Two hands fight for the dollar
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In health care and elsewhere, the price of services and products is determined by the relative bargaining power of the buyer and seller. The top dog can afford to walk away without entering the deal, while the underdog cannot. Being the best or the underdog makes the difference in healthcare prices.
For example, the Medicare fee-for-service program, with its vast patient population, occupies the dominant position of top dog when pitted against almost any health care provider. It can withdraw from one provider and contract with the next, while most providers cannot afford to lose their Medicare business. Therefore, the Medicare program dictates the prices it pays.
Private Medicare Advantage plans are also the best. Out-of-network providers, as required by law, receive payments limited to Medicare fee-for-service rates. This rule takes away bargaining power from providers, forcing them to accept the price set by the plan.
Competitions for bargaining power also determine how much rebates pharmacy managers can extract from brand-name drug manufacturers. If a drug is the only game in town, the manufacturer enjoys top dog position and offers small discounts. In contrast, if multiple therapeutic alternatives are available, the manufacturer becomes an outsider and must offer large discounts to the PBM, hoping to be placed favorably on the PBM’s formulary to achieve high sales volume.
Having bargaining power also leads to many other positive financial outcomes, such as a shorter cash conversion cycle – top dogs can make payments later but collect receipts earlier. In light of its importance, both providers and commercial payers are seeking bargaining power to gain an upper hand at the negotiating table.
Trade market negotiations take place at the local level. Suppliers gain bargaining power through mergers and acquisitions. Those with must-have status occupy top positions, which guarantees high prices. Meanwhile, payers (insurers for fully insured plans and self-insured employers) are playing back in this recurring power game, trying to control prices.
Because of their limited working population, individual employers rarely have significant bargaining power at the local level. They can consolidate power by building local buying coalitions and by contracting directly with small suppliers. An employer’s patient volume may matter to small providers, causing them to accept lower prices.
Employers can also allow workers to buy insurance on their own in the individual market and reimburse premiums (health care reimbursement arrangements). This option has the potential to build strong local bargaining power. Once regulatory inefficiencies are addressed in the individual market, workers will likely gain access to more affordable insurance premiums.
For low-cost routine services, such as generic prescription drugs and primary care, eliminating insurance would lower prices by giving patients bargaining power. By acting as both consumer and direct payer, patients will be freed from insurance restrictions and be able to say “no thanks”, go elsewhere and keep the savings for themselves.
This ultimate bargaining power will change the dynamic, forcing providers to compete with each other to please patients by offering affordable prices and attractive services. Consumers have such bargaining power almost everywhere outside of healthcare.
Without significant bargaining power, one remains an outsider, taken advantage of by the top dogs. The search for accessibility in the commercial market is a journey to acquire and exercise bargaining power.
