In healthcare and elsewhere, the price of services and products is determined by the relative bargaining power between the buyer and the seller. A top dog can afford to walk away without entering the transaction, whereas an underdog cannot. Being the top dog or the underdog makes all the difference for prices in healthcare.
For instance, the Medicare fee-for-service program, with its vast patient population, commands the dominating top-dog position when facing almost any healthcare provider. It can walk away from one provider and contract with the next, while most providers cannot afford to lose their Medicare business. Consequently, the Medicare program dictates the prices it pays.
The privately-run Medicare Advantage plans are also the top dog. Out-of-network providers, as required by law, receive payments capped at the Medicare fee-for-services rates. This rule takes bargaining power away from providers, forcing them to accept the price set by the plan.
The bargaining power contests also determine how much rebates pharmacy benefit managers (PBMs) can extract from brand-name drug manufacturers. If a drug is the only game in town, the manufacturer enjoys the top-dog position and offers little rebates. In contrast, if multiple therapeutic alternatives are available, the manufacturer becomes the underdog and has to offer large rebates to the PBM, hoping to be placed favorably on the PBM’s formulary to attain a large sales volume.
Possessing bargaining power also results in many other positive financial outcomes, such as a shorter cash conversion cycle—top dogs can make payments later but collect receipts sooner. In light of its importance, both providers and commercial payers pursue bargaining power to gain an upper hand at the negotiating table.
Negotiations in the commercial market occur at the local level. Providers reap bargaining power through mergers and acquisitions. Those with a must-have status hold a top-dog position, which ensures high prices. Meanwhile, payers (insurers for fully-insured plans and self-insured employers) play a counter strike in this repeated power game, attempting to contain prices.
Due to their limited worker population, individual employers rarely possess meaningful bargaining power at the local level. They can consolidate power by building local purchase coalitions and by entering direct contracts with small providers. An employer’s patient volume matter to small providers, leading them to accept lower prices.
Employers can also let workers buy insurance in the individual market on their own and reimburse the premiums (health reimbursement arrangements). This option has the potential to build strong bargaining power at the local level. Once regulatory inefficiencies are addressed in the individual market, workers will likely access more affordable insurance premiums.
For low-cost routine services, such as generic prescription drugs and primary care, removing insurance will lower prices by conferring bargaining power to patients. By becoming both the user and the direct payer, patients will be liberated from insurance restrictions, and able to say “no thank you,” go elsewhere and keep savings to themselves.
This ultimate bargaining power will shift the dynamic, forcing providers to compete with each other to please patients by offering affordable prices and attractive services. Consumers possess such bargaining power almost everywhere outside of healthcare.
Without possessing meaningful bargaining power, one remains an underdog taken advantage by top dogs. Seeking affordability in the commercial market is a journey to acquire and exercise bargaining power.