Prices Generally Unaffected by Increased Competition in the Pharmaceutical Industry

The laws of economics state that price is inversely proportional to competition. The more competition there is in an industry, the more options a potential customer has, which means the competitors have to lower their prices to draw in the customers. This phenomenon occurs especially in situations where the products being sold by different companies are similar enough to be interchangeable. For some reason, as investigated in Melody Peterson's L.A. Times article, that doesn't seem to be happening with pharmaceutical prices, even when there are many competitors.

To some extent, it makes sense that pharmaceutical manufacturers charge high prices for the prescription drugs and medical devices that they provide. It takes years and millions of dollars in research and development to create something new, which then has to spend years being tested by the Food & Drug Administration before it is finally approved for sale to the public. Often, by the time a medication has been approved by the FDA, there is only a small amount of time remaining on the patent. So, the developing company has only a few years in which to recoup their investment before other companies come out with generic versions.

The unfortunate aspect of that situation is that the medications and devices being developed are often necessary to cure or treat diseases. That can create an unfair situation: the creating company has the right to choose whatever price they want for their product, and the sick person has no choice but to pay it. That's what makes pharmaceuticals different from a normal product. If a computer company comes out with a new type of device that they have patented and decides to charge exorbitant prices for it, a customer has the choice to either pay the high price or move on without buying the new computer. It doesn't work that way with medicine. If a medication is highly priced, a sick person's only options are to pay the price or not be treated for their illness, which could lead to worse sickness or even death.

You would think that once a patent runs out, generic drug manufacturers would enter the market with a lower-priced product, thus giving customers a choice. The increased competition between the original manufacturer and all of the new generic providers should drive the price down, but it doesn't. Even generic drug producers have been coming out with exorbitantly priced medications. The price is usually slightly less than what a name-brand has it listed for, but nowhere near low enough to make it affordable or even justifiable. One example is a drug called ursodiol, which treats gallstones. The method of creating ursodiol was perfected decades ago, and all patents have run out. The ingredients are not very expensive, yet every drug company is charging somewhere around $5 per pill.

Analysts believe that drug manufacturers are defying the laws of economics for one simple reason: they can. When one company raises their price on a medicine, instead of lowering prices to gain greater demand, the competitors follow suit and raise their prices. In that way, the companies bring in more income, mainly at the cost of medical insurers, which leads insurance companies to charge higher premiums to customers. It's a cycle of rising costs with no end in sight. If a single company stood against the status quo and kept their prices at normal levels, the other companies would eventually have to either lower their prices or go out of business due to lack of demand.

Since none of the companies seem to be following economic principles and standing against the current, many are suspicious of the whole situation. Some fear that the medical suppliers have secretly formed a type of coalition or "trust," an incredibly illegal practice. The grand jury has subpoenaed some of these companies to find out if they had any communication with their competitors prior to making consistent price increases. Analysts believe that a trust could be the explanation as to why drug producers have successfully avoided the laws of economics from catching up to them. In time, a federal investigation may reveal the truth of the matter.

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Health Insurance Providers Face Scrutiny Due to Upcoming Mergers

Competition is a major key for keeping product prices low. When that competition is removed, whether by government interference or as a natural effect of the free market, a single company or small group of companies can effectively gain a monopoly on the supplies of a specific type of good or service, which would give them the ability to charge as high a price as they want. It is that situation that many individuals fear may occur in the health care industry. Chad Terhune, of the Los Angeles Times, describes in his article the various mergers currently in the works between health care providers, and the effects that these mergers, if successful, could have on the average American.

For employers and employees alike, these mergers could have huge effects. If all of the pending mergers are approved, then three companies will have control of the majority of the healthcare market, which could lead to a forcing-out of smaller, competing businesses, which could grant them more control. Currently, the companies have the following goals: Anthem Blue Cross Inc. aims to buy out Cigna Corp. for $54.2 billion, Aetna Inc. wants to take over Humana for $37 billion, and the smaller company Centene is looking to acquire Health Net Inc. for $6.8 billion. In the end, Anthem, Aetna, and United Health Group could be at the top of the industry, in California at least.

