6 - Collusion in Health Care Markets

Summary

In The Wealth of Nations, Adam Smith observed that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” As we will see, Smith’s warning has stood the test of time. Over 240 years later, we find such conspiracies among physicians, hospitals, pharmaceutical manufacturers, medical device producers, and health insurers. Their contrivances to raise prices add billions of dollars to our expenditures on health care. In this chapter, we introduce an economic model of a price-fixing cartel and discuss the deleterious effects on price, quantity, and social welfare. Using health care examples, we discuss collusion among physicians to deny staff privileges, noncompete agreements among hospitals, and market division schemes in the health insurance sector.