August 4, 2021

Addressing Market Failure: Lowering Health Care Costs for Americans

The United States is facing a crisis when it comes to health care costs. Prices for lifesaving, necessary care and drugs are simply too high for consumers.

Recent surveys have found that roughly one quarter of people in the country find it difficult to afford their prescription drugs, and three-in-ten say they haven’t taken prescribed drugs due to high costs. For some, the cost of prescription drugs is literally a matter of life-and-death. By 2030, 112,000 seniors each year could die prematurely because drug prices and associated cost-sharing are so high that they cannot afford their medication.

In 2019, 158 million Americans received health coverage through their employer. That’s nearly half the total population as estimated by the U.S. Census Bureau. This means high costs also place significant financial burden on employers that provide health benefits to employees and their families. This comes at the expense of core business investments and holds down wages, dampening business growth.

Why are health care costs so high?

Health care industry consolidation is increasing the market power of dominant hospitals, health systems, physician groups and drug companies. This has enabled them to raise prices beyond what is reasonable or necessary in the commercial market.

Some hospitals, health systems and physician groups use their market power to bully health plans, employers and ultimately patients, into contract terms that drive up costs with no corresponding increase in value. An example of this is the ongoing lawsuit against Sutter Health in California. Sutter used its market leverage to force large companies and their insurers into contracts with terms that drove prices up but did not add value for the employers or their employees. A settlement, including a payout to the employers and injunctive relief, has been announced but is still pending final approval after a 10-year court battle. This will be a victory for these employers, and the suit – particularly its injunctive relief, which requires the health system to end its anti-competitive business practices – provides a roadmap for nationwide reform that could dramatically improve costs.  We need wide-scale solutions to address the problem broadly, and cannot wait for decade-long court cases to solve this problem one health system at a time.

Yet, the problem seems to be accelerating. Between January 2019 to January 2021, hospital and other corporate entities acquired 20,900 physician practices, resulting in a 25% increase in corporate-owned practices. With the decrease in independent practices comes a decrease in the competition necessary to ensure healthy markets, allowing large corporate entities to use their market power to drive prices up for non-hospital care.

Further, through manipulation of patent and market exclusivity laws, including “patent evergreening” and “patent thickets,” pharmaceutical companies have thwarted market competition by keeping drugs under patent well past their original expiration. While prices of brand name drugs continue to rise, the pipeline of innovative treatments has begun to dry up. Today, 78% of drug patents are not for new drugs, but for minor changes to existing ones. Patents should encourage and reward innovation, not be used to discourage market competition.

What can we do about it?

There are two main ways to address the issues at the root of the ever-rising health care costs – strengthen anti-trust enforcement and prohibit specific anti-competitive practices.

Strengthening anti-trust enforcement

All federal agencies with the authority to enforce laws meant to promote free and open markets must do so to protect American consumers. The federal government has begun to take action to strengthen anti-trust enforcement. In President Biden’s recent executive order on promoting competition in the American economy, he directs the Department of Justice and the Federal Trade Commission (FTC) to enforce anti-trust laws vigorously.

The executive order also encourages the Department of Justice and the FTC to review the horizontal and vertical merger guidelines and consider revision. The guidelines should be revised to address the increased industry consolidation behind the rising costs of health care. Additional staff and resources are also needed to support the work of the federal agencies working to enforce anti-trust laws.

On the state level, regulatory bodies should closely monitor mergers and acquisitions to ensure they meet public benefit requirements, meaning they are beneficial to the communities in which the entities operate.

Prohibiting specific anti-competitive practices

Legislation that specifically regulates anti-competitive contracting practices should be prioritized by Congress and moved expediently. The Lower Health Care Costs Act, which was passed on a bipartisan vote by the Senate HELP Committee in 2019, specifically addresses anti-competitive terms in facility and insurance contracts that limit access to higher quality, lower cost care. This would address the issues with contracting practices used by health systems like Sutter Health to hold employers and health plans hostage. The bill is still awaiting a vote by the full Senate.

We must end the gaming of the patent system that allows drug manufacturers to reduce competition for expensive brand-name drugs. President Biden’s executive order on promoting competition also directs the Department of Health and Human services to take action on the cost of prescription drugs. Specifically, he directs the department to lower prices and improve access by promoting generic drug and biosimilar competition, ensuring patents incentivize innovation and are not used simply to delay the development of generic drugs and biosimilars, supporting the market entry of lower-cost generic drugs and biosimilars and preparing for payment models to support increased utilization of generic drugs and biosimilars.