Many opponents to these mergers fear that the benefits that these health care providers receive by expanding will not be passed on to consumers. In fact, they fear that the new power earned by the companies might lead them to increase rates, forcing customers to pay more or try to find an alternative provider, which would be quite difficult to accomplish in a short time period. They also want to make sure that these large companies have restrictions and extra rules making them focus on improving patient care. Partly in response to the issues raised by opponents, the Department of Justice is having anti-trust officials investigating each of these deals, but in general, state approval determines the end result.

States tend to put the most regulations on the health insurance market. So, in the end, it is usually up to your specific state to decide what conditions the merging companies will have to meet, including holds on premium increases and general network standards. There are, however, existing issues in the system, involving a patient's ability to get insurance at all, as well as the affordability of the patient's final choice. Often, health insurance providers will set a limit on the amount of coverage they will provide to specific patients, depending on the patients' health and medical history. In some instances, this can actually help the common customer. For example, Anthem at one point declared that it would provide a maximum of $30,000 in coverage for knee and hip replacements. Because of this limit, customers were forced to shop around to find a medical practice that would do the procedure for a lower price, which forced about 20% of hospitals to lower prices so as to not lose the business.

Proponents of the mergers hope that similar situations will occur in the future of the health insurance industry. They hope that, as the companies gain more control, they will be able to force medical providers to lower prices to keep the demand constant. They expect that consumers will see a lowering of overall costs, both to hospitals and to the insurance providers as well. For now, there is no real way to determine definitively whether the mergers will be positive or negative for the common American. In all likelihood, the mergers will be approved by the Department of Justice. So, these three companies will almost definitely become the leaders in the industry. The only question might be the level of restriction placed on these companies by each state.

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Rising Insurance Costs in High Fire-Risk Areas

When a home is purchased with a mortgage, using a loan from a bank, the bank will always require the homeowner to get insurance in order to make sure their investment is protected to some extent. Insurance, while a necessity, can be a costly addition to one's monthly or yearly bills. Since an insurance company wants to stay in business, it charges higher rates to provide insurance to individuals in high-risk areas: flood zones, fire zones, earthquake centers, etc, so that it will have the money to pay off claims involving fixing or rebuilding of affected properties. For people like John Stoffan in Samantha Masunaga's L.A. Times article, the costs of fire insurance in drought-parched California make the state almost too costly to bear.

The Stoffan family, whose Northern California home survived various wildfires around Yosemite National Park throughout the years, is finding that their insurance rates may actually be the reason they finally jump ship. The house itself, as well as the county in which it is situated, are considered to be "high-risk" for insurance companies. Even after having installed fire-resistant plants, developed "buffer zones" of areas without any plants surrounding the property, and created holding areas to keep thousands of gallons of water on hand, insurance companies have doubled rated in the past year.

The past four years of dry conditions have made things worse for those living near large forests. The combination of summer temperature and lack of water can turn a forest into a raging wildfire with the merest spark. Because of this risk, home-owners like the Stoffans, no matter how many preventative measures they take, are stuck between a rock and a hard place. They need insurance to have a mortgage to own a home, yet the insurance rates are unaffordable and getting worse. What is their alternative?

While all are hoping for a good winter to break California's dry spell, many are considering moving out of the area altogether. Others have found more creative options to reduce their insurance costs. Some people, like Alpine's Mollie Jacques, have been able to find significant discounts by using insurance companies based in other cities. For Jacques, her choice to switch to an insurance company 100 miles from her home saves her over $700 per year. Some homeowners have even been refused insurance completely and have been forced to use the California Fair Plan Association to have some, albeit limited, coverage.

Communities are coming together in these fire-prone areas to try to make their homes and surrounding land as safe as possible. Since insurance companies determine rates through statistics involving fire department preparedness, water supplies, and availability of emergency communication. With the help of the California Fire Safe Council, a nonprofit organization, such communities are able to purchase wood chippers and other machinery to help clear dry brush and other flammable material. The more prepared a community becomes for a wildfire, the better rates insurance companies will provide. It comes down to economics. Insurance companies will charge a lot of money for taking on a huge financial risk. The more you lower that risk for the insurance company, the less money they will require you to pay.

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