To lower drug prices, we should pursue price transparency — not price controls

Today, both the House Oversight Committee and Senate Finance Committee are holding hearings on prescription drug prices.

This is welcome action to address a major national problem. According to Kaiser Health, about one-quarter of Americans say they or their family have not filled a prescription or skipped doses because of cost. At my private practice in Louisiana, I hear complaints from my patients almost daily about how high drug costs impact their pocketbooks, retirement savings and even health.

{mosads}Everyone agrees that prescription drug prices must be addressed, but we disagree about how to lower them. Increasingly, politicians and commentators are demanding price controls. This month, Rep. Elijah Cummings (D-Md.), who is chairing today’s House hearing, introduced legislation to peg U.S. drug prices to those in a basket of countries that use government price controls.

Yet, price controls cause some drugs to be overvalued and hence oversupplied. And they cause some drugs to be undervalued and undersupplied. Such reforms would exacerbate the widespread drug shortages — including on basic drugs like intravenous saline (salt water) —that already persist due to existing drug price controls as well as threaten new innovation. Committee members should strive for a better solution.

I’ve long argued that the best way to bring down health-care costs is by moving in the opposite direction of price controls, toward a market-based system with price transparency. I believe this is the best way to reduce drug prices and prevent shortages.

Prescription drug markets are characterized by hidden prices and convoluted payment schemes. This “Kabuki drug pricing” (to borrow a phrase from FDA chief Scott Gottlieb) drives up prices for several reasons. Most obviously, prices increase because middlemen take a cut that otherwise could be lopped off patients’ bills. Drug companies sell to pharmacy benefit managers (PBMs). PBMs control access to insurance plan formularies and sell to pharmacies and hospitals. Pharmacies and hospitals sell to insurers, employers and ultimately patients. Prices increase at each level in the same way that middlemen suppliers and a concession stand raise the price of a Coke. (At least with a Coke you know what it costs.)

According to disclosures by CVS Health, the list prices of brand name prescription drugs increased by 37 percent between 2011 and 2017. But at the same time, net prices — which are list prices minus manufacturer payments to PBMs — increased by a mere 9 percent, or about 1 percent a year. The Wall Street Journal reported that while list prices of insulin have more than doubled since 2011, net prices have remained virtually flat because of increasing rebates paid to PBMs, which control drug distribution. This picture suggests that third parties are largely to blame for rising drug costs. 

Unfortunately, opaque prescription drug pricing, hides signals that the market needs to determine which drugs to supply in order to reduce costs, relieve shortages and increase competition. (Of course, other important factors such as regulatory hurdles and the power of PBMs to determine formulary access also reduce new supply).

A significant first step toward price transparency would be working to eliminate the spread between list and net drug prices, currently estimated to be about 33 percent and growing. This would help to move toward a lower market price. This goal could be achieved by addressing the rebate system that creates these two separate prices in the first place. Health and Human Services Secretary Alex Azar suggested such a reform in Senate testimony last June when he said, “We may need to move toward a system without rebates.”

Today’s committees are right that prescription drug prices are a major problem, but they’re wrong to think that further muddying prices by instituting price controls is the solution. They can simply look to any other sector of the economy for proof that price transparency works.

Dr. Gerard Gianoli is a neuro-otologist and a member of The American Association of Physicians and Surgeons. He is also an associate professor at Tulane University.