Can Drug Price Transparency Keep Costs Down?

(Heidi de Marco/KHN)

Will forcing drugmakers to disclose big price hikes and new high-cost treatments help keep medications affordable for consumers?

That’s the premise behind legislation considered this year in roughly a dozen states, including California. In addition, President Barack Obama proposed in his 2017 budget that the Department of Health and Human Services require drugmakers to disclose their research and development costs.

But some researchers and consumer advocates say these “drug price transparency” measures likely won’t bring spiraling costs down by themselves — other policy changes will be needed.

“By themselves, I don’t think it’s likely the [measures] will have a big impact,” said Chapin White, a senior researcher and health care cost transparency expert at the Santa Monica-based think tank RAND Corp. Chapin said getting more information is only part of deciding “what’s a fair amount to pay” for pharmaceuticals.

He suggested, however, that such laws could prevent pharmaceutical companies from raising prices “for no reason.”

On Wednesday, California state lawmakers will review a bill that would require pharmaceutical companies to give advance notice if they plan to introduce drugs that cost $10,000 or more (per year or per course of treatment) or raise the price on existing medications by more than certain percentages. They also would be obliged to justify those costs within 30 days — although the legislation is not clear on how they’d need to do so.

The bill also would require health plans to report annually how much they spend on prescription drugs.

Proposals in other states have included requiring pharmaceutical companies to report closely held research and development costs to government agencies, creating pharmaceutical review commissions and allowing government health programs not to cover certain high-priced drugs.

Most of the measures have stalled this year, except in California, New Jersey and Pennsylvania, according to the National Council of State Legislatures. Supporters of such legislation attribute their failure to proceed in most states to strong pressure from the pharmaceutical industry.

Rising prescription drug costs have been hotly debated, especially since Martin Shkreli, a now-disgraced pharmaceutical executive, obtained the manufacturing license for a lifesaving antiparasitic drug and last year hiked its price by more than 5,000 percent. With that episode as an extreme example, policymakers have been searching for ways to prevent price gouging.

Supporters of the California bill say advance notice of price increases can help drug purchasers negotiate the best deal for consumers.

But drug companies say the legislation could prompt “hoarding” by large pharmacies because once they learned of a price hike, they could buy up the existing cheaper supply.

The industry says transparency measures threaten their fundamental business interests.

“Disclosing that information is revealing very commercially sensitive information to a large population, which could frankly undermine competition and yield unintended consequences,” said Priscilla VanderVeer, deputy vice president of state communications at the Pharmaceutical Research and Manufacturers of America (PhRMA).

VanderVeer said a drug’s sticker price does not give an accurate picture of what it actually costs, since the price is almost always negotiated down.

Chapin, the RAND senior researcher, noted that current patent rules give drugmakers the power to charge high prices as a reward for innovation.

“Through the system of patent protection, we’ve created monopoly power [for] pharmaceutical companies,” he said, but added that he can’t imagine that system being scrapped.

Instead, he said, drug price discussions should focus on the “reasonable bounds” of pricing, and the cost of a medication should reflect how much it advances the practice of medicine.

“There has to be some limit,” said Chapin. “It shouldn’t be the case that [a] firm can just charge a sky’s-the-limit price.”

Ameet Sarpatwari, a professor at Harvard Medical School, said transparency measures could arm lawmakers with information to help them enact other, more fundamental policy changes. Actually controlling drug prices would likely require federal action, he said, such as allowing state Medicaid programs to keep high-cost drugs off their formularies.

California Public Employees’ Retirement System (CalPERS), which in 2014 spent $1.8 billion on prescription drugs for its 1.4 million members, says it already benefits from its own efforts to collect pharmacy spending information from health plans every year. That data has helped the agency decide how much more to charge enrollees for drugs and to determine the list of drugs it covers.

CalPERS supports California’s transparency bill, calling it a first step towards bringing drug prices down.

“You can’t ask the questions relative to costs when folks don’t know what the costs are,” said Doug McKeever, CalPERS’ deputy executive officer for benefit programs policy and planning. “It gives us opportunities to collectively say, ‘how can we work together collaboratively to address these cost increases?’”

For now, CalPERS’ cost-cutting measures have helped protect the agency’s bottom line primarily by requiring members to pay more or have less choice. But the agency believes more widespread drug price transparency might allow health care payers to negotiate better prices later on, easing the pain for consumers.

Public Citizen, a national public advocacy group, supports state transparency measures as well, but it says they should have enough teeth to “open up [the] black box” of research and development costs. Without that, policymakers would not have adequate information to vet industry claims about costs, said Steven Knievel, an organizer with Public Citizen’s Global Access to Medicines program.

California’s drug price transparency measure would be more useful, Knievel said, if it required disclosure of such costs, which some other state measures have called for.

If policymakers don’t push to make information available as broadly as necessary to change the drug price conversation, Knievel added, proposed transparency measures risk becoming no more than “PR for policymakers that want to be seen as tough on the drug companies.”

The group is also pushing for federal action to suppress drug prices. It says it wants government officials to step in when drugs developed using public funds are not sold on “reasonable terms.”

Categories: Capitol Desk, Health Care Costs, Health Industry

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