Drug Price Transparency – A False Panacea
There has been a recent bubble of political support for increased transparency into the pricing of pharmaceuticals. From Senator McCain’s “Fair Accountability and Innovative Research Drug Pricing Act of 2016” to several state-level bills in Maryland, Pennsylvania, Washington, Vermont (first to pass), and potentially more to come. This follows a series of made-for-TV-villains in the world of pharmaceuticals (see: Martin Shkreli, Heather Bresch, or Valeant Pharmaceuticals) who put a face or logo on an issue that has been plaguing the United States for many years: How do we determine a fair price for a drug while simultaneously incentivizing innovation?
I want to address the notion of drug price transparency as a real solution to the escalation of drug prices in the United States, as transparency has time-and-time-again been marketed by both political parties as the cure to problems in a market system of health care services.
DISCLAIMER: Before I begin, let me first say to those supporting transparency: “I write this blog post with love.” I understand you are fighting for a cause for more reasonable pricing mechanisms and it is one that I support. Go back and read anything I’ve written on the issue throughout my career before you jump to the conclusion that I’m your opponent.
Drug Companies Have Not HIDDEN Their Intention or Motives for Price Increases
My first reaction to proposed price transparency laws or regulations is shock mixed with confusion. “What on earth about Martin Shkreli makes you think he is scared of transparency?!?!” The guy has spent his entire career trolling people on various social media outlets and has gone on camera several times to explain WHAT he is doing and WHY he is doing it. Whether or not you agree with him is beside the point, the guy has been crystal clear in his strategy…and there is nothing in the current practice of drug regulation in the United States that can/will stop him. The extremely high price increases for DARAPRIM® were not illegal.
The strategic actions of for-profit companies are really not that hard to predict. Just go back to Michael Porter’s 5-forces and apply to brand, generic, and specialty drug markets…an exercise I make my students do in their P3 year. You don’t need their cost-of-goods-sold or operating expenses laid out to understand their actions. To me, the transparency efforts feel more like a political attack on one industry – albeit an industry that has made itself an easy target.
Transparency ≠ Perfect Information
In simple economic terms and general equilibrium theory a perfectly competitive market requires perfect information. In a simple consumer transaction, like a neighborhood lemonade stand, a business selling fresh squeezed lemons mixed with water and sugar served in a cup full of ice may charge a customer $1.00/cup. As a consumer (I like lemonade), I know what I am buying and I know the personal enjoyment (utility) and feeling I get after quenching my thirst on a hot summer day. I trade $1.00 worth of currency for this good, I drink it, and I move on.
I do not have to be prescribed lemonade by a thirst-expert who went to Thirst University and completed a 3-year thirst treatment residency at Johns Hopkins and became board certified in Thirstology. I do not pay a monthly premium to a company to pool my risk of getting thirsty with millions of other Americans with differing thirst-risk levels. During the Super Bowl, I do not see a slew of advertisements of happy people drinking fresh lemonade with tiny fine print about the warnings of too much sugar that oversell the benefits of lemonade and underreport the risks of lemonade. When I get thirsty, I also have the option of drinking water instead of lemonade (which would likely be the first line of therapy taught at Thirst University).
My argument is that health care is too complex to make the leap from transparency to perfect information. While I’m not opposed to transparency, I’m not confident that a drug company disclosing drug pricing information in a vacuum is enough for payers or the end user (the patient) to make a “rational” decision.
Sometimes Innovation Doesn’t Reduce Overall Spending
The pharmaceutical industry in the US is robust and successful in many cases. When a pharmaceutical innovation is discovered that reduces the need for a medical or surgical intervention we might expect spending on medical or surgical services to go down and spending on pharmaceuticals to increase. Simple, eh? Is that what happens? What if the market demand for surgeries isn’t constrained by the number of consumers but by the number of producers (surgeons)? If a drug that reduces the demand for surgeries by 50% but the actual utilization of surgeries only decreases by 10% (as surgeons now stratify those to drug and those who still need surgery), then the math simply becomes: “Is the drug spend offset by the surgery savings?”
What if by focusing on those who still need surgeries results in the same utilization (ie: budget for surgeries) such that the spending doesn’t change but now we are spending more on drugs? Is that bad? As a society, are we willing to pay for that? Will a “transparent report” of drug pricing determinations change the complexity of health care services in a meaningful way?
One thing that has scared me with a transparency push by individual states is a potential backlash where a manufacturer decides the costs of selling in one state (Maryland, Vermont, Washington, etc.) are more than the benefits (net earnings from sales in the state) and they decide not to sell to health systems in the state. Now, I understand this would be a publicity nightmare scenario, but I feel like it could be real in some circumstances. This is why I think a state-by-state strategy is dangerous, but I can understand why advocates are choosing this route (It is probably easier politically to get something done given the climate in Washington DC).
Another potential consequence to transparency involves real cost-effectiveness. What if a drug is found to be REALLY under-valued and thorough evaluation results in price increases for many generic drugs? Yes, $700 sounds crazy for an old drug like epinephrine, but is it really a bad value buy? Is it worth $700 to someone with severe allergies to have access to a handy epinephrine-injecting device? When we get into value, do we need to discuss willingness-to-pay and issues of equity that has plagued WTP arguments (ie: $700 to you may be different than $700 to Bill Gates)?
A long term consequence to shaming profits made in the pharmaceutical industry is forcing investors to other industries where they are free to make unlimited profits exploiting consumers…but without creating new drugs. I agree that our government has played an enormous role in advancing research but it is hard to deny the power of private equity. What if greed is a necessary evil and helps find the next big breakthrough?
Ok, Joey…if not transparency, then what?
I think drug pricing strategies will need to be multi-faceted to make a real difference. I do think that transparency plays a role, but only a small one. First, we have to decide on value. How should we value life added and quality of life added? Do we follow European models or build a modified framework for our population? Should the value put on health/life be the same for everyone in the population?
Next, we have to consider market barriers to entry. We have restricted market entry through patent exclusivity and other mechanisms intentionally to allow innovator companies a temporary monopoly. This has been a successful “carrot” but there doesn’t seem to be a stick to punish bad actors. We can statutorily change our rules around patent exclusivity and licensing to send a much stronger signal to companies who appear to collude or exploit their markets beyond some reasonable allowances.
Next, we can work to improve information and understand that it will never be perfect. With the caveat that the information isn’t perfect, we may be better prepared to regulate the market because we will concede where it fails the test for perfect competition. We need to continue improving instruction in health professions around the context of cost-effectiveness to provide our clinicians the tools to make better decisions around value (given we have decided on that value construct listed above).
We must protect individuals facing an inelastic demand for a health service (ie: No matter the price, they have to pay it). As long as a really sick patient NEEDS a service, the potential for charging whatever you want still exists. We have used the third-party payment model to create a principle-agent relationship and help as a safeguard, but when the principle has different financial incentives for different recommendations we create another problem (see specialty pharmacy, spread pricing, drug rebates). Until we address our safeguards in place for urgent situations with no other options…I’m afraid we will keep having these pricing discussions.