The specter of drug pricing can’t seem to disappear from public discourse. On the one hand, this isn’t a bad thing – wanting to tie drug prices (and healthcare prices overall) to some measure of value is a noble goal. But the devil is in the details – and Vermont’s attempt to “do something” on drug pricing moves the needle in the wrong direction.
“As with other areas of our healthcare system focusing on list prices is a mistake. No one (except the uninsured) pays list prices.”
The non-controversial-sounding bill – “An act relating to prescription drugs” – was signed by Governor Shumlin several days ago and sold as “healthcare transparency” legislation. One part of the bill does indeed deal with transparency. Health insurers are required to make information on their formularies easily available and hospitals are required to make cost-sharing information available to affiliated physicians.
What has gotten the most media attention, however, is the bill’s new requirement for justification of drug price increases. Here’s how it works: the state will identify up to 15 high-expenditure drugs with (list) price increases of 50% over the past five years, or 15% over the past year. The state’s inspector general will then require drug manufacturers to provide a breakdown of factors affecting increases in the list price and how much each factor contributed to the increase in list price.
There are two major problems.
For starters, as with other areas of our healthcare system focusing on list prices is a mistake. No one (except the uninsured) pays list prices. Focusing on the so-called “wholesale acquisition cost” (WAC) is entirely wrongheaded. The WAC price might be compared to the so-called “chargemaster” price at many hospitals – a hospital might charge $20 for a Tylenol, but would rarely get paid that much. That’s because insurers negotiate significant discounts off of these list prices.
A similar story plays out in pharmaceuticals. Pharmacy benefit managers (PBMs) and insurers routinely negotiate discounts off of list prices for drugs – this is, in fact, one of their main roles. Indeed, it’s been reported that the average discount for Sovaldi and Harvoni (two highly-effective, but nominally expensive hepatitis c drugs) has fallen close to 50%. As I’ve written elsewhere, the major discounts that PBMs negotiate (in the form of rebates) generally don’t flow through to patients – this means that typically, when a patient pays their coinsurance for a drug, it is often applied to the list price. But this is more an issue relating to the PBM rather than pharmaceutical industry.
The bigger issue, however, is that this demand for “transparency,” ignores what actually determines a drug’s price. Drug companies, because of a monopoly granted by patents, will charge the maximum that payers (insurers, the government, patients, hospitals etc.) are willing to pay. (When the patent expires, generics flood the market and drag down the price significantly.)
As research has recently indicated, for oncology drugs, new indications can also work to increase prices. And new indications can sometimes, though not always, be valuable.
“Demand for "transparency," ignores what actually determines a drug’s price. Drug companies... will charge the maximum that payers (insurers, the government, patients, hospitals etc.) are willing to pay.”
The high cost of developing a drug, too plays a role. At $2.6 billion, the net present value of a particular drug at a particular price may become negative, in which case it doesn’t get developed. To the extent that this reduces competition, it also reduces pricing pressure on pharmaceutical companies.
All of this is to say that it isn’t clear what Vermont’s regulators ultimately hope to achieve. There are cases where manufacturing problems or shortages might raise the price of a drug – though this is likely to be the exception rather than the rule. Based on Vermont’s prior legislative escapades – looking to allow the importation of drugs from Canada – it would seem that legislators simply wantlower drug prices across the board (with an added bonus of shaming drugmakers, of course).
That’s a mistake. We shouldn’t want lower drug prices for the sake of having lower drug prices. Instead, the goal – as most health policy researchers will note – should be to tie prices across the entire spectrum of healthcare closer to the value they provide.
Instead of demanding justification for price increases, legislators could approach the question of prices more tactfully. For highly-effective but expensive drugs, healthcare loans (for the private sector) or bond offerings (for the public sector, as my former colleague Paul Howard has suggested) could be a useful approach. For drugs that are effective for one indication but not another, indication-specific pricing (which could be piloted by public programs like Medicaid) is a good alternative. Many other ideas are out there for reform-minded legislators to peruse. They may not be as catchy and media-friendly, but would arguably push us down the right path on drug pricing.
This piece originally appeared on Forbes
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Yevgeniy Feyman is an adjunct fellow at the Manhattan Institute. Follow him on Twitter here.
This piece originally appeared in Forbes