The Hatch-Waxman Act of 1984 extended the patent life of a pioneer drug to compensate for delays in the FDA approval process, which incentivized pioneer firms to invest in research and development and accelerated the entry of generic drugs, which would reduce pharmaceutical expenditures. Unfortunately, the Act has serious flaws that encourage both generic producers and pioneer firms to game the system. In the pursuit of economic profit, some producers of generic drugs use the Hatch-Waxman Act to challenge pioneer brands that were covered by valid patents. This conduct undermines the value of the patent awarded to the pioneer firm by the Patent and Trademark Office. At the same time, pioneer firms stall generic competition by filing perhaps baseless patent infringement suits. After 30 months, the pioneer firm and the would-be entrant often strike deals that result in reverse payments by the pioneer firm to the generic producer to delay its entry into the market. This conduct has aroused antitrust concerns that are the subject of this chapter.

Monopsony is the inelegant term that refers to a market in which there is a single buyer (or employer) of a well-specified good or service. Provided that the supply of inputs is positively sloped, the monopsonist may have market power. Profit maximization will lead the monopsonist to depress the price of the input by reducing its purchases, which harms input suppliers and also consumers. Although it is somewhat counterintuitive, this apparent cost saving does not result in lower output prices. In this chapter, we will show how the exercise of monopsony power has deleterious economic effects in both the input market and the output market. We also extend our discussion to dominant buyers and oligopsonists. We observe monopsony in many health insurance markets. Dominant health insurers generally represent a large share of business for health care providers. This allows an insurer to depress reimbursement rates for health care providers by adjusting the quantity of the services that it buys. Those lower reimbursement rates may lead to a reduction in the availability and quality of care for patients.

In this final chapter, we emphasize the importance of competition in health care markets. The antitrust laws can be used to promote competition and thereby save consumers, health insurers, and the government billions of dollars. Although many policymakers call for a complete replacement of the US health care system, we offer remedies that can be implemented immediately.

In recent years, there have been many accounts of extreme prescription drug prices that have raised issues of equity, price gouging, social conscience, and demands for relief. In part, these prices arise due to the inelastic demand for lifesaving drugs and the patents that create short-term legal monopolies. The economic rationale for patent protection flows from the fact that the investment made by inventors necessarily precedes any financial benefits received from the discovery of new products or more efficient production processes. Patent law prevents copiers from free riding so that innovators can reap the reward of monopoly profits for their innovation. Thus, there is a trade-off between innovation and affordability. Antitrust law cannot be used to disrupt legal monopolies, so the US government has turned to congressional proposals that would mitigate extreme drug pricing. We also review the policies of other countries that are aimed at reducing pharmaceutical drug prices and consider whether such policies would work in the US market.

We discuss vertical mergers, which occur when two firms at different levels of the supply chain consolidate to become one firm. Vertical mergers can provide procompetitive benefits when they decrease transaction costs, such as those incurred in market exchange, and eliminate double marginalization. These mergers, however, may increase a firm’s market power, which could lead to raising rivals’ costs or market foreclosure. In this chapter, we provide a comprehensive theory of vertical integration. We also discuss mergers that involve suppliers of complementary goods.

Collusion among buyers is every bit as objectionable on social welfare grounds as collusion among sellers. In this chapter, we focus on the antitrust claims in Kamakahi v. American Society of Reproductive Medicine, which arose from collusion among buyers of human eggs (oocytes), which were comprised of fertility clinics and donor agencies. Two closely related trade associations organized and orchestrated a price-fixing conspiracy aimed at depressing the fees paid to egg donors. The antitrust victims were women who were underpaid for the eggs that they donated to fertility clinics or donor agencies. The collusion among fertility clinics would seem to warrant harsh treatment under Section 1 of the Sherman Act. While this case raises important issues in medicine, public health, eugenics, and ethics, we focus our analysis on the merits of the antitrust claim and the effect on the competitive process.

Neither vertical mergers nor mergers of complementary input suppliers alter the structure of either the upstream or downstream market. As a result, assessing their competitive significance is more complicated and more subtle than assessing the competitive significance of a horizontal merger. In this chapter, we will tease out the competitive concerns that have shaped vertical merger policy. We discuss vertical mergers in the biotechnology industry, in managed care, and between physician groups and hospitals to illustrate the difficult evaluation task assigned to the Agencies.

Ever on the lookout for a way to extend a patent monopoly and thereby continue to earn monopoly profits, some prescription drug manufacturers have hit on a strategy known as product hopping. During the life of a pharmaceutical firm’s patent, the patentee may develop a modified version of the prescription drug by (1) altering the dose to improve efficacy, (2) changing the absorption rate, or (3) switching the medication form from, for example, tablets to capsules. To the extent that the newer version confers real therapeutic benefits, this practice may be unobjectionable. Product hopping may be anticompetitive, however, if the benefits to the patient from innovation are not greater than the harm to patients resulting from the delay in the entrance of competing drug manufacturers. In this chapter, we review how product hopping can work in practice by looking at some case examples and discuss available remedies for addressing this kind of behavior.

In some situations, it may be advantageous for a government to allow buyers or sellers to cooperate on prices and output to keep a lawful monopolist or a lawful monopsonist, respectively, in check. Although it may seem anticompetitive at first, allowing this behavior is a way to even the playing field and can lead to a socially optimal solution. The parties will find it in their mutual self-interest to select the quantity that maximizes the surplus, which is the competitive quantity. This market structure with actors on both sides acting as a single monopolist is known as bilateral monopoly. In many local markets for physician services, reimbursement rates (payment for services) are dictated by large health insurers who wield monopsony power. In an effort to blunt the buying power enjoyed by the health insurer, physicians have attempted to collectively bargain for the sole purpose of negotiating reimbursement rates. In this chapter, we examine the case for collective bargaining by physicians.

Health care professions are regulated by state licensing boards, which are charged with promoting public health, safety, and welfare by preventing charlatans, incompetents, and quacks from practicing. Typically, these boards are populated by members of the profession being regulated since they have the requisite expertise to police the profession. However, professionals with the power to grant licenses may have a financial incentive to use that power to reduce competition and exclude other medical professionals. Reduced competition leads to higher prices and reduced access to health care. Concerned about this conflict of interest, the Supreme Court in North Carolina Dental agreed that the state should supervise such boards through the state action doctrine. In this chapter, we explore the competitive concerns economists and the antitrust Agencies have regarding professional licensure regulations. We identify two general antitrust concerns: (1) the exclusion of some competitors through entry limitations or practice restrictions and (2) supervision requirements that make the employment of competitors less attractive.

In Economics 101, we learn that competition and competitive markets provide the biggest bang for the buck. Market imperfections, however, impair the competitive process and introduce inefficiencies that, in time, reduce the well-being of society. In this chapter, we discuss how the antitrust laws can be used to promote competition in the US health care sector, which could save consumers, health insurers, and the government billions of dollars. We provide a road map of the issues that we will discuss in later chapters.

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.