No Deal

National Review Online

Monday, February 08, 2016

Donald Trump doesn’t know what he thinks about health care. He has been a periodic advocate of a United Kingdom–style monopoly system and a periodic critic of such monopolies. He says that we should repeal the so-called Affordable Care Act and replace it with . . . something. Something “terrific.”

Well.

When asked by New Hampshire debate moderator Mary Katharine Ham whether his flirtations with single-payer leave him closer to Vermont socialist Bernie Sanders than to mainstream Republicans, Trump gave a hilariously incoherent answer based in one part on banalities and one part on lies — which is the Trump magic formula. He said that he was the only candidate on stage free to explore all the policy options because he is self-funded and therefore not beholden to special interests. Trump is in fact mainly funded by donors, like the other candidates, but he persists in this lie, brazenly. He also claimed that the insurance companies are “getting rich on Obamacare,” which would be news to United, Cigna, Aetna, and others who have taken a bath on their ACA offerings. (They might have thought they were going to get rich — it’s nice to have a federal law mandating the purchase of your product — but, having gone to bed with the devil, they are waking up with a burning sensation.) Trump also promises a system that would not leave Americans “dying on the street.”

Trump likes to talk about “deals,” and to tout his purported expertise as a dealmaker. To the extent that he has communicated anything that deserves to be called an idea on the issue of health care, it is in joining in with Barack Obama, Bernie Sanders, Hillary Rodham Clinton, et al., in calling for government negotiation with pharmaceutical companies over prescription-drug prices. Trump promises to apply the business acumen he has brought to the casino racket and his reality-television enterprise to negotiate better deals on pharmaceuticals.

It is a superficially appealing position: About two-thirds of Republicans tell pollsters they believe the government should engage in such negotiations. As things stand, the Department of Health and Human Services is prohibited from engaging in direct price negotiations with pharmaceutical companies, a rule that was adopted in the creation of Medicare Part D, the competitive prescription-drug benefit program. There were three reasons for that: One, it was a sop to the pharmaceutical companies; two, Congress and the George W. Bush administration had quite reasonable concerns that transferring the price-negotiating function from private insurers to the Centers for Medicare and Medicaid Services would create something like a price-fixing monopsony; three, the experience of Medicaid suggests that such negotiations might backfire, with pharmaceutical companies raising their prices in the private market to create the illusion of steeper discounts for government buyers.

Barack Obama had campaigned on undertaking such negotiations, but, in a rare concession to reality, he quietly dropped from the ACA a provision that permitted them. The idea that a team from the Centers for Medicare and Medicaid Services is going to sit around a table with the top brass from Merck and Purdue and hammer out standing deals covering the thousands of permutations of pharmaceuticals American medical patients receive is impractical, to say the least. The Obama administration and Mrs. Clinton have since changed their approach, suggesting that the government become involved in direct negotiations over the prices of a small number of very expensive drugs, such as biologics, especially those that do not have very many competitors. 

The belief that a single federal health soviet is going to come to a better settlement than a large number of insurance companies negotiating a large number of different deals to serve a large number of different interests is a classic example of monopolistic progressive thinking, something for which Trump, who currently styles himself a conservative of some sort, has a weakness. In reality, one of the reasons private-sector negotiation has failed to produce large savings is that the private insurance companies face prohibitions of their own, thanks to federal regulation.

There are six classes of care that are “protected” by federal regulation, meaning that private insurance plans doing business with Medicare are obliged by law to cover “all or substantially all” prescription drugs related to them. Which is to say, the law ensures that insurance companies are in a weak negotiating position, because they cannot walk away from the transaction — in the end, they are required by federal law to buy the drugs. There’s a little poetic justice in that: Under the ACA, insurance premiums are going up, because consumers are required by law to carry certain insurance; the insurance companies are in the same position (an unwieldy federal mandate) vis-à-vis certain pharmaceuticals.

The Congressional Budget Office studied the question a few years back and concluded that direct negotiations probably would not have much effect on overall prices. In a report for the National Bureau of Economic Research, professors Mark Duggan and Fiona M. Scott Morton found that a larger Medicaid footprint in the market for particular drugs was associated with higher prices, not lower prices: A 10 percent increase in Medicaid’s share of the buyers’ market for a prescription was associated with a 7 to 10 percent increase in the average price of that prescription.

Trump goes astray in the same way that Obama, Sanders, and Clinton do: in the assumption that what ails American health care is profit. What actually ails American health care is demographics, with an aging society undermining the finances of Medicare and the Social Security disability program; defective markets in which state-by-state insurance licensing prevents the emergence of a national market, and hence national competition, for insurance services; preexisting regulatory burdens that all but ensure high prices for health-care consumers; special-interest concessions written into every program from Medicaid to Obamacare, paid out as the price of industry support for various federal interventions. If Trump’s confused answer about “lines around the states” was a reference to the fractured U.S. insurance market, then he is correct to identify that as a problem. Beyond that, his strategy seems to consist mainly of adjectives: wonderful, terrific, etc.

Trump’s error is useful to consider inasmuch as he is not the only one who imagines the federal government in the role of master dealmaker in the health-care market. In reality, the main problem isn’t a lack of deals but a lack of competitive markets, consumer choice, and transparent prices. Two-party deals between Big Government and Big Pharma are one way to make that situation even worse than it is.

No deal.