Avik Roy: Why states must break the healthcare monopoly
Avik Roy is the president and co-founder of the Foundation for Research on Equal Opportunity (FREOPP), a nonpartisan think tank dedicated to expanding economic opportunity to those who least have it. Trained as a physician at Yale and a scientist at MIT, Roy previously worked in investment research at Bain Capital before becoming one of the nation’s leading voices for market-based healthcare reform. A former health policy advisor to Mitt Romney, Rick Perry, and Marco Rubio, he has been described by Meet the Press as “the go-to policy wonk critic of the health care law.” Roy is the author of “Medicare Advantage for All” and other influential works on healthcare, fiscal reform, and decentralized finance. He recently spoke with American Habits Editor Ray Nothstine.
I’m asking this because it pertains to me, but it pertains to many Americans. They’ve noticed that having coverage, whether through an employer, the Affordable Care Act (ACA), or government programs like Medicare or Medicaid, doesn’t necessarily mean receiving great care. What should policymakers and consumers think about that? Are there improvements that we can have for better care even if we have access to insurance?
Avik Roy: To be more precise, let me try to reframe your question. What I think people are learning, and people get frustrated with, is they have a card that says they have health insurance. Maybe that card comes from their employer, maybe it comes from the government, maybe they bought it themselves. People are frustrated because they assume insurance will pay for the healthcare they receive at the doctor or hospital.
They’re upset when insurers refuse to pay or when copays, coinsurance, or deductibles are higher than expected. People feel like, “My health insurance should pay for everything. It doesn’t. Why is that?” Or “My health insurance should cover everything, every service that a doctor recommends. Why doesn’t it?”
The simplest way to put it is this: healthcare is expensive. If we want insurance to remain affordable, insurers have to steer patients toward the most cost-effective care available. In theory, when an insurer says “no” to a test or procedure, it’s because there’s a less invasive or less expensive treatment that works just as well—or better. That’s the principle, at least, even if it doesn’t always play out in practice.
Doctors tend to be lazy about this stuff. They’ll often say, “I’ll just prescribe this and figure it out later,” without thinking about whether the patient can afford it. Many are paid more when they prescribe costlier treatments, so the incentives point in the wrong direction. As healthcare gets more expensive, insurers and the government try to rein in costs through various controls to keep premiums down.
People get angry when insurers deny coverage or require pre-approval, so the government steps in and mandates that insurers cover certain procedures, drugs, or tests. But that only makes things worse. Once companies know the law requires coverage, they can charge whatever they want, knowing insurers—and ultimately taxpayers—must pay. It becomes a vicious cycle of ever-rising costs.
The simplest way to put it is this: healthcare is expensive.
All of this traces back to World War II, when the federal government began heavily subsidizing employer-sponsored insurance through the tax code — the original sin of American healthcare policy. Nearly every distortion since stems from that decision. And for many of your readers in state policy think tanks, the frustrating reality is that states have limited power to change it since most of the system is federally governed.
Are there some innovative state-level reforms that you’re seeing right now in healthcare policy that you think the rest of the country should be watching closely that might be exciting?
Roy: There’s nothing that’s passed into law yet that really excites me, though there are some small steps in the right direction. One example you often hear about in free-market circles is reforming certificate of need laws, something we’ve talked about at FREOPP for a long time.
These laws require anyone who wants to open a new hospital or major medical facility to first get permission from the existing hospital industry, essentially, asking competitors for approval to compete. It’s a ridiculous system that protects incumbents and limits patient choice. Most of the states that still have these laws are blue states, but a few are starting to roll them back, which is encouraging.
The challenge is that starting a new hospital is incredibly difficult. Launching one costs billions of dollars. So even if you repeal certificate of need laws, it doesn’t suddenly spark a wave of new hospitals. The real leverage states have lies elsewhere: in pro-competitive antitrust policy. That’s where states can make a genuine difference.
Some in the libertarian movement have a knee-jerk aversion to antitrust policy. They argue that breaking up hospital monopolies isn’t ‘free market,’ but I disagree. If you want a truly free-market healthcare system, you need hospitals that truly compete with one another on quality, price, and service. The healthiest system is one where hospitals operate as independent entities, not consolidated giants. When a few systems dominate a region, that’s not a market—it’s a monopoly.
It’s not that different substantively from the government. The government is a monopoly. If the hospital system in your state is a monopoly, that’s basically the same thing. In Connecticut, where I went to medical school, the Yale New Haven Health System owns the entire state. You basically can’t go to a hospital outside of the control of the Yale New Haven Health System. What do you think they do with that market power? They charge whatever they want. They’re not accountable for quality because you can’t go anywhere else. The one thing states can do, and the attorney generals in particular, the ones that have this power, is to tackle anti-competitive practices by hospital monopolies.
Red states have mostly stayed on the sidelines when it comes to tackling hospital monopolies, though there are a few exceptions. Indiana has taken the issue seriously, experimenting with several reforms, and Florida has started to move in that direction too.
