Pharmaceutical price transparency falls into the same oxymoronic category as the long-vaunted “paperless society” and the oldie but goodie, “airline food” (which used to be an oxymoron but now is a somewhat distant, if unpleasant, memory for boomer sojourners).
There are good reasons for the relative opacity of pharmaceutical pricing. I remember going to a pricing seminar back in the day where a gentleman in charge of pricing for one of the pharma companies explained to us very vividly that fundamentally, the only constraint on pharma pricing was regulation driven by public opinion.
I have a friend who has stage 4 lung cancer. He is 62 years old. He would have paid anything for a cure, and he just did. Miraculously, it seems to be working. The last thing he’s thinking about is the price. Fortunately, a third party is picking up most of the tab.
So, the price inelasticity of life-saving drugs is compounded by third-party payment, which is why we are where we are today. Pharma in health care is unlike any other good or service because it can literally be a matter of life and death. In the case of a life-threatening illness particularly, the patient has very little choice. In addition, the market is very distorted by third-party payment. Any good or service that is subsidized by a third party, also known as other people’s money, is subject to extraordinary inflation—period. It is no coincidence that the three principal segments of the economy that have managed to have serious inflation in a historically deflationary economic era—education, health care, and defense—are all paid for with other people’s money. The normal forces of supply and demand do not apply. The normal price competition of an efficient market does not apply. Thus, there is no transparency because the price signals through which buyers and sellers communicate in normal markets are not recognizable to either buyers or sellers. In fact, sellers have powerful incentives not to publicize pricing because they make different deals with different buyers based on volume discounts. For example, in the case of the Veterans Administration (VA), legislative fiats mandate the lowest, best price for our veterans.
In fact, pharma pricing is something of a trade secret. The big players get big deals. It’s the little guy who pays list price for drugs. This is the tragedy of the uninsured. One of the principle benefits of health insurance, beyond the insurance paying a certain portion of the cost of care, is its incredible “in-network” price negotiating power.
So, the main contemporary constraint on pharma pricing power is volume discounts, with one HUGE exception: Medicare, which is specifically prohibited from negotiating pharma prices. Yes, some elements of the government, such as the VA can, but the Gulliver of government is generally quite well-restrained by the Lilliputian lobbyists from flexing its giant muscles.
Why the VA you ask? It all goes back to the ultimate restraint on pharma pricing: public opinion. Whenever government programs such as the Affordable Care Act (aka ACA, aka Obamacare, which oddly can be either pejorative or laudatory depending on your political hue) come into play, pharma always negotiates a clause, if possible, where the public payer is specifically prohibited from negotiating price, except where the market is relatively small and the PR damage potential is very high. Bad press about unaffordable drugs for our veterans is very bad for business.
That is, of course, why pharma and the rest of the health care industry tremble at the thought of a monopsony and “Medicare for All” (formerly known as national health, alias “single payer,” alias [pejorative] “socialized medicine”). We’ll just call it M4A, which is the current Beltway shorthand.
A monopsony is the inverse, or polar opposite, of a monopoly. In a monopoly, there is only one seller. In a monopsony, there is only one buyer. Whatever the buyer will pay is the price. Period. Full stop. Well, except of course, for those pesky lobbyists, whose employers may stop making the donuts, and inventing new ones, if they lose money on manufacturing and marketing. Oh, and the voters, who can’t get the drugs they need to keep voting. Oh, and then there are the health care professionals who won’t be too happy about not being able to do their jobs with anything but thoughts and prayers (they are doctors of MEDICINE after all).
However, for fans of pricing transparency, this is Utopia. There’s only one price and it’s published in the Federal Register.
Since purchasing power drives consolidation on both sides of the supply-demand line, and a monopsony is the singularity of purchasing power, the sell side would inevitably tend to consolidate into its own black hole singularity.
Nobody on the sell side wants that. Even the buyers may find that dealing with a monopoly Healthcare Inc. that owns all the doctors, hospitals, drugs, and medical devices, may not be as much fun as it sounded. The famously nonpartisan Congressional Budget Office (aka CBO for those of you collecting acronyms) just estimated the cost of M4A at a rather impressive $32 trillion with a T over the infamous 10-year budget window. To paraphrase the late Illinois senator Everett Dirksen, “a trillion here, a trillion there, pretty soon you’re talking real money.” Even, one might add, when you can print the stuff with just a keystroke at the Fed.
