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One major reason why healthcare costs are much higher in America than in other countries in that our prices are exceptionally high. In this article, I address whether we ought to rely more heavily on buyer power to reduce those prices, as other nations do. I focus on two sectors where greater buyer could easily be exercised: prescription drugs covered by Medicare and hospital and physician services covered by private insurance. I conclude that the biggest buyer of all, the federal government, should be allowed to negotiate Medicare prescription drug prices. That would substantially reduce the prices of many branded drugs and is unlikely to cause a large reduction in innovation. The drug companies appear to have been exceptionally profitable in recent years and thus could lower prices on many drugs and still earn a competitive return on most R&D. The incentive to develop important new medicines would remain high because the government would have little leverage over their prices. And if problems with innovation develop, payments for new drugs can be increased. Encouraging large insurance companies to merge, however, does not appear to be a promising way of lowering healthcare costs. While those mergers would enhance buyer power, they are also likely to present significant competitive risks: they may allow the merged firm to exert monopsony power over small providers, they may create market power and lead to higher premiums (despite the increase in buyer power); and they may allow the merged firm to gain a discriminatory advantage over smaller insurance companies, threatening downstream competition. Because of these dangers, it seems unwise, as a general rule, to allow large health insurers to merge.

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