How 'price transparency' could affect high cost of US prescription drugs

  1. Drugs cost much more than in Canada, or Europe
  2. Argument that pharma companies fear public backlash against price rises
  3. Critic says state fines not high enough to act as deterrent

The cost of pharmaceuticals in the United States is one of the highest in the world (CNN), something that President Donald J. Trump has said his administration will address. And it’s one of the few things Democrat and Republican voters agree on (Harvard T.H. Chan School of Public Health).

CNN cited Nexium (Esomeprazole), a drug to ease acid reflux, which costs (an insurer) $215 (€182) per customer, whereas it is nearly one-tenth, equivalent to $23, in the Netherlands. A report by the National Center for Health Statistics on prescription costs in 2013 found that nearly 8 percent of U.S. adults did not obtain their medication as prescribed, while nearly twice as many (15.1 percent) asked a doctor for a lower-cost medication. A sizeable number of people buy medicine from other countries, despite this being mostly illegal (FDA). 

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Trump’s rhetoric on the issue has softened considerably since his first week in office, when he said pharmaceutical companies were “getting away with murder.”

The White House released a rough plan on May 11 to rein in drug prices, titled “American Patients First.” The policy recommendations did not include forcing drug companies to lower their prices, allowing cheaper imports to enter the market, or empowering the government to negotiate better rates for Medicare. All of these are methods used in the healthcare systems of other industrialized countries.

Stocks for U.S healthcare companies rose after “American Patients First” was released (CNBC).

However, there is one component of the “APF” plan that could trouble the pharmaceutical industry: price transparency.

The argument for price transparency is that drug companies might shy away from raising prices if they knew the public was watching. Exposing high prices is generally considered a more politically viable alternative compared to government forcibly lowering them (The Hill). But whether the theory is actually effective is unknown as it has only been tested at the state level.

At least 20 states have implemented some form of price transparency laws, according to the National Academy of State Health Policy, each with its own version of the concept.

American Patients First does not offer specifics on how transparency will be pursued at a federal level. Here is what potential legislation could look like based on what state houses have enacted in the past two years.

Announce and justify price hikes

California was the first state to pass a price transparency law in October 2017. It required drug manufacturers to give a 60-day notice to insurers when increasing a drug’s price above 16 percent over a two year period.

Politico reports that drug companies are so far complying with the law.

Teva Pharmaceuticals, for example, disclosed its plans to raise the price of an asthma inhalant by 49 percent.

While the law is less than a year old, there is so far no evidence that these mandatory advance warnings deter drug companies from increasing the cost of medication. Nor has there been a significant public backlash in California, although a pharma industry group is suing the state over the law.

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Dr. Walid Gellad, director of the University of Pittsburgh Center for Pharmaceutical Policy and Prescribing, approves the willingness of state houses to experiment with new laws where the federal government won’t. But he is careful to point out that transparency efforts should never be confused with a solution for high drug prices.

“I think just notifying us whether there’s a price increase, that’s not really going to have any effect I don’t think,” Gellad told WikiTribune. “Many of these state laws also have very low fines if they don’t report this data.”

Data is power. Expose the middle men.

Gellad sees more value in transparency laws that require the pharmaceutical industry to expose how much third-party players profit from consumers purchasing their medication. This includes Oregon’s law, passed in March 2018, which features a requirement for drug companies to list a breakdown of where the money goes for specific drugs.

It is already well reported that U.S. pharmaceutical companies spend 19 times more on marketing their drugs than they do researching and developing them. This statistic is often used by reformists when confronted with the argument that high drug prices are needed to fund research and development of new life-saving drugs.

Graphic from Natrual Society. Produced by Dadaviz. Data from Deloitte

What’s less known is the role of “pharmaceutical benefit managers” (PBMs). The PBM industry began as a way to help insurers negotiate better pharmaceutical prices from sellers. The “big three” PBMs in the United States is Express Scripts, CVS Health, and OptumRx.

But these PBM negotiators have consumed an increasing amount of healthcare dollars in the form of “rebates.” Take the example of EpiPen, the American poster child of how little consumers or the government can control the seemingly arbitrary price fluctuations of life-saving medication. A two-pack of the emergency injection for severe allergic reactions went from roughly $100 in 2007 to over $600 in 2016. (Bloomberg).

Mylan, the manufacturer of EpiPen, defended the price hike, arguing that the company only receives $100 out of the $600 price tag. Mylan CEO Heather Bresch defended her company in an interview with CBSNews saying that “there’s at least five entities touching that product” before it reaches consumers.

Naturally, PBMs dispute the notion that they are responsible for high drug prices. Express Scripts told Bloomberg that despite profiting from the system, PBMs are the only factor preventing drug companies from charging whatever they want. Drug spending only went up by 1.5 percent in 2017 — the lowest increase in the past 24 years, according to an Express Scripts report.

It is not known exactly how much PBMs profit from pharmaceutical sales.

An op-ed in The Hill estimated that PBMs received $300 out of the roughly $600 list price for EpiPen sales but did not list its source. PBM rebates are difficult to report because they often require and enforce confidential contracts with other healthcare companies according to a class action lawsuit against CVS Caremark. Express Scripts forced a PBM contract to be removed from an Axios story after complaining to the cloud company hosting the document that it violated copyright law.

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Oregon’s law removes much of the secrecy behind PBMs’ complicated role in the supply chain of pharmaceuticals, by requiring that all rebates be made public.

Gillad, director of pharmaceutical pricing studies at the University of Pittsburgh, says that exposing these rebates is the most “interesting” aspect of transparency laws.

“Whether it’s around R&D … whether it’s because the rebates are large and they’re getting larger. I think it can help identify the specific problem that’s leading to the price increase in specific situations and then no one can really deflect blame.” Gillad said in support of Oregon’s version of price transparency laws.

Report on other state transparency efforts. Use the National Academy of State Health Policy to learn about similar bills.

Transparency might not be enough

While conservative politicians often support price transparency as a less invasive way to address drug prices, the pharmaceutical industry has opposed the legislation. PhRma, a drug manufacturer industry group, is suing the state of California for its transparency law. NPR reported that pharmaceutical companies hired 45 lobbyists to stop or water down California’s transparency efforts.

Lobbyists also targeted Oregon during their legislative process. Eugene Register-Guard, a local newspaper, reported that pharmaceutical companies hired a lobbying firm to call senior citizens in Oregon and give them “misleading” information on the bill.

“We’re hoping the whole disclosure thing might work a little bit towards [lowering prices],” Oregon State Senator Lee Beyer said. “But I want to be clear, there’s no hard hammer on it. I mean we really don’t have an ability under current law to say ‘no.’”

I don’t think [pharma companies] need to make hundreds or thousand percent profits. – Lee Beyer

Despite co-sponsoring the transparency bill, Beyer rejects the idea that these transparency laws hurt drug manufacturers. For him, it’s a distant plan B for legislation that could have actually reduced drug prices.

Asked how the federal government could learn from Oregon, Beyers said he would do price controls and start negotiating for Medicare and Medicaid.

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Price controls are government mandates that would force pharmaceutical companies to keep costs at approved levels. However, many healthcare economists see price controls as an extreme form of government intervention that could stifle innovation. (Science Daily).

Allowing the government to negotiate drug prices for Medicare and permitting foreign drug imports are considered more politically palatable, though still rejected by the Republican congress (The Hill). However, most Americans support these measures, according to a Harvard University 2016 poll.

“We don’t want to keep [drug companies] from making a reasonable profit, and that’s the way the system works and that’s how you get new drugs, but I don’t think they need to make hundreds or thousand percent profits,” Beyer said.

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