So that probably leaves us pretty much back where we are today absent any French Revolution-style head surgery. Since Utopian transparency shall probably remain for the next world, let’s get back to work here on this mortal plane.
Pharmacy benefit managers (PBMs) are another factor in the lack of price transparency in the pharma market. Much light has been shed of late on this particularly opaque area of pharmacoeconomics. PBMs have become a convenient whipping boy on the price and transparency issue, and not without some merit. PBMs basically carve out the pharma side of the equation, which is very complicated and which many payers don’t want to delve into. So, the PBM is tasked with negotiating a good deal with all the various pharma companies and passing on the savings to their client, the payer. The allegation, of course, is that the PBM negotiates a very good deal and then keeps an unfair amount of the money and passes on very little savings to the payer.
Another complicating factor is the use of co-pays and deductibles. Payers don’t like paying. The claims are the not-so-fun part of the insurance business—the premiums are! Of course, health insurance really isn’t insurance anyway; it’s just prepayment of health care, as the late, great Dr. Uwe Reinhardt held. However, co-pays are one of the blunt instruments that payers use to discourage people from prescribing and consuming expensive drugs. The intent of the co-pay is to bludgeon “covered life” (aka the patient) to seek the least costly solution to any particular problem, generally with a generic drug.
This briefly unmutes the price signal, like a dog whistle lowered to human pitch. Consumers, being quite careful with their own money vs. other people’s money, immediately head to Costco for a thousand-pill package of lisinopril or some such.
Here we will pause for a thought experiment on a world of perfect price transparency.
Suppose for just a moment that you woke up today and third-party payment of health care products and services had been made impossible according to the laws of economic physics, or an act of Congress. What would you do? What would pharma do? You would probably meet at the local pharmacy and have a little talk. You would say, there’s no way I’m paying that much money for your drugs. I guess I’ll just go die. The pharma company would say, wait, don’t do that, we’ll go out of business. A discussion would ensue in which you would discover a price. That’s what we capitalists call the invisible hand of the marketplace. Customers would pay what they could, or would pay, and companies would price accordingly and manage costs to make a profit. Simple, eh? Transparent? Perfectly. Possible? No. Okay, back to planet Earth.
When we last left our heroes, customers had become price sensitive due to the dastardly co-pays. Pharma companies responded by providing co-pay cards to take the sting out of the co-pay, muting the price signal. This is very controversial.
So now we have described the various clouds that make the pharmaceutical market a particularly nontransparent area of the economy. What is to be done?
The reality is that in an environment where third-party payment prevails, a transparent market is probably not achievable. Government will seek transparency, to some degree, for idealistic reasons, for the benefit of the public, and for their own political capital. Young representatives coming to the Beltway may not be privy even to the cursory knowledge articulated by your humble correspondent as they unveil simple solutions to complex problems. (As the saying goes, for every complex problem there is a simple solution, and it is simply wrong.) The issue of transparency will be debated in the halls of Congress, powerful lobbies will be brought into play, and it will be one more skirmish in a cold war leading down the eventual path to M4A. As time passes and I watched the Congress dominated by the GOP attempt to repeal the Affordable Care Act with no success, I have concluded that M4A is probably the end state of the health care debate. It is only a matter of time. However, the question is how much time. Eventually the only way for prices to be transparent, at least to the government, is for the government to pay for all prescriptions. The government will have the ultimate leverage, an absolute in negotiating prices. The trade-off for patients is innovation.
