Current Events Economics - General

The Downside of Concentrated Health Care Markets

Many recent healthcare policies aim to consolidate the provision of medical services.  For instance, Accountable Care Organizations consolidate providers with the goal of providing seamless, integrated patient care.  Consolidation can increase efficiency and (potentially) drive down prices.  If a market is highly concentrated, however, problems in a single supplier can lead to shortages.  Consider the case of Sandoz in Quebec.

On March 4 a fire broke out at a Quebec manufacturing facility of the multinational generic drug manufacturer Sandoz. The fire halted production and led to medication shortages across the country….

The resulting shortage has hit hospitals especially hard because the Sandoz plant manufactures the vast majority of injectable medications used in Canada….But why was one factory manufacturing such a large proportion of so many important drugs?

Hospitals in Ontario purchase most of their drugs through group purchasing organizations (GPOs). The two largest GPOs in Ontario are Medbuy and HealthPRO. Both organizations are governed by their member organizations, which are mainly hospitals and other health care providers. GPOs were established to increase efficiency for member hospitals. Instead of each hospital signing its own contracts with multiple different pharmaceutical companies, GPOs deal with the pharmaceutical companies and the hospitals only have to deal with GPOs.

GPOs drive down prices by buying in bulk. But the downside of negotiating aggressively is that sometimes only one manufacturer remains willing to supply a particular drug at the negotiated price. And what appears to have occurred in Canada is that Sandoz was the only willing manufacturer not just for one important medication, but for dozens.

There are parallels in the car industry as well.

The company is a chemical plant in a town called Marl. That explosion there killed two people. It was a tragedy, but did not seem to have global significance….Until car companies realized that Marl is vital to their business….

In [Marl], there’s a plant that makes a chemical…that is used in another material called Nylon-12, which is a material that is used – it’s a very basic material. It’s simply a coating that’s used in some of the critical parts of the vehicle, like fuel lines and brake lines.

It’s the kind of thing where it’s so specialized, that not a lot of companies make the product, but a lot of companies end up using it. The plant is one of very few – less than a handful – that make the chemical in the world.

Concentrating production in a single company can produce economies of scale.  A lack of diversification of suppliers (whether its suppliers of medications or car parts) make producers vulnerable to disruptions in their global supply chain.

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