Can Big Medicine Control Big Pharma? (Hint: the Answer Is ‘No’)

Four giant health care systems are joining forces to produce generic drugs at a lower cost to themselves. But, that doesn’t mean the savings will be passed on to consumers.

Four giant health care systems—Intermountain Healthcare, Ascension, SSM Health and Trinity Health—announced last week that they are joining forces to create a new generic drug company. Their goal, they said, is to combat the astronomical price increases charged by some incumbent generic drug makers. “It’s hard to make people better if they don’t have access to the medicines they need,” said Intermountain CEO Marc Harrison. “To add insult to injury, those medicines are being priced in a way that’s nonsensical.”

This is good news, right? We all know that generic drug manufacturers are out of control. Just think of Martin Shkreli’s company Turing Pharmaceuticals, which raised the price of the old, cheap generic drug Daraprim from $13.50 to $750 a pill. Don’t we want some real competition for the big pharma corporations that are jacking up prices, cutting supply, and reducing the quality and reliability of even the most basic of drugs?

Yes, but it is far from clear that the way to deal with colluding, monopolistic drug makers is to embrace collusion among increasingly monopolistic health care systems.

Consider the case of Intermountain. Its hegemony over both the practice and finance of medicine in Utah is hard to overstate. About half the state’s population relies on Intermountain’s 22 hospitals and 185 clinics. Intermountain also dominates health insurance in Utah, with a market share that includes a staggering 90 percent of all HMO policies. Clearly, Intermountain knows how to use vertical integration to leverage market power. Now imagine what it would be like to start a new hospital or clinic in Utah. You’d be trying to compete against a system that not only is one of the state’s largest purchasers of health care, and the owner of most of the state’s hospital and clinics, but also has secured its own supply of cheaper drugs by joining forces with other incumbent giants.

Then there is Ascension. If its merger talks with Providence St. Joseph Health come to fruition, Ascension will become the largest hospital chain in the U.S., a $44.8 billion operation controlling 191 hospitals across 27 states. And Trinity Health? After merging with Catholic Health East in 2013, it already controls 93 hospitals in 22 states, making it one of the largest chains in the country.

Can allowing these behemoths to collude in the production of drugs, in ways that only further their vertical integration across health care sectors, possibly be in the public interest?

Consider what has generally happened when hospital corporations have bought up most of the beds within a region, and then used that power to leverage control over doctors’ practices, clinics, and health insurance companies. Defenders of these deals argue that size and integration will enable the new giant to deliver care more efficiently, in ways that better serve the public. But, in fact, experience shows that any savings that might come from such roll-ups are rarely passed on to consumers. Instead, monopolistic health care systems, including those that are nominally non-profit, tend to use their greater market power to reduce service, jack up prices, and inflate executive pay.

So what can we expect if a combine of health care systems manages to produce its own generic drugs at a lower cost to themselves? We shouldn’t count on patients, employers, and other purchasers of health care—including, of course, taxpayers—to share in the benefit. As I recently argued, this would be true even if America goes to a “single payer” system, because the single payer would be at mercy of “single providers” in most health care markets.

What’s a better answer? Last week, the head of the United States Justice Department’s Antitrust Division, Makan Delrahim, announced that the DOJ may join state attorneys general in suing to recover damages from generic drug manufacturers if ongoing investigations show that the price hikes are due to collusion. Meanwhile, the Federal Trade Commission needs to step up efforts to block hospital mergers and break up health care monopolies, while Congress needs to pass legislation to allow for sensible price regulation in markets where effective competition no longer exists. Which is nearly everywhere: A study recently published in Health Affairs found that hospital ownership in 90 percent of metro areas exceeds what antitrust regulators have historically regarded as the threshold for when action is needed to avoid inefficiency and collusion.

This article originally appeared in the Open Markets Institute’s newsletter, The Corner.

Phillip Longman

Phillip Longman is senior editor at the Washington Monthly and the policy director at the Open Markets Institute.