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Research & Commentary: Drug Price Controls and Price Transparency

November 14, 2016

In this Research & Commentary, Matthew Glans examines drug price controls and price transparency.

The pharmaceutical industry spends billions of dollars each year on the research and development of new products. Innovative prescription drugs have made a profound impact on the lives of millions, curing illnesses and lengthening and improving quality of life. These advances were made not through any government mandate, but through the free market.

While drug companies have argued for many years their prices are competitive and determined by the cost of development, critics say new laws are needed that would set the price of prescription drugs at “fair” rates. These critics say this form of market manipulation is necessary to guarantee access to pharmaceutical drugs for all people. There are two approaches state legislatures have taken to address the price of medications: transparency requirements and price controls.

Placing price caps on prescription drugs is unnecessary and counterproductive. David Tuerck, John Barrett, Douglas Giuffre, and Zaur Rzakhanov of the Institute for Policy Innovation argue price controls will have two primary effects in a state: All consumers would have fewer new drugs and therapies, and consumers living in states housing a substantial number of pharmaceutical and biotechnology firms would be negatively affected by reduced research investment.

In a recent study, Citizens against Government Waste (CAGW) analyzed why price controls would be ineffective at reducing prescription drug costs and harmful to long-term research and development. The report concluded price controls would do enormous damage all around the world. Promising therapies would never be discovered, leading to a shortage of life-enhancing or life-saving treatments, especially for chronic diseases that are difficult to conquer, such as Alzheimer’s and cancer. When other countries utilize price controls, the U.S. pays the true costs for biopharmaceutical innovation.”

In an article on the study, CAGW President Tom Schatz argued competition is the best and fastest way to lower prices. The report recommends ways competition can be improved, including reducing Food and Drug Administration approval times and by modernizing clinical trials.

One point legislators must remember is a great deal of the costs created during the drug development process is due to existing government regulation. The Pioneer Institute found from discovery to launch, drug development takes about 15 years to complete. This is significantly longer than just a short time ago; development time has increased by 145 percent since 2003

The study also found the cost of development averaged $2.6 billion in 2014. The high cost of regulatory compliance and the threat of lawsuits creates a disincentive to develop new drugs – unless there is a significant profit incentive. Affordable drug prices won’t matter much if pharmaceutical companies stop producing new products.

While price caps are harmful, transparency requirements can work if they are structured properly. When consumers are able to actively shop and compare prices, market pressures encourage providers to produce a more affordable, high-quality product. If they don’t, they risk losing out to their competitors.

Access to transparent health care prices remains elusive for most U.S. health care consumers, who are often insulated from price considerations by the standard third-party payment systems commonly used for medical billing. A recent report published by the Health Care Incentives Improvement Institute and Catalyst for Payment Reform found “45 of 50 states fail when it comes to disclosing health care price information to the public.”

Many current price transparency laws need to be improved, but research shows they do work. In a 2013 study published in the Journal of the American Medical Association, researchers looked at the medical claims paid by employers after a price transparency tool was made available. The study was extensive; it covered 500,000 individuals in 253,000 households between 2010 and 2013 and examined three basic medical services: laboratory tests, advanced imaging services, and clinician office visits. The results were positive: Costs for consumers using the price transparency tool were “14 percent lower for lab tests and 13 percent lower for imaging services compared to those who did not use the tool. Costs associated with office visits declined by 1 percent.”

Price caps are vague, obtrusive, and give far too much control over the pharmaceutical market to government regulators. Price gouging can be a problem, but price controls are not the answer. Instead of killing the free market and innovation in the pharmaceutical industry, state lawmakers should promote transparency and let the market and legal system monitor drug prices.

The following documents provide additional information about the effects of drug price controls and the new push for drug price transparency.

 

Pharmaceutical Price Controls: A Prescription for Disaster
http://www.cagw.org/media/press-releases/cagw-report-price-controls-pharmaceuticals-would-be-disastrous
In this report, Elizabeth Wright of Citizens Against Government Waste analyzes why price controls would be ineffective at reducing prescription drug costs and harmful to long-term research and development. The report also reviews how price controls have been used historically and the havoc they cause in the pharmaceutical marketplace.

Ohio to Require Medical Provider Price Transparency in 2017
https://www.heartland.org/news-opinion/news/ohio-to-require-medical-provider-price-transparency-in-2017?source=policybot
David Grandouiller of Health Care News examines a new law taking effect that would, in most cases, require health care providers to provide patients with written estimates of charges, the portion insurers will pay, and the patient’s portion.

Price Transparency in Health Care Report from the HFMA Price Transparency Task Force
https://www.heartland.org/publications-resources/publications/price-transparency-in-health-care-report-from-the-hfma-price-transparency-task-force?source=policybot
This report from the Healthcare Financial Management Association Task Force focuses on the issue of price transparency.

Ten Principles of Health Care Policy
http://heartland.org/policy-documents/ten-principles-health-care-policy
This pamphlet in The Heartland Institute’s Legislative Principles series describes the proper role of government in financing and delivering health care and provides proposed reforms to remedy current health care policy problems.

Are Drug Prices Driving Healthcare Cost Growth?
http://pioneerinstitute.org/healthcare/are-drug-prices-driving-healthcare-cost-growth/
Jim Stergios and Gregory Sullivan examines why “state-level regulatory reactions to short-term increases in drug prices are not supported by the evidence and could produce negative consequences for patients and other purchasers.”

