One of the reasons that healthcare costs are high is how weak the buyers are when it comes time to bargain over price. The text book solution to this problem is to enable the buyers to pool their negotiating power into buying collectives.  For example, insurance companies might play that role; though then you get the agency problems (to you trust ’em?).  For example, the reason drugs and medical equipment is so much cheaper in other countries is the negotiating power held by the state’s health insurance programs.

A lack of bargaining power could happen on the supply side; and in some industries it does. For example farmers generally have no bargaining power, they are forced to take the price the commoditized market offers them. Minimum wage labor typically has no bargaining power when it comes to selling their time. Again these suppliers might be able to address the situation by pooling their negotiating powers. Alternatively they can wait and hope that scarcity will drive up prices.  There is a beautifully executed story in Red Plenty about a factory management’s carefully orchestrated accident intended to create supply scarcity.

So, I’m  a bit confused by an editorial in the NY Times today.  The article states that there are many generic “drugs” (aka commoditized) that are scarce today in the US. But it’s a bit hard for me to see exactly what they believe the cause is. I don’t think they explain it very well. So I have to guess.

The drugs they report are scarce are typically bought by hospitals, and those hospitals have been reasonably successful at consolidating their purchasing power.  They shop for the lowest price and award the contract for a given generic to a single manufacture. I think that’s where they made a mistake. The winner gains an advantage in the next round of the game, since next year when they go to get bids the losers have all gone out of business. In effect the buyer side forced the selling side to consolidate; and thus gave it the power to drive up prices. The scarcity is then, I think, just the consequence of that.

The article goes on to suggest that this might actually not be “dumb” but actually kind of criminal. To see why you need only shift your view a bit to recognize that the managers running the collective buying agent are middlemen, who they might want to maximize their margins.  In this story the middlemen are called “hospital purchasing organizations.”  In that case the middleman might work out an agreement with the provider. “Yeah, how about you give me a kickback. Oh, wait. Did I say kickback; I meant an administrative fee.” If that went sour; then the providers could buy protection from competition. Oh, another species of kind of regulatory capture.

That’s what the article suggests when they point out that the buying collectives have been granted some immunity from prosecution over kickbacks. I’m curious how these immunities differ from the analogous immunities one encounters around assorted industry trade associations, since it is often the case that if you want to enable collective action you need to turn down the regulations on conspiracies. Think for example about how anti-trust law is in tension with industrial standardization.  The article uses the word cabal.

This kind of thing is pervasive in supply chains. They are wonderfully weird. It’s just in ones that effect the public sphere and pull on the heart strings that we get to read NY Times editorials.