The Opportunities and Limitations of Monopsony Power in Healthcare
Perhaps more than any other sector of the economy, healthcare systems across the world depend on government resources. As a result, many healthcare systems rely on the use of government monopsony power to decrease spending. The United States is a notable exception, where prices in large portions of the healthcare sector are set without government involvement in purchasing. Critics of the U.S. health system call for expanded government involvement, often citing the relatively low prices for similar healthcare goods and services in other countries such as Canada as evidence of the potential cost savings. In this paper we examine the potential opportunities for a greater use of monopsony power in the United States by estimating the degree to which price differences with Canada are the result of the use of buyer power or other economic factors. Overall, we find that wage differences for medical providers are primarily driven by the broader labor market while price difference for prescription drugs are more directly the result of buyer power. We discuss theoretical reasons why a Canadian monopsonist may be more willing to exploit its power over prescription drugs rather than provider wages, and the implications for greater use of buyer power in the United States.