Sunday, August 28, 2016

Needed: A Prescription Less Bitter

What makes the US healthcare system so confoundingly expensive and inefficient? The answer may be surprisingly simple. 

It's well-known that the United States has one of the most expensive and least efficient healthcare systems in the world. Scores of learned studies and articles have attempted to answer the question of why. The reasons are myriad and include a lack of transparency in pricing, a rash profusion of tests, and an unholy nexus between insurers and healthcare providers. Not surprisingly, the consensus view - whether among experts or the lay public - is that the problem is stultifyingly complex and will defy solutions for a long time to come. 

But there may also be a simple factor at work here that's going largely unrecognized - plain, old-fashioned industry concentration. Industry concentration means that a few companies get so big they can dictate terms to other players in their industry's value chain - customers, suppliers, competitors, and even regulators and government. Thus, with true monopolistic fervor, these few companies enjoy phenomenal pricing power and the ability to make everybody else dance to their self-serving tune. 

To check whether this applies to the US healthcare industry, let's have a look at Fortune's 2016 list of the largest US corporations. A glance shows that of the top 7 companies on that list, no less than 3 are healthcare companies with combined revenues of just under half a trillion dollars (you read that right, that's 'trillion' with a 'tr') ! This means that these 3 companies represent about a sixth of the US healthcare market - a startlingly high level of concentration (there are over 800 healthcare companies in the US*). Just to compare this with what's happening outside the US, a look at Fortune's Global list  shows that there is not a single healthcare company in the top 10. 

And if these healthcare companies have grown that big, it means they've carved out humongous strongholds in their respective corners of the healthcare industry. What's more, none of these 3 companies was in the top 10 as recently as the 2015 list, ie a scant one year ago - which suggests they're getting even bigger fast**. 

Clearly, US healthcare companies have grown outsize, have achieved industry concentrations far in excess of their global counterparts, and are accelerating that trend. 

So what's the prescription? 

Breakup via regulatory fiat (a la Standard Oil, 1911 and AT&T Corp, 1982  used to be the way to go. But not only is such a heavy-handed approach likely to be regulatory overkill, it's also likely to be mired in enough legal wrangling (remember Microsoft's break up, ordered in 2000, that never happened) to stymie the intention. 

The solution, instead, should be to change the regulatory, business and industry landscape so as to encourage a voluntary downsizing or breakup of these companies. This may include tax treatment, changing the policy framework so as to offset the scale advantages that large firms enjoy, etc. After all, the government tried for years to forcefully break up Microsoft and failed. On the other hand, HP, Xerox, Kraft Foods and Motorola broke up on their own, with no forceful nudge whatsoever. Economics is a far more potent weapon than force. And in the end, economics always wins. 

* In addition, a lot of the US healthcare demand is serviced from outside the US, viz. syringes from Korea and pharmaceuticals from China and India. Even allowing for the fact that the healthcare industry is huge - almost 18% of US GDP - the concentration implied by the above data is very high. 

** For a comparison, there is only 1 tech company in the same top 7 mentioned above. In fact, no other industry has more than 1 representative - the other 3 companies are drawn from retail, energy and financial services.