Why do patients not comparison shop for medical goods and services like they do for most other goods and services? Economist Kenneth Arrow wrote about Uncertainty and the Welfare Economics of Medical Care back in 1963. His theory posits that patients lack their physician’s knowledge and cannot really make informed decisions on their own. Perhaps that is true in some cases but not others.
There are other reasons patients do not act more like consumers. Third party payment is a primary reason. When someone else is paying 90% of the bills, consumers care less about the cost. An added problem is that doctors, hospitals, and drug companies are not competing on price. As a result, they do not post prices. Even when people ask the price it is difficult to get information on costs. Doctors and hospitals will tell you they will not know the price until the service is completed and the charges submitted to the insurance company. Prices are not bundled as they would be in other markets. Rather, prices are disaggregated into numerous billing codes to maximize revenue against third party reimbursement formulas.
Public health advocates are prone to simply say, health care is just not like other markets. It is too complicated to comparison shop. Yet, when we look for examples of patients acting like consumers, the medical marketplace has plenty of examples. One example is the market for cosmetic surgery. Most cosmetic services are not covered by insurance. Consumers pay the bill out of pocket. Providers of cosmetic services respond by making prices relatively transparent and bundling services into a package price. Prices are also stable, rising about equal to consumer inflation, which is one-third of medical inflation. Another example is over the counter (OTC) drugs. Once a drug loses patent protection and is switched to OTC, prices fall about 95% within a year or two. The reason is because health insurance does not generally reimburse for OTC drugs and retailers compete for customer’s OTC business.
Yet another example is emerging right before our eyes: GLP-1 weight-loss drugs. Take semaglutide, for example. Semaglutide, known by the brand name Wegovy, had a list price of around $1,350 several years ago. Health insurance discounts drove the price down by half, maybe even 60%. However, $525 to $675 a month rivals a new car payment. Even though health insurers negotiate discounts, they do not reimburse for weight-loss drugs when losing weight is not a medical necessity. For millions of men and women, GLP-1 drugs are vanity purchases that must be paid out of pocket. Few people can afford to divert $600 a month from their monthly budget just to look slimmer. If the makers of GLP-1 drugs hope to maximize revenue, they need to reduce the price to a level millions of overweight consumers can afford. And it is happening. Drugmakers are having to respond with competition. According to the Wall Street Journal:
Two years ago, a GLP-1 prescription could cost an uninsured patient more than $1,000 a month. Today, Novo Nordisk’s Wegovy pill starts at just $149 through cash-pay programs.
In the world of Big Pharma, this is unheard of.
… [H]ow unusual this market has become, operating more like a high-growth consumer business than a traditional drug market. In recent years, demand spread through TikTok, Instagram, and word-of-mouth, often before patients ever saw a physician. Unlike treatments for conditions such as high blood pressure, the impact of GLP-1s isn’t measured only in lab results: it’s visible. That viral demand overwhelmed manufacturing capacity and outpaced employers’ willingness to cover the drugs.
Consider this: the prices are falling even as demand skyrockets. How can that be? It is due to competition.
Drugs are an unusual business. The products are highly regulated, with huge upfront costs. It may cost more than $1 billion dollars to produce the first dose of a new drug, but only pennies to produce the second dose. With untold millions of people worldwide who could benefit from GLP-1 drugs, but unable to afford them, lowering price to boost market share is a way to maximize revenue. Along the way competition between the makers of GLP-1 drugs is also driving down the price of drugs to levels middle class consumers can afford.
Read more at WSJ: The Weight-Loss Price Wars Are Breaking Big Pharma’s Business Model
See also: The Real Reason Weight-Loss Drugs Have Fallen in Price – The Goodman Institute Health Blog