Drug prices are getting more transparent, too

We’ve covered the waves of price transparency that are washing over health care the past few weeks in the KBGH Book Club and here in the blog: no more surprise medical bills, new public tools for comparing procedure prices, no more gag clauses on cost or quality, and others. But we haven’t talked about what’s coming in drug pricing transparency. Americans pay far, far more than peer countries for prescription drugs. Drug prices account for almost a fifth of our excess health spending, even more than administrative overhead and salaries. How bad is the problem? Americans make up less than five percent of the world’s population, but we account for 80% of pharmaceutical revenues.

It is easy to cast the pharmaceutical manufacturers alone as the bad guys here; they spend far more on advertising than on research and development, they are far more profitable than any other sector in the economy, they cannibalize profits to gift to shareholders, and they lobby Congress far harder than any other industry. But manufacturers are not the only players. The manufacturers only set list prices, which are publicly disclosed. Manufacturers negotiate rebates with insurers and pharmacy benefit managers (PBMs) in order to move their drugs up the list on the insurers’ and PBMs’ formularies. Rebates and discounts like this have grown to an astonishing extent over the past few years, leading to “net” prices for many brand-name drugs that are lower than list prices. As we’ve pointed out before, insulin has a typical rebate of 66%. Because the process is so opaque, consumers have no way of knowing the actual price paid for the drugs. Payers argue that this “confidentiality” (if you’re charitable; “secrecy” if you’re cynical like me) allows them to more effectively negotiate because transparency would only allow drug manufacturers to get net prices closer to their very high list prices. This is transparently false. If secrecy were such a tool for keeping costs down, the industry would not be fighting transparency rules. Instead, the manufacturers would be demanding more transparency to allow prices for their products to rise naturally. 

Manufacturers and PBMs have reason to be concerned because of the “Transparency in Coverage” final rule that was issued in 2019 as part of the usual flurry of executive orders that precede and accompany any presidential transition. The rule, which takes effect for plan years beginning January 1, 2023, requires that:

1.     insurers disclose the 1) current list price and 2) historical net price for prescription drugs,  

2.     the data be available in “machine-readable” files (that is, not blurry .pdf scans) online to allow for comparisons, and

3.     insurers provide real-time personalized estimates of cost-sharing. 

 Legal challenges may slightly change the final product prior to 2023. But the rule has unusually solid bipartisan support: both Presidents Trump and Biden support it, along with a clear majority of congressional Republicans and Democrats. So it will be difficult to overturn completely. This is all the more reason to make sure our employees are educated shoppers for health services moving forward.

As the Medical Director of the Kansas Business Group on Health I’m sometimes asked to weigh in on hot topics that might affect employers or employees. This is a reprint of a blog post from KBGH.