Issue No. 10: The States as Drug-Price Regulators: A Bad Idea That's Catching On

Who regulates pharmaceuticals in the United States? If you answered, “The federal government, of course,” then think again. In the past two years, according to the National Conference of State Legislatures, 46 states have enacted prescription-drug laws, and 2,200 bills have been filed and are awaiting action. The range is broad and includes such areas as regulation of local compounding pharmacies, but some legislation relates to pricing. 

This glut really has no public-policy justification. Congress gave the federal government jurisdiction over practically all aspects of pharmaceutical research and development, safety, approval, manufacture, marketing, and distribution. It is these activities that, in the end, influence competition, the key determinant in pricing.
 
The rationale for state jurisdiction in setting the prices of pharmaceuticals – or almost anything else, for that matter – is flimsy. Federal courts have ruled against previous attempts. In addition, price controls at any level of government have consistently failed, creating unintended consequences like gas lines. U.S. Rep. Tom McClintock (R-Calif), put it well, “Price controls always sound good in theory – but in practice they always create shortages of whatever commodity is being controlled.”

But that has not stopped state legislators.

‘Transparency’ Laws

While Maryland is currently trying to set drug prices directly by giving its attorney general authority to decide which increases are “unconscionable,” most states are more subtle. Particularly popular are “price transparency laws,” which require manufacturers to file reports on the cost factors – many of them proprietary – that are believed to determine pricing. 

The idea is not to give patients information they need. Instead, according toAmeet Sarpatwari, a professor at Harvard Medical School, the aim is to arm lawmakers with proprietary details so they can enact more sweeping policy changes aimed at trying to set prices either directly or indirectly by, for example, keeping certain drugs out of Medicaid formularies.

Consider New York state. The Partnership for New York City, a network of business leaders, opposes a drug-price-transparency proposal in the state’s 2017-18 budget because it would require companies to give up “trade-secret information on pricing, sales, marketing, research, development and clinical trials.” The New York Department of Health would then “be authorized to use this information to set benchmark prices on drugs and to mandate surcharges and rebates on drugs sold at higher prices.”

The goal of Gov. Andrew Cuomo’s proposal, according to the New York Daily News, is quite simply “to control the price of prescription drugs.”

The Partnership calls the proposal an “industry-killing legislation,” adding in a Feb. 7 memorandum, “New York can’t have it both ways. We can either enact politics that attract and support the life sciences industry or impose restrictions that make it difficult to build companies and create jobs here.” 

Or consider Pennsylvania, where Tony DeLuca, a Pennsylvania legislator. Quoted in the Wall Street Journal on a bill he proposed for his state, he said, “We need to have some transparency. I’m hoping it achieves lower health care costs.” 

But such laws, which originated in Vermont, may have the opposite effect. The detail that some legislators are seeking is an expensive distraction for the manufacturers to gather and counter-productive for patients, who may get stuck with the extra administrative costs. In addition, they do nothing to improve the access of consumers to prescription drugs. 

Patients Need the Right Information,
Not the Proprietary Business Data That Legislators Are After

Patients do, in fact, need more information – facts that can help them make informed decisions about their health care. If the goals are better care and lower costs, then legislators should focus on getting information to achieve that purpose. How about enhancing the collection and integration of claims and clinical data across all the payers in a state? That way, we can all identify the underlying drivers of costs and assess the comparative value of each treatment.

The questions that patients really need answered are ones like this: How much clinical value does a medicine (or more broadly, a medical treatment) provide? Will the treatment relieve my symptoms? Save my life? The question for policy makers is: Will this treatment help patients and lower costs for society as a whole? A focus on the price of manufacturing a pill or buying an ad is a diversion, and a costly one besides.

DeLuca, a Democrat who chairs the Pennsylvania House Insurance Committee, may have inadvertently revealed the true beneficiaries of the law in an interview in February with Healthcare Finance. “We’re not talking about price controls,” he said. “We are asking to make sure the insurance companies are not being ripped off.”

Insurance companies have their own business relationships with drug manufacturers. Getting legislators to tip the scales in their favor, may benefit insurers’ shareholders, but it does nothing for patients.

Anyone who recognizes the basics of economics knows that prices are not mainly determined by cost inputs but by value to consumers and the power of supply and demand in a competitive environment. Lady Gaga after all, does not price her concert tickets based on her bills for singing lessons. 

Structural change is what is needed – and this is where the right information can play an important role. The U.S. requires models that can help us shift from fee-for-service medicine (where payments are based on inputs) to value-based arrangements (where payments are based on outputs). That’s for all services – not just prescription drugs but hospitals, nursing homes, and doctors’ services. All health-care stakeholders have a role to play in developing a high-quality, cost-efficient system.

