Buyer Power and Healthcare Prices

42 Pages Posted: 16 Sep 2015 Last revised: 19 Apr 2016

John B. Kirkwood

Seattle University School of Law

Date Written: October 16, 2015

Abstract

One major reason why healthcare spending is much higher in America than in other countries is that our prices are exceptionally high. This Article addresses whether we ought to rely more heavily on buyer power to reduce those prices, as other nations do. It focuses on two sectors where greater buyer power could easily be exercised: prescription drugs covered by Medicare and hospital and physician services covered by private insurance.

The Article concludes that the biggest buyer of all, the federal government, should be allowed to negotiate Medicare prescription drug prices. This would likely reduce the prices of many branded drugs substantially without causing a large reduction in innovation. Multiple studies indicate that drug companies have been exceptionally profitable in recent years. As a result, they could lower prices on many drugs and still earn a competitive return on most research and development. Moreover, the incentive to develop important new medicines would remain high because the government would have little leverage over the prices of these drugs. Finally, if problems with innovation develop, payments for new drugs can be increased.

In contrast, encouraging large insurance companies to merge does not appear to be a promising way of lowering healthcare costs. While some large mergers may be procompetitive — lowering both excessive provider prices and insurance premiums — most would present significant competitive risks. They may allow the merged firm to exert monopsony power over small providers, they may create market power and lead to higher premiums, or they may permit the merged firm to gain a discriminatory advantage over smaller insurance companies, threatening downstream competition. Because of these dangers, it would not be wise, as a general rule, to permit large health insurers to merge.

Keywords: antitrust, health care, buyer power, prescription drugs, innovation, Medicare, federal negotiation, mergers, health insurance, health plans, hospitals, physicians, countervailing power, monopsony power

Suggested Citation

Kirkwood, John B., Buyer Power and Healthcare Prices (October 16, 2015). Washington Law Review, Vol. 91 (2016); Seattle University School of Law Research Paper No. 16-09. Available at SSRN: https://ssrn.com/abstract=2660553

John B. Kirkwood (Contact Author)

Seattle University School of Law ( email )

901 12th Avenue, Sullivan Hall
P.O. Box 222000
Seattle, WA n/a 98122-1090
United States

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