Monopolistic Profiteering? Market Failures?

June 26, 2015

For the last 5 years since the passage of the Affordable Care Act, health care costs have been under control; per capita spending in Medicare has shown very slow growth, same with Medicaid and recently most private insurance. There have been debates about causation; some suggest the Great Recession and its aftermath; others credit the payment reforms in the ACA. The great debates on whether to regulate rates or to let the markets decide have been held in abeyance as the rates of health spending growth have moderated. But!!!

Recently, Health Affairs reported that some for profit hospitals are price gouging their uninsured patients and others by inflating their charges by up to 1000% above their costs. Ge Bai and Gerard Anderson, Extreme Markup: the Fifty US Hospitals with the Highest Charge to Cost Ratios, Health Affairs (June 2015).  While the worst actors were for profit hospitals associated with two hospital chains and many of the worst were based in Florida, inflated charges are the hospital industry norm, now averaging nearly 400% of costs here in California where three of the fifty were located.

There really is no good reason to continue the outdated fiction of hospital charges; Medicare does not pay them; Medi-Cal does not pay them; private insurance does not pay them and the uninsured are moving into coverage through Covered California and Medi-Cal at rapid rates so they don’t pay them. They are an anachronism whose time has passed and should be eliminated.

The Los Angeles Times and others have reported on the large for profit national health plans in acquisition frenzy mode to buy each other and their smaller competitors in order to achieve dominant national and state market shares.

How might this impact California? We do have smaller national for profits in Health Net and Molina based in California; they could become acquisition targets for the big national for profit plans. In California, the commercial markets are dominated by four plans: Kaiser, Anthem Blue Cross, Blue Shield and Health Net – only one of which is a large, national for profit; they have 85% of the small group market, 81% of the individual market, and 90% of the individual market. In the county Medi-Cal managed care markets, local government organized plans typically dominate their markets (about 2/3rds of total enrollment) with commercial competition from Health Net, Anthem Blue Cross, Molina and now Blue Shield/Care 1st. Health Net has about a 14% market share statewide. Kaiser participates in the Medi-Cal managed care markets in San Diego, Sacramento and as a subcontractor in Los Angeles, but is a much smaller participant than either Health Net or Anthem Blue Cross and does not compete directly with the government organized plans. In California, nearly 38% of Medicare beneficiaries participate voluntarily in managed care plans. While the Medicare Advantage Plans market includes greater participation by the national non-profits, such as Humana, United and Aetna, Kaiser, nevertheless, has nearly a 45% market share in California, followed by United at 16% and then California-based Health Net and SCAN with between 7 and 8% of the market each.



Physicians specializing in the care of cancer patients are organizing a backlash to the astronomical pricing of life saving cancer drugs. The criticisms are coming from doctors close to the drug companies, who have helped develop and test drugs for the pharmaceutical industry.

Hepatitis C blockbuster drugs (Solvadi) are priced at $1,000 a pill, projected to add $200-300 per year to every Americans’ health premium for the next five years. Sovaldi is scheduled for $10 billion in sales in 2014, making it the largest selling drug in the world. Company profits were up nearly 500% from 50¢ a share to $2.36 a share in one year.

What can be done? What needs to be done? The Covered California Board capped the amount of these soaring specialty drug costs that can be passed on to patients.  The California legislature capped hospitals’ ability to pass on their inflated charges to their low, moderate and middle-income patients.  The Health Affairs analysis of California’s Hospital Fair Pricing Act is available here.

While important, these caps do not address the fundamental question because it still leaves entities with near monopoly powers the freedom to pass on their highly inflated prices to others.

Should society regulate the monopoly pricing policies of health care purveyors for scarce and life saving treatments? My opinion is an unqualified “yes”, and it needs to get started. The state and federal governments can use the justice system, the legislative and oversight process, the administrative process, anti trust enforcement or their contracting authority, but they need to send a clear and strong message on profiteering and monopoly pricing in the health care industry. In my opinion this is not a question of free markets or competition versus state regulation, but rather of profiteering in life saving care.