A new regulation that would require pharmaceutical companies to disclose the list price of their drugs in TV ads. Sounds good for consumers, but it isn't.
A new regulation that would require pharmaceutical companies to disclose the list price of their drugs in television ads has been called a boon for price transparency and a win for consumers.
The policy, announced last week by Health and Human Services Secretary Alex Azar, was met with almost immediate backlash from the pharmaceutical industry, leading many to conclude that the Trump administration has taken a step in the right direction.
But opposition from "Big Pharma" does not necessarily mean a policy is good. Neither does repeated use of the word "transparency." Posting list prices in pharmaceutical ads will reinforce the worst aspects of our policy discussion, and could unnecessarily harm patients.
There's one big problem with this regulation: nobody really pays the list price of a drug. A wholesale distributor buys the drug from the pharmaceutical company, and then distributes it to pharmacies. The price they pay for the drugs — called the "wholesale acquisition cost" — becomes a drug list price.
But wholesale distribution marks simply the first step in a long, complicated channel that takes a drug from manufacturers to patients. When a patient goes to the pharmacy, the price they pay is determined by their insurance company, who has worked out a payment arrangement with the pharmaceutical companies, with the assistance of pharmacy benefit managers, who have negotiated rebates and discounts along the way.
Who Pays 'List Price'? No One
It's opaque and complicated, but the end result is simple: nobody pays the list price, and everyone pays something different. Supporters of this regulation have pointed out that the list price matters, since it's the starting point for the ultimately discounted price a patient pays.
This is true, but only in the sense that the original price of a dress you buy at the outlet mall matters: sure, it was the starting point, but when it's 75% off, you don't really care.
Many people have pointed out that some people pay the list price for drugs, specifically, the uninsured and those in high-deductible health plans. This is true. But this is not the type of reform that will relieve these patients of their burdens. In fact, it may even harm them in the long run.
Discouraging Patients
Without any other context, the looming presence of a high list price could discourage patients from seeking the treatment they need. If a patient is going to have to shell out the list price of a drug, it's better for them to find out in a conversation with their doctor, rather than in a TV ad. Unlike an ad, a doctor would be able to inform the patient of a cheaper generic or branded alternative.
Doctors are also able to offer patients a fuller picture of the trade-off between upfront cost and future health. Oftentimes, expensive drug treatments help patients avoid even more expensive and painful conditions down the line.
To use the most popular example of recent years, $84,000 may seem like a steep price to pay to cure hepatitis c, but it's much more cost effective than paying to treat the liver or kidney failure that could result if the disease went untreated.
None of this makes drugs more affordable for patients who have to pay for the full list price — but neither will this new approach. As I've written elsewhere, zeroing in on high list prices is an ineffective way to make medicine more affordable, since these prices don't always stay high, and can be driven down by competition from other drugs.
Drugs: Superficial Reforms
By mandating the inclusion of list prices in pharmaceutical ads, the Trump administration is putting them front and center in our policy discourse, shifting attention away from real reforms that will actually lower prices across the board.
This is a mistake. Rather than leaning on drug companies to lower list prices, HHS should continue to focus on streamlining the pharmaceutical supply chain, and encouraging the approval of generic drugs. The FDA is hard at work on that front, having approved 971 generic drugs in FY18, beating last year's record of 937.
If the Trump administration wants to quickly and unilaterally slash list prices, they should nationalize the drug companies, or join Democrats in their calls for price controls and profit ceilings. But if they want to have a real impact on making medicines affordable for patients across the country, they should abandon this ill-conceived regulation, and focus on policies that work.
This piece originally appeared in Investor's Business Daily
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Tim Rice is deputy director for health policy at the Manhattan Institute. Follow him on Twitter here.
This piece originally appeared in Investor's Business Daily