One Weird Trick for Reducing Drug Prices They Don’t Want You To Know About Joe Bruner Follow Jan 15 · 8 min read

If you’ve been following the Democratic primary at all, you’ve probably heard Senator Warren or Senator Sanders say during the debates that we pay twice as much for health care as most other countries. And even moderate CNN agrees the US does spend twice as much on health care as peer nations, with little to show for it, including no great improvements over our peers in wait times, life expectancy, perceived quality of care, or any other measure. But after seven debates and days of post-debate commentary, a clear explanation for why we have to spend more than other countries on health care seems elusive. I aim to give you the largest piece of the answer.

Most people do know that in a monopoly, where only one company sells a product, that company can make that product very expensive, charging huge prices. This is especially true if that product is one that people can’t give up easily (demand-inelastic in economics jargon), such as gasoline, insulin, or chemotherapy. If you were around in the 1980s, you probably remember Americans saying they’d stop driving if gas prices ever rose to two dollars per gallon. If you grew up in the suburbs in the 1990s, you’ll remember that when gas prices hit two dollars per gallon, no one stopped driving. Everyone had to keep paying a price they considered unfair and unreasonable because they had no real alternative to gasoline. And now, I live in California, where gas prices sometimes go over $5 a gallon, and there’s still plenty of traffic on the roads.

While monopolization is typically supposed to be illegal in the United States under the Sherman Anti-Trust Act, the United States’s health care system is full of legalized monopolies. Brand-name prescription drugs, the kind you see advertised on TV, are legally immune from competition for a minimum of 13 years, and often far longer, as drug companies abuse the patent system to maintain their monopoly for longer than 13 years. And pharmaceutical manufacturers frequently use their monopoly power to raise prices on drugs they’ve already launched to extortionate levels. As of 2020, the price of the world’s best-selling drug Humira is over $72,000 per year. The average American family couldn’t afford that even if they worked all year and had no other expenses.

Real US hospital bill for a one-week stay

Hospitals and other providers often work the same way — if there is only one rural hospital in a geographic area, or only one cardiovascular care center, or only one children’s hospital, that hospital can pressure patients and insurers to pay rates unheard-of in the rest of the world. Last year, one California man was charged over $360,000 for a one-week hospital stay. Some hospitals have even been caught charging new mothers extra to hold their newborn baby.

But if drug companies and health care providers can and will raise prices into the stratosphere when they act as monopolies, why are prices in the United States so much higher for the same products and services in comparison to other countries? The answer lies in the lesser-known concept of monopsony, the reverse of monopoly, where a product has only one buyer, and so that buyer can demand a very low price, close to what it costs to make the product, and manufacturers will still be forced to accept it. For example, because Walmart is one of the few large buyers for many products entering the US, it is able to demand extremely low prices. Or consider your employer — if you, like most people in the United States, could not easily get a job if you were laid off, you have few options if your employer cuts your wages or hours because they are the sole buyer for your labor.

A cartoon about the threat of the Railroad Monopoly to the economy of California — countless industries were at risk of being driven bankrupt and many towns died out because monopolistic railroads using their market power to charge excessive prices on shipping

When one company has a monopoly and is charging high prices, ordinary people combining forces to act as a single buyer and exert monopsony power is often necessary to keep prices at a reasonable level, close to what it costs to provide a product or service. This is why, one hundred years ago, many municipalities began combining the buying power of their citizens to set uniform rates for electricity and water. It’s why the Grange in the gilded-age Midwest combined the buying power of farmers to challenge the monopolies of the railroads — by acting as a single large buyer of interstate shipping, they could fight to counteract the ever-increasing prices charged by the railroads.