Price Gouging?

The Maryland price-gouging bill takes a more direct approach, though it’s doubtful many states will follow. If the legislation passes, Maryland would be the first state in the nation to give its AG the power to take pharmaceutical companies to court for price gouging,” according to the Baltimore Sun. 

Such legislation betrays an ignorance of how prices are actually determined in the sector. Insurers and PBMs, both with enormous clout, negotiate with manufacturers of medicines. Introduction of generics after patents expire and competition among branded drugs themselves serve to lower drug costs over time. It is a process wholly different from what happens in other parts of the health-care system, where, for example, rising labor and facility costs increase prices year after year. 

As we noted in our last newsletter, Express Scripts, a giant PBM, reported recently that the unit cost of traditional drugs for its members actually fell in 2016 compared with 2015 and that, overall, unit costs rose just 2.5%. By contrast, Cleveland Clinic, a respected hospital chain, recently reported that salary and benefit costs rose 9.3% over the year-earlier period, even though hospital admissions fell.
 
Undoubtedly, there are problems with specific parts of the market – particularly, with specialized generics, which, because of regulatory deficiencies, have little or no competition. Scott Gottlieb, Trump Administration’s nominee as FDA Commissioner, understands that problem and, if approved, will certainly address it. The FDA is the right level to tackle drug pricing – through smoothing and speeding the approval process.

Prop 61: Another Try at Price Controls

Concerns about prices are completely legitimate but the remedies that states are proposing are ineffective at best and counter-productive at worst. Imagine what will happen to research and development and other pharmaceutical investments in states like New York and Maryland, if their punitive measures take effect. 

Unintended consequences were a major reason that voters in California last November rejected Proposition 61, which “Prohibits state agencies from buying any prescription drug from a drug manufacturer at any price over the lowest price paid for the same drug by the United States Department of Veterans Affairs.” Californians apparently realized that, if the proposition succeeded, prices for VA drugs might rise, and veterans themselves would be hurt the most. Other possible consequences: drug formularies would become more restricted, limiting Californians’ access to medicines, and drug companies might move their facilities elsewhere.

This is not to say that all state measures are bad ideas. If disclosure focuses on information that  truly helps patients and their providers make good health-care decisions, then the facts can save lives. Ultimately, solutions require the cooperation of all health-care stakeholders, not just politicians fixated on drug prices, to create a truly high-quality, cost-efficient system.


Dreier Urges Common-Sense Economics to Constrain Health Costs

Meanwhile, a former congressman, David Dreier, a Republican who chaired of the House Rules Committee for eight years, provides a welcome antidote to more hysterical discussions of rising health-care costs in an opinion piece last week in The Hill. It is a plea to deploy economic common sense.

Dreier has been deeply involved in health policy for decades. He introduced the first bill advocating Health Savings Accounts 30 years ago. He starts his piece by making a simple point that is lost on many policy makers – or perhaps simply unknown to them: pharmaceuticals represent only about one-tenth of total health spending. By contrast, hospitals account for one-third and outpatient services (mainly physicians and other professionals) account for one-fifth.

“Why is it, then,” he writes, “that so many politicians focus on drug costs and not on hospital costs? The average one-day stay in a U.S. hospital now costs $5,000. That’s seven times as much as in Australia. Heart-bypass surgery averages $78,000, compared with $24,000 in the U.K.”

Dreier continues:

One reason for the obsession about drug costs may be political; every member of Congress has a hospital in the district but only a few have drug manufacturers. Another is the way health insurance works. Americans pay out of pocket just three percent of hospital costs, but, because of high deductibles and co-pays, 15 percent of pharmaceutical costs. 

This insurance system is counter-productive. It discourages the use of lower-cost medicines that can keep patients out of higher-cost hospitals. Every additional dollar spent on diabetes medications, for example, saves seven dollars in other medical costs. And if a drug were invented to prolong the onset of Alzheimer’s by just five years, the estimated savings to the health care system would be $367 billion. 

Hospital, physician and clinical spending rose $87 billion last year; drug spending, $13 billion. If you were the CEO of any business, where would you put your efforts to control costs?

Dreier finds his solution in the eternal verities of economics. The way to lower prices is to raise supply and lower demand. On the supply side, the U.S. can speed up drug approvals and “have more well trained professionals provide care now administered only by physicians.”

The demand side may be even more important. One point Dreier makes: “Americans are a lot sicker” than citizens of other countries – often because of unhealthy living. If we could get healthier, we would reduce the demand for health-care services.”

Dreier, as usual, takes a fresh approach. He’s on to something important.