Can we cut the middleman out of healthcare? How can we not?

By | January 30, 2019

Let’s assume you have a new product you want to sell. You were planning on selling it for $ 10, but the government is going to force you to discount the product 50 percent. Do you go ahead and sell it for $ 10, or do you charge $ 20?

Of course, you charge $ 20, and if you had to think about that, you probably shouldn’t sell a product yourself.

This is the state of the pharmaceutical industry.

Look at insulin prices: Despite gross price increases, net prices for insulin have remained fairly flat in recent years after you account for the market shenanigans. But don’t take my word for it. Here is what one company, Novonordisk, had to say about it in 2016:

As the manufacturer, we do set the ‘list price’ and have full accountability for those increases. However, after we set the list price, we negotiate with the companies that actually pay for the medicines, which we call payers. This is necessary in order for our medicines to stay on their preferred drug list or formulary. The price or profit we receive after rebates, fees and other price concessions we provide to the payer is the ‘net price.’ The net price more closely reflects our actual profits.

I just came across that post, and it stood out to me because it is basically a major pharmaceutical manufacturer coming out and admitting that the various healthcare cartel middlemen have completely taken over the pricing system.

Basically, the middlemen mob wants their cut — and they get it.

In general, our whole healthcare system is compromised this way. There are layers upon layers. There are middlemen that pitch other middlemen. Each layer wants their cut, a discount, a rebate, a pound of flesh. Because of the ways that our healthcare system is broken, the real prices of these goods and services are hidden to the end user.

The prices are so hidden that if you eschew all of the middlemen and attempt to charge what might be a “real” price of healthcare, then people question your prices instead of the other way around. Sometimes if someone doesn’t fit neatly into the broken market, then they actually might get caught paying for a product that has been marked up in a way that pleases the middlemen and other economic pirates.

Of course there are also other reasons for price increases, and they are good reasons. The technology is getting better, so more people are now using pens instead of vials. This is a large leap forward making insulin delivery easier and more consistent — but in the short-run the advancement also means higher prices. Because of ongoing research and development, there are more types of insulin on the market. Instead of just the life-saving breakthrough that was insulin, now there are long-acting versions of insulin, short-acting versions, and rapid-acting versions. These advances all help increase the quality of life for the people reliant on them, but in the short run these advances can also increase the cost.

On the other hand, when it comes to research and development breakthroughs, there have been so many that the market for new insulins is actually competitive, and that competition is also helping a bit to keep the price, at least the “net” price, down.

Healthcare middlemen need to get out of the way. They are a drain on the system that isn’t needed. But Congress also can’t just write a bill that eliminates middlemen, forces doctors to directly collect from a patient, or forces pharmaceutical companies to open their own micro-pharmacies. The real answer is to return more power to the patient by restoring the free market.

Check out the market for candy bars. There is a markup above the manufacturer, but the end user bears 100 percent of the cost; and therefore the candy bar market is very lean. Healthcare markets can work in a similar fashion.

I don’t know what the price of life-saving drugs should be. A 28-year-old bureaucrat doesn’t know either. The only way to figure out what the price should really be is to let the market work. The first place we need to start looking is at the government programs (like 340b, which is abused by hospitals) that distort the drug market in the first place. If we start by addressing these programs, the rest of the market will begin to sort itself out — and fire the middleman mob bosses.

Charles Sauer (@CharlesSauer) is a contributor to the Washington Examiner ‘s Beltway Confidential blog. He is president of the Market Institute and previously worked on Capitol Hill, for a governor, and for an academic think tank.