But in general, most leaders avoid the fight. The hospital lobby is incredibly powerful, and many state attorneys general are reluctant to challenge it. They look in the mirror and see a future senator or governor, knowing that taking on hospitals could end that future. So, the problem persists.
Interestingly, one of the most aggressive actions against hospital monopolies actually came from California. When Xavier Becerra—former President Biden’s HHS secretary—was California’s attorney general, he sued Sutter Health, the dominant hospital system in Northern California, for anti-competitive practices. The case exposed some shocking behavior: Sutter used contracts that punished insurers and doctors if they referred patients outside its network. It was classic strong-arm stuff, closer to mafia tactics than market competition.
That’s not a free market. Those kinds of practices block competition, drive up prices, and make hospitals unaccountable for quality. States could do a lot simply by requiring transparency in these contracts or outlawing such anti-competitive clauses altogether.
If you read the indictment from former California Attorney General Xavier Becerra, it’s astounding what Sutter Health was doing. They told insurers and doctors, “If you send patients outside our system, we’ll make sure you can’t do business with us again.” That’s not a free market — that’s cartel behavior.
Hospitals do this all the time. They include anti-competitive clauses in contracts with insurers and physicians, and those contracts are confidential. If an insurer complains to regulators, the hospital can sue for breaching confidentiality. Regulators rarely even see these agreements.
A simple reform — which hospitals and insurers would fiercely oppose — would be full transparency around these contracts. If regulators and the public could see them, it would be clear which provisions are anti-competitive, and states could step in to ban them. States like Texas are already pursuing such legislation, targeting “anti-steering” provisions and similar restrictions.
And it’s not just hospitals. When I tore my Achilles about ten years ago playing soccer, the anesthesiologist who put me under charged more than the surgeon who repaired the tendon — $6,000 versus $5,000. That’s absurd, but it happens because all the anesthesiologists in my area belong to the same regional group. It’s a monopoly, and they can charge whatever they want.
If state think tanks or policymakers really want to make healthcare more affordable, this is the place to start: take on anti-competitive practices by hospitals and physician groups. It’s politically tough, but it’s the single most impactful thing states can do to bring down costs.
A common concern about market-based reforms is whether they can truly protect people with chronic or preexisting conditions, one of the main goals behind the ACA. I remember states experimenting with high-risk pools and other models to help those who need more care. How do your ideas address that issue? From a cost standpoint, the ACA has been disastrous for many people.
Roy: My “fame,” if you want to call it that, came from warning about these problems before the ACA fully took effect. Back in 2010, 2011, and 2012, I was writing that premiums would skyrocket and people like Paul Krugman and Ezra Klein said I was wrong or dishonest. But I wasn’t guessing; I was looking at insurers’ filings that clearly showed what would happen.
At FREOPP, we built a nationwide database comparing 2013 pre-ACA premiums to 2014 Obamacare premiums and, sure enough, costs exploded. We’ve been tracking this issue for years.
Now, politically, there’s no going back to the pre-Obamacare world. There’s broad support for guaranteeing coverage to people with preexisting conditions, and that policy is here to stay. What’s also embedded in the system, though less talked about, is community rating. That means healthy and sick people pay the same premium.
It’s one thing to say insurers must offer you coverage regardless of health status, but under community rating, they also can’t charge you more if you’re high-risk. That’s why premiums are so expensive. Insurers can’t price policies based on expected costs and it’s akin to selling fire insurance for a house that’s already burned down.
The ACA’s solution was to make everyone pay the same premium, mandate that healthy people buy insurance, and offer subsidies. But the individual mandate was weak and eventually repealed. As a result, many healthy people dropped out of the market, leaving only higher-cost patients and driving prices up even more.
When a few systems dominate a region, that’s not a market—it’s a monopoly.
Republicans proposed high-risk pools as an alternative, separate programs to cover people with expensive conditions, directly subsidized by government, while keeping premiums low for the broader population. In theory, that makes sense. In practice, those programs were complicated and inefficient. People didn’t know whether they qualified or how to enroll.
There’s a better approach: reinsurance, basically an invisible high-risk pool built into the system. When you buy insurance from Blue Cross or UnitedHealth, you see one policy and one premium. But behind the scenes, insurers and regulators identify the highest-cost patients and share those costs through a reinsurance fund subsidized by the state or federal government.
That’s how Medicare Advantage works. It’s the private-sector alternative to traditional Medicare, and it’s been so successful that more seniors are now enrolled in Medicare Advantage than in government-run Medicare. It offers more benefits, often includes drug coverage, caps out-of-pocket costs, and is especially popular among lower-income and minority seniors.
The same model could work in the ACA marketplace or in a reformed version of it. Countries like Switzerland and Germany already do this: universal coverage delivered by private insurers, using reinsurance to protect those with costly conditions. It’s efficient, practical, and familiar to insurers.
The result is a win-win. People with chronic or preexisting conditions get real financial protection, while healthy people aren’t punished with inflated premiums. Everyone pays a price that better reflects their expected costs, and the system remains affordable and sustainable. That’s the model I’ve been advocating. I wrote about it recently in a Washington Post op-ed.
Let me ask you this, because I think it’s related. If you’re sick, say with cancer or multiple sclerosis, there are now all these new biologic medicines. They’re incredibly expensive and driving up the cost of insurance. What reforms could address this? Obviously, we don’t want to harm research or slow innovation. These new treatments are extending lives and improving quality of life for people with chronic conditions. But is there something we can do about drug prices? Some of these drugs cost tens of thousands of dollars per dose.
Roy: There’s a lot we can do. One of the biggest blind spots in the liberty movement is failing to see how high drug prices result from government distortions of the pharmaceutical market.
We have a good system for traditional “small molecule” drugs, the kinds that can be synthesized in a chemistry lab. The Hatch-Waxman Act of 1984 created a clear process for generic competition once patents expire, and that system works well. About 90% of prescriptions today fall under that framework, and competition keeps costs down.
The problem is that newer drugs, like biologic therapy, don’t fall under Hatch-Waxman. These are drugs made in living organisms, like engineered mammalian cells, often used for cancer or autoimmune diseases. Think of monoclonal antibodies such as Humira, the best-selling drug in the U.S.
Unlike small-molecule drugs, biologics can be shielded by dozens or even hundreds of overlapping patents, not because they’re vastly more innovative, but because companies can legally file trivial patents for minor tweaks. Instead of five or six patents, a biologic might have over 100. If a biosimilar (the generic equivalent) can’t get around just one of them, it can’t launch. That means years of expensive litigation and blocked competition, even for drugs that should face a normal market.
Too often, people on the right assume all patents are equal — that every patent represents legitimate property rights. But these are government-created monopolies granted by bureaucrats, and in the biologics space, too many of them protect market power, not innovation. Europe and Japan have higher standards for patent quality and allow more legitimate competition. We should do the same.
Right now, biologics make up just 0.4% of all prescriptions but account for 52% of U.S. drug spending. That’s the core distortion. Some members of Congress have tried to fix it, but reforms haven’t gone far enough.
There’s also this conventional wisdom — one even many in our movement accept — that we need high prices to sustain innovation. But we don’t say that about any other industry. We don’t argue that high energy prices are necessary for energy innovation, or that we need $10,000 cell phones to drive new smartphone technology. In every other sector, innovation means creating better products at lower prices.
Yet somehow, the pharmaceutical industry has convinced policymakers that unless taxpayers subsidize hundreds of billions of dollars of their revenue, innovation will die. That’s nonsense. Most genuine innovation comes from startups and biotech firms, not the giant incumbents like Pfizer or Merck. The big companies often buy innovation, they don’t create it.
Even if we cut drug prices in half, those entrepreneurs and investors would still do incredibly well. There’s so much money in the system that we’re seeing “too much cash chasing too few good ideas.” The economic reality is simple: the more you spend, the smaller the marginal return. Tripling the subsidies won’t triple innovation, it might only increase it slightly.
All this shows there’s plenty of room to cut waste and lower prices while still protecting true innovation in biotech and pharma.
What keeps you motivated to stay engaged in this space? Obviously, you write about many topics, but what drives your commitment to healthcare reform? Do you see any real openings or game-changers in technology or innovation, or are we stuck in this high-cost, mediocre-care model for the foreseeable future?
Roy: Earlier this summer, I spoke to a group of high-level conservative legal experts and activists about the future of the liberty movement. I asked the audience—about 150 people—to raise their hands if they believe the rising federal debt is an existential threat to America. Every hand went up. Then I said, “Keep your hand up if your day job is dedicated to solving that problem.” Every hand went down.
That’s why I do this work. I’m motivated because I believe the debt crisis is the greatest long-term threat to America’s future. My kids are nine and seven, and their adult lives will be shaped by the sovereign debt crisis we’re heading toward. In my view, we have maybe 10 to 20 years before the Treasury bond market fails.
If you truly believe this is an existential threat—on par with what the Soviet Union was during the Cold War—you must devote your mind and energy to solving it. And to solve it, you can’t just say, “The government shouldn’t be in this business.” You must build solutions that can get 60 votes in the Senate. That’s how we approach every issue at FREOPP: What’s the most pro-freedom solution that could actually get out of Congress?
We start with that question and work backward. Our vision is that you can expand individual liberty and free-enterprise innovation while improving life for people on the lower half of the economic ladder. If you can make housing, healthcare, or energy more affordable for ordinary Americans while reducing the deficit, that’s how you build consensus. Simply cutting benefits isn’t enough.
The good news is that healthcare is so expensive in America that you don’t even have to cut benefits to fix it, you just have to make healthcare less expensive. If costs fall by 50%, subsidies fall by 50%, too. The problem is the entrenched interests, and the drug companies, hospitals, and medical lobbies profit from keeping prices high. They always say, ‘If I can’t charge $6,000 for anesthesia instead of $3,000, I’ll go broke.’ Well, tough luck.” We need a healthcare system that serves patients and taxpayers, not one built to protect Ferraris in the doctor’s garage.
