a law restricting insurers loss ratios to 80% you would think it already knew (surely I jest)that the bulk of an insurer’s costs are not subject to competitive pressure on things like salaries and operating costs but rather most costs are health care claims which means the value is through more leverage on the price of services, not less.
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