The reality is that 90% of the drugs that are prescribed in today’s world are generic, and thus, far less expensive than they were when they were exclusively patented. Therefore, time heals all (pricing) wounds, and that time is the patent life of a drug. (Except for insulin. Somebody please explain insulin—Ed.) There was a recent controversy regarding biologics. The progressive camp was up in arms about the fact that the Trump administration actually LOWERED the period of patent exclusivity in the replacement to the North American Free Trade Agreement (NAFTA) from 12 years to 10 years for biologics. Their point is that 10 years is still too long compared to international norms. Biologics are good examples of complexity. They don’t lend themselves to generic competition because, unlike small molecules, they’re very expensive and very difficult to make. (What could go wrong?) It’s not just a question of hiring a patent lawyer and hiring a contract manufacturer as it is for small-molecule drugs. For those drugs I pay as little as $3 for a 30-day prescription. That is not, and never will be, the case for complex, hard-to-manufacture drugs.
So, what does the future hold regarding transparency in drug pricing? If there’s anything I’ve learned over the course of my fairly lengthy life, it is that no one can predict the future. That has lost me a lot of consulting work. With that caveat, my prediction is that the complexity and opacity of pricing will persist in the foreseeable future. The companies that are involved are powerful and have very entrenched positions and very adept legal and lobbying teams. The status quo has a great deal of inertia. And the ultimate factor is the total lack of price elasticity that prevails for patented products that can save lives.
Ultimately, the question of pharmaceutical pricing depends on the value of a human life. This relates to the minimum wage as well. Are some lives worth more than others? Should people of means be able to buy better health care than those of lesser means? It goes to the heart of capitalism. Is capitalism a just and moral system? Should health care be separated from capitalism? Should health care be a business, because if it is a business, managers will maximize shareholder value, or they’ll be replaced by managers who will. There are nothing but trade-offs here. If one were to nationalize the discovery process in the drug production process one might arguably stifle innovation. It takes two decades for the government to build a new fighter plane. How long will it take the government to develop a new product to treat an orphan disease?
Another consideration is that the government is creating its own problems. Third-party payment inflates prices. The Food and Drug Administration is complex, and its byzantine regulatory process is the main driver of costs. Except for biologics, which are difficult and costly to manufacture, all of the value of a pharmaceutical product is intellectual property. This includes the information obtained from clinical trials and research and development that guides the formulation of various inexpensive chemicals into a product that actually cures a disease. That’s why the sale versus cost of goods sold argument in pharma is so specious. The whole universe is made of chemicals, but like alchemists, pharmaceutical companies add value through their research and development and testing.
That’s why the government licenses basic research results from the National Institutes of Health and other government branches to the private sector to get it approved. Another way that the government, as the largest single payer of health care, (already accounting directly or indirectly for 60% of the funding of U.S. health care) could get a better deal, which would be to extract bigger royalties from pharma for the intellectual property that they transfer to the private sector. There is merit to such an idea—in the mind of the payer at least.
But my prediction remains that pharma pricing will continue to be a very contentious item in the public sphere. Players, including the public, will demand greater transparency, while pharmaceutical companies and benefit managers will continue to seek privacy. And this is one area in which privacy is not an undisputed good.
Of course, the ultimate solution, absent M4A, is to eliminate third-party payments in health care. I have always argued that if third-party payment, including government and insurance, and everything else other than the private transaction between the patient the suppliers of healthcare goods and services were prohibited, prices would come down as much as 90%. That, however, is a mere thought experiment. What we saw with the failure of the GOP to repeal Obamacare was that we’re on a one-way street and there is no going back to a time when people paid for health care out of their own pockets without any assistance. That changed in the 1930s during The Great Depression when the physicians formed Blue Cross and the hospitals formed Blue Shield. The government at that time wanted to pass a health care scheme but failed. The idea persisted until it was finally enacted as Medicare and Medicaid in the 1960s as part of the Great Society. Since then, the progressive wing of government has tried to expand these programs into an M4A scheme much like that of the United Kingdom and other “civilized” member countries of the Organization for Economic Cooperation and Development.
So, there is no chance that third-party payment is going away. As long as there are third-party payers there will be transparency issues. These issues are indicative of a greater problem, which is that the normal forces of supply and demand that give us $100, 44-inch TVs do not apply in health care because there is an alienation between the providers of services and the consumers of services, thus prices will be high. Even in an M4A environment, political forces will tend to inflate the price of health care because ultimately, even M4A isn’t just other people’s money—it’s everybody’s money.
