What Is “Competition” Anyway?

You know the word “travesty”? People who want to sound smart sometimes use it instead of tragedy, as if it’s the smart person’s version of tragedy. But it’s not. They use the word even though they don’t know what it actually means.

People do the same thing with “competition.” Many think it’s either the solution to everything or the cause of all evil . . . even though they don’t seem to know clearly what it means.

It turns out, I can’t fault them. This is a longstanding issue. Maybe I’m just ignorant of some classic economics textbook that has the grand master definition in it (you’d think they would have covered it in the econ classes I took), but man is it hard to find a definition of this word! I was especially hoping to find one from at least one of the classic economic thinkers. This is the best I could come up with . . .

Adam Smith didn’t use the word very much. Here’s the main example of how he thought of it, taken from The Wealth of Nations, Book IV: “The competition of producers who, in order to undersell one another, have recourse to new divisions of labour, and new improvements of art, which might never otherwise have been thought of.” So, in his mind, competition was simply improving manufacturing processes to undersell competitors?

And Joseph Schumpeter, who even still has a type of competition named after him (“Schumpeterian competition”), didn’t offer up a definition that I could find either. The closest thing is what he wrote in Capitalism, Socialism, and Democracy: “But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)—competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” He’s taking the term as a given and focusing on a specific type of it–the type related to how new innovations impact competition.

Even Michael Porter, in his book Redefining Healthcare, never provides a definition. He says things like this though: “The way to transform health care is to realign competition with value for patients. Value in health care is the health outcome per dollar of cost expended. If all system participants have to compete on value, value will improve dramatically.” He felt the need to define value, but never competition, and, like the others, took the term as a given.

And I’m completely skipping over all the definitions of “perfect competition,” which describes everything around a special case of competition without actually defining it either.

How about Wikipedia? It at least offered a definition! In the article Competition (economics), it says, “Competition is a scenario where different economic firms are in contention to obtain goods that are limited by varying the elements of the marketing mix: price, product, promotion and place.”

Competition is a scenario? And the main focus is that firms are trying to obtain goods? This one sounds really smart, but I disagree with it. I also believe it doesn’t facilitate a clear understanding of the concept.

So it’s time I offer up my own definition. Maybe I’ll change it over time as I learn more. But for now, this is what I’ve got:

Competition is a state in a market where there are multiple companies trying to win more profit by convincing potential customers to choose their product or service because it will meet their needs in a higher-quality and/or lower-priced (i.e., higher-value) way than other companies’ offerings.

I’ll unpack that.

First, it’s a state of being. Markets can exist in a state of competition or not. Really, it’s a continuum from no competition at one end to perfect competition at the other end. But the bare minimum needed for it to exist is for there to be multiple companies fighting for limited profits, which are the prize. If this is a non-profit environment, then we’ll call profits “surpluses.” Same idea. And to win those profits, they need to convince potential customers to choose them over their competitors. There’s always a mix of strategies–high-profit low-quantity vs. low-profit high-quantity–but the end goal with all of them is to win the most profit. I recognize that more and more companies are “mission driven” rather than “profit driven.” That’s great and all–I guess they’re willing to give up some profit to achieve their mission. But the stark reality is that they need to earn enough money to continue achieving their mission, which means they still have a strong profit motive if they want to sustain and grow.

I’m deliberately not defining which companies count as being in a market because it depends on the needs of people. For example, Ford’s new F-150 Lightning (an electric vehicle that can even use its battery to power your house) technically is filling the same need as people shopping for an emergency back-up generator, which means for that customer segment Ford is competing with generator companies. Competition often spans the traditional boundaries of markets.

And I said “convince” potential customers because people make a purchase decision based on the information they have. It’s not enough to be objectively better in every respect. It only matters if you convince people who are looking for a solution to fill their need. Long-term, yeah, you generally need to actually be higher-value to keep customers, at least if there’s enough information available to potential customers to make the market somewhat transparent.

So there you go. An actual attempt at a definition of competition. And, thinking about it now, isn’t it a wonderfully desirous state to strive for? I hope this definition is useful in helping you think about what you are meaning when you use the word.

Quotes from Pharmacists about Pharmacy Benefit Managers

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There are a few more papers on pharmacy benefit managers (PBMs) that I want to read at some point so I can complete this area of study (for now). But today I want to share a few quotes about PBMs that anonymous pharmacists wrote when I was having some of my pharmacist friends ask their other pharmacist friends:

“Just let him know every pharmacy has an AWFUL relationship with PBMs.”