Massachusetts Legislature Advances Bill to Impose Caps on Drug Prices
http://www.hklaw.com/publications/massachusetts-legislature-advances-bill-to-impose-caps-on-drug-prices-09-22-2015/
Jeffrey W. Mittleman and Kristin M. Cleary of law firm Holland and Knight examine a proposal in Massachusetts to cap drug prices in detail.

Regulating Drug Prices: U.S. Policy Alternatives in a Global Context
http://www.rand.org/pubs/research_briefs/RB9412/index1.html
In this article, the Rand Corporation examines the impact of drug price regulation. According to the Rand authors, “Regulatory approaches that reduce pharmaceutical revenues may generate modest consumer savings in the best cases, but risk much larger costs as decreased innovation leads to reductions in life expectancy.”

Government Regulation of Prescription Drug Pricing
http://www.amcp.org/WorkArea/DownloadAsset.aspx?id=18706
The Academy of Managed Care Pharmacy (AMCP) argues in this article government regulation of prescription drug pricing, regardless of its structure, would have an overall negative impact on consumer cost, quality, and access to health care benefits.Regulated prices can cause cost‐ shifting to other consumers and may inadvertently discourage appropriate drug prescribing, dispensing and utilization.”

The Impact of Drug Reimportation and Price Controls: The U.S. and Massachusetts
https://www.heartland.org/policy-documents/impact-drug-reimportation-and-price-controls-us-and-massachusetts
David Tuerck, John Barrett, Douglas Giuffre, and Zaur Rzakhanov of the Institute for Policy Innovation argue in this study price controls, while yielding lower drug prices in the short run, could have a significant negative impact on drug development and innovation, as well as a negative impact on the regional economies in which the pharmaceutical and biotechnology industries play an important role, such as Massachusetts.

The Demonizing of Drug Companies
http://www.beaconhill.org/Editorials/BG43200prescripDrugs.html
Prescription drugs and other technological advancements have succeeded in lengthening and improving quality of life. This was only able to occur, however, because of the economic system in which those drugs and that technology were incubated. The Beacon Hill Institute warns lawmakers that although pharmaceutical companies are the perfect political targets, they provide an invaluable service to the world.

Drug Research and Price Controls
https://www.heartland.org/policy-documents/drug-research-and-price-controls
Should the U.S. government regulate prescription drug costs, just as many countries around the world have? John Vernon of the University of Pennsylvania considers the pros and cons.

Transparency and Disclosure of Health Costs and Provider Payments: State Actions
http://www.ncsl.org/research/health/transparency-and-disclosure-health-costs.aspx
This report from the National Conference of State Legislatures describes a number of actions taken by states over the past two decades to promote the advancement of health care price transparency.

Transparency in Health Care: What Consumers Need to Know
http://www.heritage.org/research/lecture/transparency-in-health-care-what-consumers-need-to-know
In this 2006 presentation hosted by The Heritage Foundation, the Hon. Alex M. Azar II, Thomas P. Miller, David B. Kendall, and Walton Francis discuss the potential of health care price transparency and how it could affect choice and pricing. “In a free market, where consumers make their own decisions, technology and techniques rapidly improve. Quality rises and prices drop. In short, freedom fosters prosperity.”

Price Transparency in Health Care: Will it Bend the Cost Curve?
http://dailysignal.com/2010/06/28/price-transparency-in-health-care-will-it-bend-the-cost-curve/
Kathryn Nix writes in this Daily Signal article about a new trend toward greater health care price transparency, which she says has arisen because new companies are now aiming to lower costs by making health care price information readily available. “Lack of transparency regarding pricing of medical services has often been attributed as one of the factors contributing to skyrocketing spending in the health care system, a concern which drew considerable attention during the recent debate over health care reform.”

Transparency in Health Care: What Consumers Need to Know
http://www.heritage.org/research/lecture/transparency-in-health-care-what-consumers-need-to-know
In this 2006 presentation hosted by The Heritage Foundation, the Hon. Alex M. Azar II, Thomas P. Miller, David B. Kendall, and Walton Francis discuss the potential of health care price transparency and how it could affect choice and pricing. “In a free market, where consumers make their own decisions, technology and techniques rapidly improve. Quality rises and prices drop. In short, freedom fosters prosperity.”

Empowering Patients as Key Decision Makers in the Face of Rising Health Care Costs
http://www.heritage.org/research/reports/2011/12/empowering-patients-as-key-decision-makers
The current trend of rapidly rising health care costs is unsustainable. Many proposed reforms to curb spending rely on some type of rationing imposed by an unaccountable government body. A better alternative would be to allow individual consumers to make their own decisions about care, including the self-rationing of medical services, based on cost and their own desires. Such a policy is compatible with the principles of limited government and individual liberty. State and federal policymakers should adopt measures to facilitate personal control of health care decisions.

Transparency and Disclosure of Health Costs and Provider Payments: State Actions
http://www.ncsl.org/research/health/transparency-and-disclosure-health-costs.aspx
This report from the National Conference of State Legislatures describes a number of actions taken by states over the past two decades to promote the advancement of health care price transparency.

Study: Price Transparency Benefits Consumers
http://news.heartland.org/newspaper-article/2015/01/16/study-price-transparency-benefits-consumers
Kenneth Artz reports in this Heartlander article about a new study published by the Journal of the American Medical Association that found increasing health care price transparency lowers total claims payments for common medical services.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Health Care News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

Whether sending an expert to your state to testify or brief your caucus, hosting an event in your state, or simply sending you further information on the topic, Heartland can assist you. If you have any questions or comments, contact Heartland Institute Director of Government Relations John Nothdurft at jnothdurft@heartland.org or 312/377-4000.

Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR