US healthcare is worse than a free market system

Americans would like to think that their healthcare system resembles a free market system.  Canadians would like to think that theirs resembles a single payor system.  In reality, the reverse is true when it comes to prescription drugs.  In Canada, most Canadians pay for their drugs directly (out of pocket).  You could think of many Canadians as being uninsured when it comes to buying drugs.  In the US, most Americans receive prescription drug benefits from their employer, with the administration of those benefits being handled by a private company.  This is essentially private health insurance that employers are legally forced to pay for.  I would argue that this is the main reason why Americans pay dramatically more for an EpiPen than Canadians do (the listed price is roughly $600 for a pair while Canadians pay around $200 for a pair).  Private health insurance leads to higher costs.  When for-profit companies are compensated on a fee-for-service basis, they are incentivized to spend very little money on lowering drug prices for their clients.  In turn, drug makers take advantage of the situation by charging higher prices in the US than the rest of the world.  The drug makers exploit the payor.  Meanwhile, the insurance companies and PBMs spend very little money on protecting their clients.

This makes me more confident that the American government and states will continue to enact laws that benefit pharma companies, health insurers, and PBMs.  American citizens have the mistaken belief that their system resembles a free market.  On top of that, many people have difficulty understanding the US healthcare system.  Explaining healthcare shenanigans (here and here) is like trying to explain options: many college-educated people have great difficulty in grasping the concepts.  Change is unlikely to happen when American voters don’t understand the problem and its solution.  While the morality of US health insurers is questionable, their favorable economic dynamics may persist for a long time.

Non-healthcare differences between US and Canada

In theory, American online pharmacies should offer slightly lower prices than Canadian online pharmacies.

When it comes to most online retailing, Americans enjoy broader selection and slightly lower prices than Canadians.  This is obvious to Canadians like myself who shop online. and are better than and  I greatly admire the American economic engine as the US is more efficient than Canada.  America has roughly ten times the population of Canada.  10 times the competition makes American industry more competitive.  If the US and Canada had the same laws (but with trade barriers between the countries), I’m sure that American industries would be better than Canadian industry at almost everything.  The superiority of the American economic engine is the most pronounced when it comes to television, an industry where having 10X the viewing audience is a huge scale advantage.  Many Canadian TV productions have around 70% of their expenses paid for via subsidies, while American productions are below 20%.  Despite the massive subsidies, Canadian cable channels show as little Canadian TV as possible and only enough Canadian content to satisfy regulatory minimums.  Canadian TV production simply isn’t competitive despite massive subsidies.  So it is surprising that drugs are massively overpriced in America.

Healthcare details

In Canada, the government only pays for prescription drugs if they are really expensive or if the person is really poor or old.  Aside from the government, a minority of Canadians receive some level of healthcare coverage from their employer.  Otherwise, Canadians pay for drugs themselves without any insurance.  In that sense, the Canadian market is mostly a free market system.  While insurance companies in Canada do offer healthcare coverage, most Canadians do not purchase it (they are mostly exercises in marketing).

In the US, laws punish large employers (>=50 employees) if they do not purchase private health insurance for their employees.  It is these laws that distort the marketplace.  Part of the problem is fee-for-service healthcare, where the insurer is not properly incentivized to keep costs low for their clients.  Part of the problem is kickbacks- insurers have an incentive to cheat their clients to receive rebates from drug makers.  I suspect the crux of the problem is that employers have to pay for healthcare at almost any price.  Unfortunately, toxic insurance accounts for a large portion of American healthcare spending.  This leads to a bizarre situation where Americans can cross a border and buy Epipens for a third of the list price.  Some US employers such as municipalities save money by helping their employees buy drugs online from other countries.

The actual prices being paid for drugs in the US is a little more complicated.  Some drug makers will have absurdly high list prices for their drugs and attempt to trick payors into paying the list price.  For example, they may improperly provide kickbacks to doctors in the form of speaking fees to generate prescriptions for overpriced drugs.  In theory, the PBMs could negotiate reasonable drug costs (below the listed price) for their clients since the PBM has a minor economic incentive to do so- they don’t want their client to fire them.  However, the gatekeeping is circumvented in various ways.  A drug maker may negotiate with the PBM to provide kickbacks to the PBMs in the form of “rebates”.  Or, a drug maker may use sham specialty pharmacies to game the PBM’s drug reimbursement processes.  Or, the drug maker may provide copay coupons to counter the role that copays play in discouraging wasteful healthcare spending.

The PBMs don’t want pricing transparency because they don’t want their clients to understand how much the PBMs make in kickbacks.  This makes it difficult to get data on the actual price being paid for drugs in the US.  PBMs often do negotiate lower prices for their clients because the listed retail prices are absurd.  The average price paid for a drug in the US can be significantly lower than the list price.  In rare cases, the listed US retail price might be 50-100X the lowest price that a drug is being sold for in the US.  Unfortunately, the US system is setup to have opaque pricing so I don’t have great figures as to what the actual price differential is between US, Canada, and the rest of the world.  Canada does pay higher costs for drugs than many other developed nations as other nations have single-payor systems for prescription drugs; the negotiating power of a government versus an individual leads to lower costs.

Actual Epi-pen pricing

I couldn’t easily find an online Canadian pharmacy that sells Epi-Pens.  (As a Canadian, I bought mine at a bricks and mortar Costco and did not shop online for them at the time.  While Costco has an online pharmacy program, they don’t list prices online.  Opaque pricing happens in Canada.)  A Toronto Star newspaper article sheds some more light on the issue:

  • As of 2016, Epi-pens were around $200 to $220 per pair in Canada (presumably Canadian dollars).
  • An American couple spent US$225 to buy a pair from Canada
  • The US list price was around US$609.
  • Mylan has a “patient assistance” program, which is a variation on the copay coupon.  Eligible patients can get up to a $300 discount on their copay.  In this instance, Mylan is effectively willing to sell a pair for as low as US$309 (assuming no rebates to the health insurer).
  • Effectively, the couple spent US$225 rather than US$309-$609 by purchasing Epi-Pens online from Canada.

Since then:

What I find interesting is that the FDA actively creates barriers against price competition.  This seems like an action that would benefit drug makers at the expense of Americans.

Is change likely?

I would argue that Americans don’t understand the problem.  They don’t understand how private industry has been quite successful in advancing their interests.  The private sector has managed to corrupt the single-payor Medicare program with Medicare Advantage, a model that allows private companies to behave like financial parasites.  MA providers siphon off the most profitable patients from government-administered Medicare while delivering healthcare inefficiently as they pay doctors more than Medicare.  (Australia has a similar problem, although John Hempton likes the private elements of his country’s healthcare system.)  The Affordable Care Act / Obamacare, while politically unpopular at the moment (and unprofitable for most health insurers), has created a new market for private health insurers to profit from.  The ACA has also allowed political lackeys in charge of “not”-for-profit organizations to benefit via government “loans”.

More importantly, the ACA has allowed the private insurance industry to dodge a bullet: the expansion of single-payor healthcare.  Single-payor healthcare is an obvious solution as single-payor healthcare systems put the American for-profit system to shame.  This happens even in the US as the US Medicare system pays doctors less than Medicare Advantage.  Single-payor countries that cover prescription drugs pay even less for Epi-pens than Canadians do.  Single-payor systems are more efficient than the private sector, are more consumer-friendly (citizens don’t declare bankruptcy even when they have health insurance), and deliver greater social equality.  Nonetheless, private industry has influenced the ideological debates over healthcare such that single-payor is not part of the American political conversation.  The right-wing versus left-wing debate is over free markets versus socialism.  Sadly, American voters aren’t aware that their system is worse than a free market solution.

American journalists have been rather slow in figuring out that:

  1. PBMs allow pharma companies to gouge their clients and receive kickbacks for doing so.  Kickbacks are typically paid in the form of so-called “rebates”.
  2. Corporations hide their lobbying efforts through 401(c)(4) organizations such as the American Action Network.  These extremely well-funded organizations spend millions each year to push the political agendas of their undisclosed donors.

The journalists miss the bigger picture: private healthcare is the problem.

Single payor successes in the US

The trend is not promising.

While I’d like to believe that the American voter will become wiser and savvier in terms of healthcare reform, I suspect that private industry will continue to advance its interests.  The root of the problem is that almost all voters and journalists are entrenched in their ideologies.  They talk about a complicated system that they don’t understand.  The right-wingers erroneously believe that the American healthcare system closely resembles a free market.  The left-wingers go along with it so that they can blame everything on evil capitalists (they also don’t want to argue in favour of free markets).  Neither side spends much time researching how the US healthcare system works or how other countries’ healthcare systems work.

*Disclosure:  Long ESRX, CNC and UNH.  Short HZNP.



My overview of US Health insurers

The danger of our own beliefs and ideologies

2 thoughts on “US healthcare is worse than a free market system

  1. Pingback: Healthcare inflation is driven by bad medicine – Glenn Chan's Random Notes on Investing

  2. Pingback: A grab bag of shorts (Jan 2019) – Glenn Chan's Random Notes on Investing

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.