Multiple pharmacists used the same word, “theft,” when describing PBMs.

“All I can say is I don’t know directly how PBMs make their money other than charging companies high prices and negotiating pharmacies to make very little in comparison.”

“I don’t remember the exact details as far as $$ amounts but this example is true. We had a Tricare patient come into our pharmacy upset after looking over his health statement from his insurance company and seeing if we really charged his insurance $200 for a product.  We looked over everything on our end and learned the product cost was $20 and our profit was $7, so the total collected was $27.  This means that the PBM chose to charge the government $200 and kept $173. Again the $$ may be a little skewed but I recall the  dollar amount the PBM paid itself was significant. Adding more middle men doesn’t decrease costs it increases them.”

“Seriously, and they are not transparent! They don’t give the pharmacy access to those numbers, they don’t give us access to the contracted costs. When contracted costs change, we aren’t notified. Then there’s DIR fees to add into the mix. They try to put gag orders on pharmacies, threatening to throw them out of network if they communicate about any of it. They just want us to sit down, shut up, and take whatever they give us. And they don’t even tell us what they’re giving to us! There’s no negotiating.”

Clearly there are some pretty adversarial relationships between pharmacies and PBMs! But remember that this doesn’t reflect all pharmacists’ opinions on the topic, so don’t use it to adjust your prior too much, but my sampling of friends (and friends’ friends) had pretty uniform negative responses about PBMs. This may be a reflection of pharmacists who run independent pharmacies feeling powerless against PBMs because they have almost no bargaining power when they are up against these juggernaut PBMs. This is how bargaining power works–the bigger guy on one side of the table can command the lion’s share of the profit when negotiating with the little guy sitting across from him.

The Cheapest Way to Own a Car

I published this article last month on the White Coat Investor blog, and I decided to share it on here as well for two reasons: (1) it’s a really fun analysis with a surprising conclusion and (2) I don’t usually don’t get to share my quantitative efforts as much on here.

My favourite comments on it were these ones:

“After reading the article, I went back to see what the author did for a living. I was sure he must be an engineer or CPA. I had always assumed the correct answer was buy used and keep it forever. Thanks for writing it.”

“I don’t read many posts that on their own will change some of my behavior for the rest of my life. But this one will. Thank you.”

Back to our usual programming tomorrow . . .

Helping Patients Choose Higher-Value Providers


Last week, I wrote about how quality metrics are misused by healthcare reformers. They’re almost exclusively tied to bonuses or penalties from insurers. In other words, they’re used to increase or decrease the price providers get paid. This is a form of administrative pricing, which is a super economically inefficient way to set prices. And I proposed the alternative use of quality metrics–to help patients choose higher-value providers.

We give people quality metrics and they seem to generally do a good job shopping for the best value in pretty much every other industry, which drives competition over value. So why do we fail so miserably in healthcare?

The first problem is that healthcare is missing the thing that motives people to shop around for the best value: their money is on the line. I wrote about this a couple weeks ago. We need people to pay a little more if they choose a higher-priced provider. But when prices are opaque or unknowable beforehand, or when their insurance plan makes them pay the same regardless of the provider’s price (or if the insurance plan is complex enough that the patient doesn’t understand that they’ll have to pay more if they choose a higher-priced provider), people don’t perceive that their money is on the line. In that last sentence, I just listed four issues preventing people from actually caring what the price is!

And then there are the issues of having only one option (like in a rural area) and non-shoppable services (like during emergencies) and non-shopping-when-you’re-already-established-with-a-provider. Yeah, there are a lot of reasons people don’t shop for prices in healthcare! But in spite of all that, there are some good studies that show that people will actually shop for services when all the stars align.

I know that even if people have a hard time knowing prices beforehand, they theoretically could still shop just as vigorously for the highest quality.

But I think there’s something that happens when people can’t shop for price that sorta stops them from thinking about shopping for quality too. I haven’t seen any studies that prove this, but I suspect it’s a thing.

So let’s talk about the people who say, “Well if I don’t know what I’m going to pay, I might as well try to find the best quality option.” They use a variety of sources since there isn’t one single well-known and useful quality source out there. Usually they rely on recommendations from their doctor or their friends and family. If that person had a good experience, that’s a reliable indicator of quality, right?

