Halt Cronyism in the Health Care Industry

One legitimate criticism of elected officials is that far too often they confuse being pro-business with being pro-free market. And a shaky understanding of the relationship between public policy and economics can lead to serious unintended consequences, especially when politics holds sway.

For instance, an elected official may support some policy in the name of being “pro-business” when it only benefits some narrow range of interests. This is what leads to “cronyism” — and cronyism is neither pro-business nor free-market.

Generally, the goal of cronyism is simple: A large actor in an industry uses its power and influence to craft a public policy that feathers its own nest by either punishing competitors or keeping them out of the marketplace entirely. The public loses in these instances, sometimes with serious impact.

This is especially true in the realm of health care. Certificates of need are one example. New medical businesses must prove to some governmental entity that such a venture is satisfying some public need not currently being met by existing health systems.

But who gets to weigh in on whether a venture is necessary? Existing health businesses! Of course, their impetus is to protect their market share, so they use the certificate system to keep competitors at bay. The public loses as a result.

We’re also seeing cronyism in the prescription drug realm. Name-brand pharmaceutical manufacturers, ably represented in Washington by Pharma, are working overtime to keep generic drug manufacturers from bringing their products to the marketplace.

It’s a straightforward proposition. Pharma and other industry actors know that generics, because they offer true market competition, have brought drug prices down — by a whopping 90 percent over the course of the last decade. Consumers, especially working families, are the big winners. But this costs the name-brand companies, obviously, so they try to use the power of government bureaucracy to stifle such competition.

New drugs get a 12-year period of exclusivity. This allows their creators to recoup their investment and make a sizeable profit. It is the system we, as a nation, have agreed to as a way of protecting the intellectual property rights that are the underpinning of the drive to innovate. Just look at the lack of innovation — and economic vitality — from nations that have no private property rights protections.

After a dozen years, competitors are permitted to bring generics to market — provided they meet stringent safety and testing requirements. It’s here that the name-brand companies can use the power of the bureaucracy to stifle competition, gaming processes, such as the development of Risk Evaluation and Mitigation Strategies, so that it becomes inordinately difficult for generics manufacturers to develop such strategies.

This kind of regulatory gymnastics is at the root of what keeps drug costs high. But others, including elected officials, want to blame all manner of evil as a way of keeping the public’s attention away from anti-competitive practices. Congressman Buddy Carter (R-GA), for instance, recently tried blaming “Pharmacy Benefit Managers” for high prescription drug prices — as though their ability to negotiate lower prices for their specific customers was keeping prices high for others. This is interesting, because Carter himself owns three pharmacies, or, at least, owned them while he was a member of the Georgia State Senate. (Carter brought the spotlight on himself as a state senator when he authored a bill regarding pharmacy reiumbursement rates.) As the owner of a business, Carter should know that competition serves to lower prices, and that the big actors in any industry are working to stifle competition.

As my colleague Mytheos Holt wrote recently:

Don’t take my word for it. The data shows the same thing. A recent study by America’s Health Insurance Plans showed that the actual thing that keeps drug prices high is not some random group of negotiators holding Pharma’s feet to the fire, but rather — surprise, surprise, the lack of competition in the pharmaceutical market. Health Affairs also noted that, of the $480 billion spent on prescription medications in 2016, $323 billion of it went directly to Pharma companies’ profits. A measly $23 billion, or 4 percent, went to PBMs. Pharma basically is eating more than half the pie, while complaining about the one guy with a measly slice in the corner.

Competition works; it always has. It moves people to innovate and it helps consumers by giving them better products at lower prices. Cronyism, on the other hand, doesn’t; it never has. It stifles innovation and works to hurt consumers by keeping prices high. And we cannot, as a nation, afford to have our industries or public policies driven by cronyism — especially when it comes to health care.

Andrew Langer is President of the Institute for Liberty.