In most other developed countries, everyone has already figured this out. Governments combine the buying power of their citizens to force a showdown with pharmaceutical and health provider monopolies by either deciding what to pay directly, as in the case of the UK, Canada, and much of the EU, or by setting one uniform buying price for prescription drugs and health care services for all insurers, as in Japan. The foremost prescription drug pricing expert in the United States is perhaps William S. Comanor, a Harvard economist currently serving as the director of UCLA’s Research Program on Pharmaceutical Economics and Policy. Comanor has repeatedly said for decades you can’t even model US drug prices using the same economic models as for EU drug prices is because in EU countries, the government generally acts in monopsony as the price-setter or single buyer, allowing the government to have leverage setting the price. But here, in the United States, prescription drug companies can play the multitude of insurance companies, employers, and state and federal plans against one another, threatening not to sell to their patients — patients like you — at all, because as the AARP reports, because our government does not act as the single price negotiator, drug companies and health care providers can shut out any insurer or patient who won’t give them their desired price.

Additionally, our failure to use our monopsony power against drug companies and health care providers means Americans who do have government insurance often get outbid by those with the fanciest private health plans which pay providers and drug companies the most money. This is a major reason why many people on Medicaid can’t find anyone to take them as a patient; 22% of pediatricians, 32% of family doctors, and a staggering 64% of psychiatrists openly admit they won’t take any new patients insured by Medicaid, mainly because they have plenty of patients with high-priced private insurance already. The Democratic party, for the past decade, has largely focused on making sure everyone has some kind of health insurance, but as long as we keep neglecting to exercise our monopsony power together, we ensure that the very poorest among us, covered by Medicaid, are the least likely to actually get the medical care they need.

All of the Democratic candidates still in the race save Senator Sanders have talked about the importance of letting people keep their private insurance. Joe Biden says “if you like your plan, you can keep it.” Pete Buttigieg says it’s better to have “Medicare for All Who Want It.” Elizabeth Warren offers the best alternative, but would still keep Medicare limited to a public option for just some until at least three years in office have elapsed. All of these alternatives don’t solve the monopsony problem — they don’t allow us all to combine together our buying power to cut prices and reduce our costs. And they don’t prohibit doctors from choosing patients with high-priced private insurance over patients on government insurance.

Why didn’t the CNN moderators raise these questions in seventh Democratic to those who wish to keep private insurance on the market? Currently, the majority of prescription drug bills are paid for by insurance companies and patients’ out-of-pocket costs. Gerard Anderson, Professor of Health Policy and Management from Johns Hopkins University, found that medical costs are 50% higher when paid privately, rather than through Medicare. Even though Medicare only covers 15% of the US population right now, it already has the buying power to negotiate prices that are only 2/3rds of what private insurers are paying. Any discussion of the cost of Medicare for All needs to take into account that having only one buyer for prescription drugs and medical care would allow us to demand the low prices paid by the rest of the world and see a massive reduction in costs from day 1. Any failure to take advantage of these potential cost savings is an economic drain that we all suffer.

You may be wondering why this monopoly/monopsony issue is never clearly raised or explained by our Democratic debate moderators on network TV, or in the post-debate commentary. This is partly because, as the audience for network TV ages, prescription pharmaceutical companies have become one of the largest and the absolute fastest-growing buyer of TV advertisement time; Any direct explanation that we could combine our power as citizens, taxpayers, and consumers to force them to charge us less could risk them pulling back on their advertising. They already spend far more on marketing their drugs and negotiating high prices for them by playing insurers against one another than on actually developing new drugs. Insurance companies are no slouch in advertisement spending either. And as network TV is an industry in deep, continuing decline, they literally can’t afford to risk angering the people who will pay hundreds of millions of dollars to advertise erectile dysfunction during the Super Bowl in a couple of weeks.

Because Senator Sanders has the only health plan that promises to directly attack the monopolistic system that allows American patients to be extorted from day one of his administration, I don’t think it’s any great surprise that Democratic voters have consistently rated him their most trusted candidate on health care. What is surprising is that the mainstream media has focused on how we pay for it — and not how much money it would save us, and not how we are failing to provide care and pay private medical bills right now. Senator Warren, admittedly, hopes to get there eventually, but Biden and Buttigieg have no plan to get there at all.