Issue Briefs: Volume 7
While policymakers have talked a lot recently about finding a comprehensive fix for escalating health care costs, such as Medicare-for-all, many economists have been exploring the possibility that the answer for excessive health care spending may rest instead in series of smaller adjustments. One such small fix is preferred pharmacy networks. This is a relatively new tool whereby health insurers aim to steer consumers to lower cost “preferred” pharmacies, where insurers are able to negotiate lower drug prices. The research concludes that preferred pharmacy contracting results in a roughly 1 percent decrease in Medicare Part D drug costs among plans utilizing this tool—a fact that should be encouraging to policymakers concerned about reigning in costs, especially in light of other research demonstrating that health care consumers do not shop around for lower priced care. If this practice of “steering” consumers toward lower cost drugs were applied to the entire pharmaceutical industry, the savings could be much greater.
The landmark Supreme Court ruling in Illinois Brick Co. v. Illinois (IB), which bars “indirect purchasers” from bringing antitrust suits against upstream product manufacturers, has greatly reduced the legal costs associated with antitrust enforcement. The ruling also might have another, lesser-known result: it has the potential to enable firms upstream in the supply chain to engage in collusion through the use of a particular contract structure—the wholesale price plus fixed fee structure (WPFF). The key component of the WPFF structure is a slotting fee, by which manufacturers agree to pay a fixed fee to retailers, compensating them for stocking fewer, higher cost items than they would under perfect competition. The fee acts as a disincentive for retailers to level antitrust suits against manufacturers. And consumers, whose welfare is reduced by the collusion, are forbidden from bringing antitrust action by the IB ruling. The research suggests that the incentive to collude is greater when demand uncertainty for a product is higher, the number of retailers in the market is higher, and the number of manufacturers is lower. Public enforcers of antitrust law can use this knowledge to focus their monitoring efforts on firms embedded in the type of supply chain structures described here while using WPFF contracts.
Throughout its history, the U.S. Federal Reserve has engaged in international diplomacy, outside the bounds of (and sometimes in conflict with) the priorities of the White House and U.S. State Department. In directing monetary policy, the Fed’s primary concern is to benefit the U.S. economy. In the process, the Fed at times acts in concert with foreign central banks, as was the case in setting new bank regulations after the 2008 financial crisis. At other times, the Fed acts in ways that other countries view as detrimental to their economic interests. Either way, the Fed operates with little public accountability, and can wind up complicating the work of U.S. diplomats. This brief addresses the questions of whether and how greater oversight of the Fed’s international activities should be pursued. The brief recommends not an overhaul of the Fed’s structure or the elimination of its role in international affairs, but instead calls for greater disclosure of its international activities. The authors suggest that the Fed should provide testimony to Congress twice per year on its foreign policies, just as it does for monetary and regulatory policy. This kind of disclosure permits broader discussion of the Fed’s activities without eliminating the benefits of its institutional independence for monetary policy.