Or maybe they decide to be brave and try Googling quality metrics. They’ll find something, certainly. But chances are they’ll find quality metrics that aren’t super relevant to what they actually care about. For example, maybe they’ll discover Medicare’s Care Compare website. What does 3 stars even mean? Even drilling down, how useful is it to know that a hospital’s safety is “below the national average” in 2 out of 8 metrics? How does that get weighed against a high recommendation of the hospital from a family member? Or, is that quality rating ignored because the hospital’s lobby is spacious and it advertises meals prepared by well-known chefs?

Compare the relative uselessness of those quality metrics to the example of Seattle’s Virginia Mason Health System when they were redesigning their low-back pain care pathway. They figured out that people care most about how soon they can get back to work (it’s expensive to live in Seattle, if you didn’t know) and, among other changes, made same-day appointments available. This was the quality metric people cared about, and their low-back-pain market share doubled.

After reading all these barriers to people shopping for the best value in healthcare, I hope you can see that (1) this problem is perfectly explainable and (2) it’s totally fixable. Can someone please tell the Medicare administrators that most of their current efforts at “value-based purchasing” are going to be close to useless? And tell them to look at getting rid of some of these barriers to patients choosing high-value providers instead.

Pharmacy Benefit Managers – Index of Posts

I’ve written enough posts about PBMs that I’m adding this index so they’re all easy to find.

Pharmacy Benefit Managers: Kind of a Mystery to Me

Why Does GoodRx Exist, and How Does It Work

I’m Still Confused by PBMs But Trying to Fix That

Maybe This Is How PBMs Started Getting Kickbacks?

Is the pharmacy benefit manager market competitive?

A Brief History of Pharmacy Benefit Managers (How They Became the “Shady Middle Men” in the Drug Market)

How Pharmacy Benefit Managers Are Getting Away with More than They Should (And a Solution?)

PBMs Are Using the Same Strategy as Credit Card Companies

Quotes from Pharmacists About PBMs

The True Usefulness of Quality Reporting Is Misunderstood

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Last week I wrote about how cost sharing is misunderstood. This week I’ll continue in the same vein and talk about the same thing but related to quality measurement and reporting.

Quality measurement and reporting is becoming a pretty big thing. Just look at all the different Medicare programs (the big ones being MIPS and APMs) trying to achieve this thing they call “value-based purchasing” (which, in their estimation, seems to mean pretty much anything other than straight fee-for-service reimbursements). These programs involve lots of quality reporting requirements, and then compensation is directly tied to those quality metrics, usually through bonuses for high performers.

But this is the wrong way to use quality metrics.

Before I explain why I believe this is the wrong way, I need to clarify what my goal is with healthcare reform. I am interested in improving the value (Value = Quality / Price) our healthcare system delivers.

This is usually the part where people say, “If you want to improve value, you’ll make a lot more progress by preventing people from getting sick in the first place, so you should focus your efforts on public health initiatives!” Or, others will say, “You need to work on getting more people access to the healthcare system. Solve this issue first, then you can figure out how to improve the system’s value!”

I agree that those are very important issues. And I believe we need to work on both of them as well as this one of improving the value the system delivers at the same time. So I’ll keep writing about these things and figuring out how to fix our healthcare system in all these ways.

Anyway, let’s think about what is going on when a provider does a great job and has really high quality metrics and gets paid bonuses (say, 5% or so on top of what Medicare would otherwise have paid them) as a reward.

If our goal is to improve value, what we’ve just done is taken the higher-value providers and increased their price, which means their value has dropped back down to everyone else’s. Sure, this incentive has gotten us better quality for more money, and yeah eventually we’ll probably have higher quality overall, but it’s going to be at the cost of a lot of consternation of providers as we repeatedly take away their quality bonuses when we raise standards. Overall, this quality bonuses idea is just a frustrating and generally ineffective way to improve value. But I understand why it’s so popular–it’s an obvious way to encourage value.

Is there an alternative? Of course. We need to find some way to reward providers for providing extra quality. But how we do that, that’s the question.

What if we could find a way to get more patients to choose those higher-value providers? This would reward them with more profit, and now the providers with lower value are losing out on money because they’re losing market share. There would be no administrators at fault when a provider makes less money. No top-down program decisions to blame. PLUS, more patients would be getting higher-quality care immediately. That’s a pretty great system.

So, instead of using quality reporting to give administratively determined bonuses, we need to use them to help patients identify the best-quality providers so they can choose to receive care from them. This would involve measuring very different quality metrics–ones that patients actually care about.

Can we do it? I believe we can. There’s a lot to how we could make this happen, and I’ll talk more about that next week.

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