Adapted from: “The Economics of the Public Option: Evidence from Local Pharmaceutical Markets,” by Juan Pablo Atal of the University of Pennsylvania; José Ignacio Cuesta of Stanford University; Felipe González of Queen Mary University of London; and Cristóbal Otero of Columbia Business School.
Key takeaways:
- Public pharmacies in Chile leveraged the bargaining power of large government orders with laboratories to offer pharmaceutical drugs at a third of the price of the highly concentrated private sector.
- However, lower prices led to only 4 percent of consumers switching from private to public pharmacies. The researchers believe this was because the state-run options had longer waiting times, less convenient hours, less product variety, and longer travel distances for consumers.
- Following the introduction of public pharmacies, private pharmacies raised their prices for the less price-sensitive consumers who stayed, according to Otero, but overall, the benefits of the public option outweighed the costs by around 8 percent.
- The results demonstrate that, in some settings, the government can have a cost advantage that can be passed on to consumers. The findings also reveal the importance of non-price attributes in public rollouts like this, including convenience and variety.
In recent years, there’s been a renewed interest in introducing a public healthcare option that can compete with private insurance companies for US consumers. Advocates argue such an option would lower insurance premiums and help control the overall cost of healthcare.
“People who are for this option say that public firms may help discipline the market when there are not enough incentives through competition,” explains Cristóbal Otero, assistant professor of economics at Columbia Business School. “On the other hand, critics say state options are inefficient, they lower quality, and more importantly, they can be captured by political interests.”
When it comes to the actual impact of a public option in any industry — whether in healthcare, insurance, noncommercial banking, or another sector — there’s plenty of theoretical literature but very little empirical evidence, Otero says. He hopes to help close that research gap.
His recent work has found that state-run pharmacies in Chile offered drugs at one-third the price of private competitors and offered the government an 8 percent return on investment. Still, only 4 percent of consumers switched to the public option, illuminating some important constraining factors.
How the research was done: Otero and his co-researchers looked to Chile as a case study in the introduction of a public healthcare option — specifically, the large-scale, decentralized introduction of state-run retail pharmacies, which entered around half the nation’s counties between 2015 and 2018. “Before the entry of these public firms, it was well documented that the retail drug market in Chile was super-concentrated,” Otero says. Furthermore, in 2008, the three largest pharmaceutical chains had been involved in a collusion scandal. “So you have a market that could be disciplined by a public firm,” he adds. “It's a case study where a public option makes sense.”
Using a quasi-experimental approach combined with a field experiment to study market outcomes and political preference, the researchers analyzed prescription drug costs at both public and private pharmacies, as well as consumer behavior and municipal spending.
What the researcher found: State-owned firms emerged as a significantly lower-cost alternative to private pharmacies, providing drugs at a third of the cost of private companies. A small but significant portion of consumers responded to the change: Eighteen months after opening, researchers found, the average public pharmacy had shifted 4 percent of sales away from its private competitors, and the consumers who switched to public pharmacies saved an average of $150 on drugs yearly. The biggest effect, though, was on consumers living with chronic illnesses, who saved $550 yearly. In Chile, Otero says, this is close to the median monthly wage.
The private pharmacies responded as well: The researchers found that after the public pharmacies opened, drug prices increased in the private sector by 1 percent and consumers who stayed with their private pharmacy paid about $2 more per year on average.
The researchers believe people stayed at private pharmacies because of the lower quality of state-run pharmacies. For example, compared to private competitors, public firms required consumers to travel further distances, carried fewer brands of drugs, and had more restrictive operating hours and longer wait times.
From the standpoint of municipal spending, the research team also found that the benefit of the public policy — the overall consumer savings — outweighed the cost of introducing the option by a sizable 8 percent.
Why it matters: The results of this study offer empirical evidence that a public option could be beneficial for consumers when the government has a cost advantage relative to the private sector.
However, Otero says the findings also serve as a warning for any government approaching a public option: If a state wants more than 4 percent of consumers to make the switch to a public option, details are important.
“It would have been really different if these public pharmacies had, say, better opening times and more variety,” he says. “So, when thinking about introducing a public option, it can be a very effective policy to provide important products and services, such as, for example, healthcare insurance in the United States at more affordable rates. But advocates of this option should keep in mind that these need to be designed in a manner that is appealing to consumers to ensure that they actually adopt it.”
