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Faculty Viewpoints

Prof. Fiona Scott Morton Outlines Fixes for Healthcare Markets in Congressional Testimony

Prof. Scott Morton called a private healthcare system without competitive pressure “the worst of both worlds” in terms of costs. She outlined a series of reforms and other actions that could increase competition for both drug makers and healthcare providers, thereby driving down prices.

Shelves filled with medications

Simon Dawson/Bloomberg via Getty Images

By Ted O’Callahan

Testifying before Congress on March 7, Fiona Scott Morton, the Theodore Nierenberg Professor of Economics at Yale SOM, made recommendations to lower costs by improving competition in healthcare.

Amidst a political debate that includes calls for “Medicare for All” and ongoing attacks on Obamacare, Scott Morton focused on market dynamics in the healthcare system and produced a number of pragmatic reform suggestions. “The narrative that healthcare costs are high because we use markets, rather than government, to provide healthcare is not correct in my view,” she said. “Rather, healthcare costs are high because we do not have competitive markets for these services. Private providers that are not subject to competitive forces create the worst of both worlds. Because the sector is so regulated there are many ways for private healthcare providers to successfully lobby for regulations and practices that shield themselves from competition.”

Read Fiona Scott Morton’s prepared testimony

One theme of Scott Morton’s comments was that we are not helpless in front of ever-rising healthcare costs. “Congress could significantly lower healthcare costs and restrain cost increases with some relatively simple statutes that create more competition in this sector,” Scott Morton told the House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law. Since many anticompetitive practices may violate existing antitrust laws, Scott Morton recommended healthcare-focused Federal Trade Commission enforcement projects combined with statutory changes that would eliminate grey areas that are being exploited.

“The good news, therefore, is that high prices in many areas of pharmaceutical and medical care are eminently fixable and there is a great deal of evidence about what policies will bring down prices,” Scott Morton said. “The bad news is that the providers whose prices will come down—should they have to vigorously compete for business—will lobby against any changes in the law, and have historically been very successful at doing that.”

Scott Morton ran through a number of proposals to increase competition in healthcare markets.

She analyzed several tactics that drug companies use to prevent or delay competition from generics. One example she highlighted was pharmaceutical companies using pay-for-delay schemes that hamper entry of generic and biosimilar competitors after a drug’s patent protection expires. Once alternatives do come on the market, companies employ anticompetitive loyalty rebate schemes. “Rebates can be designed so that even if the new entrant charges zero for its product, the buyer still pays more in total by forgoing the rebates,” she argued.

Another problem area Scott Morton identified was pharmaceutical procurement. Medicare Part B reimbursement doesn’t incentivize price consideration. “[Physicians] have no incentive to consider equally effective, but lower-priced product. Indeed, because the physician earns a percentage margin on the medication, a physician has a financial incentive to use a higher priced branded product,” said Scott Morton.

She pointed out that the Veterans Administration does incentivize choosing options with the lowest possible price. “The U.S. VA has been able to negotiate more than an 80% lower price for a biosimilar as compared to the reference product. Data from Europe demonstrate similar levels of savings.”

Passing up the benefits in cost and quality that come from competition represents a “massive waste of Medicare funds” in her view. “Given the ease of enabling competition in this sector, these are savings that Congress is choosing to forgo on behalf of U.S. taxpayers and patients.”

Scott Morton also discussed the perverse incentives created by some high-deductible insurance plans. “If the list price of a drug is $600 while a plan has negotiated a price of $300, a consumer with a $1,000 deductible will pay the full $600 list price. Her plan will receive a $300 rebate from the manufacturer but will have paid out nothing for the claim. In this situation, not only is the patient paying more than the competitive price for the medication, but the employer or plan has made a profit on the claim.” Scott Morton offered specific technical fixes that would resolve this problem; however, she warned that without careful design any changes might simply shift which stakeholders end up with the anticompetitive incentives.

The most prominent anticompetitive practice among healthcare providers is mergers, according to Scott Morton. She said that research demonstrates that decades of mergers of healthcare providers have hurt competition, offering examples from dialysis centers as well as hospitals. One response could be increased enforcement of existing antitrust law, including the Clayton Act, which restricts anti-competitive mergers. “Because there is no time limit on Clayton Act violations, Congress could instruct the FTC to open a unit to revisit healthcare mergers that have harmed competition.”

In another area where Scott Morton sees promise from greater competition, new rules would be required. Currently, nonprofits are exempt from most Federal Trade Commission oversight, and many hospitals and insurers operate as nonprofits, she said. She called for competition laws to be applied to all organizations.

Scott Morton’s testimony, “Diagnosing the Problem: Exploring the Effects of Consolidation and Anticompetitive Conduct in Health Care Markets,” was delivered to the House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law on March 7, 2019.

Department: Faculty Viewpoints