Increasing monopsony power cuts drug costs
One of the heartbreaking realities of America’s health care system is that sick people have to pay exorbitant amounts of money for life-saving drugs. We have heard countless tragedies of people who have lost their lives just because they could not pay for their prescriptions.
These stories have led progressives to call on the federal government to be the sole negotiator on drug prices to bring them down – a policy that must be a priority for Congress.
Before delving into why a single insurer would make drugs affordable, it’s important to understand the market structure that allows drug companies to get away with charging astronomical prices for essential prescriptions.
First, the critical drug demand curve is relatively inelastic, which means that if a company
were to increase the price of a good from $ 100 to $ 1,000, the variation in quantity demand would be negligible. When a pharmaceutical company raises the price of an essential drug, people keep buying it.
Second, a lot of spending is spent on drug development. These expenses, combined with an intensive regulatory process, create conditions in which only some companies may exist. In addition, these companies can obtain patents, buy or sell competing products, and establish “brand loyalty” in which consumers only buy a company’s brand name drugs.
Finally, companies in the pharmaceutical industry are interdependent, since they set their production levels according to the estimates of their competitors, which allows relatively stable prices.
With these characteristics in mind, economists would describe the pharmaceutical industry as an oligopoly, where companies try to differentiate homogeneous products through strategies such as advertising, promotions or innovations protected by patents.
Firms in oligopoly are socially inefficient, which means that at the level where firms maximize their profits, they do not produce enough goods for the benefit of consumers. By connecting the dots between an inelastic demand curve and the components of the oligopoly, it becomes clear why drug companies are raising drug prices.
Lawmakers have suggested many solutions to deal with the prescription drug crisis. The Iowa Legislature recently passed a cap on the number of manufacturers may charge for insulin. President Joe Biden administered a decree that allows Americans to import cheaper drugs from Canada.
However, these solutions do not address the root cause of why prescriptions are higher in the United States than in the rest of the world.
American consumers are unfairly advantaged. To level the playing field, the government should increase monopsony, or purchasing power, of consumers.
Theoretically, if hundreds of insurance companies representing sick clients were replaced by a single giant insurer – in this case the government – the insurer would be able to dictate the terms of pricing, thus offsetting the power of pricing that the pharmaceutical oligopoly owns.
While there are many logistical complications with the transition from a private market to a single monopsonist, the long-term benefits to consumers cannot be underestimated. In Canada, where it is a reality, Canadians pay 54 percent lower in drug costs compared to their American counterparts, signaling a future in which people don’t have to go broke to pay for basic necessities.
It is time to redesign health care and treat prescription drugs as a public good rather than a private one. The only way to do that would be to institute a system in which everyone is protected by government security.
Columns reflect the views of the authors and are not necessarily those of the Editorial Board, The Daily Iowan, or other organizations in which the author may be involved.