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One theory of how single payer/universal healthcare systems are less expensive than the US private insurance market is that each country functions as a monopsony: a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. For example, with drug pricing, a country can ultimately tell Pfizer, "We don't want to pay more than X for your new drug. If you don't agree, you can take your business elsewhere", and Pfizer is forced to agree because otherwise they lose an entire market. I have two questions on this logic:

  1. Pfizer is a global company, they sell to many countries, how can any single small country be considered a "monopsony" on Pfizer's products? . In a global marketplace, with many payers, it would seem that none of those payers individually can claim to have a monopsony. And this is especially true for small payers, such as Sweden, Norway, Denmark, New Zealand, which are individually a very small part of the global customer base. And this brings me to the next question, the flipside:

  2. Why don't US health insurers have the same "monopsony" power? Why can't Aetna, which is bigger than many countries, tell Pfizer the same thing: "We don't want to pay more than X for your new drug. If you don't agree, you can take your business elsewhere"? How is their "monopsony" any less than Sweden's, which is a much smaller market?

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If a firm cannot cover costs and make profit then it has no profit motive to develop and sell drug XYZ. So the profit motive is a "cost plus" model. The price must cover costs plus profit whether there is a single buyer or multiple buyers of the output goods.

If drug XYZ makes a net profit in a domestic market, and if there is a marginal profit in other global markets, then prices can be set lower in some parts of the global market and there is still an incentive to provide drug XYZ for marginal profits there.

Bottom line is price floors must be set by the market and/or government purchases if long term investments are to be recovered from future cash flows. This looks like cost plus pricing of output goods. Otherwise a firm that cannot recover costs from cash flows goes bankrupt and the assets transfer to another firm with less long term debt and then the cost can come down.

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  • $\begingroup$ Thanks. Seems like you're explaining how the price could be really high in one country and lower in others. But I can't really tell if you are agreeing with the "monopsony theory" and explaining it. $\endgroup$ – dlp Oct 2 '20 at 21:44
  • $\begingroup$ The producer faces cost of inputs such as wages and materials. If the single buyer cannot drive down those input costs, and if it is not willing to pay enough to cover the cost of goods sold, then there is no incentive for a private firm to produce the goods because it would operate at a loss. So the single buyer either can drive down costs in the chain of production or must set a price floor at or above costs of production. If there is not a single buyer, and profit is made in the industry, then the producers have enough pricing power to cover their costs and make some profit. $\endgroup$ – SystemTheory Oct 2 '20 at 22:36
  • $\begingroup$ Suppose a government wants to drive down the costs of health care rather than subsidize costs and profits in the industry. Then the government must have a cost control policy to make it less expensive to become a doctor or nurse or to build a hospital or medical machines etc. Private insurance firms don't have control over such input factors nor does a single buyer unless government policy is used for cost control. Cost controls can be effective usually during war but then ethical and moral disputes arise concerning how to provide for the public good via markets or price controls. $\endgroup$ – SystemTheory Oct 2 '20 at 22:47

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