The WasteWatcher: The Staff Blog of Citizens Against Government Waste

Pennsylvania Attempts Faulty Price Control Scheme for Prescription Drugs

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


In their July 2, 2015 Federal Trade Commission (FTC) commentary, “Price Transparency or TMI,” Office of Policy Planning authors Tara Isa Koslov and Elizabeth Jex noted, “Is more information about prices always a good thing for consumers and competition?  Too much transparency can harm competition in any market, including in health care markets.”

Yet, despite their wise words, transparency legislation continues to be introduced in dozens of state legislatures across the country, purportedly to understand how prescription drugs are priced.  While details vary from state to state, all the bills would require pharmaceutical manufacturers to provide reams of pricing and cost data, much of it proprietary, to state officials.  Often the bills will drag in other private-sector entities involved in pharmaceutical pricing negotiations, such as pharmacy benefit managers (PBMs) and insurers.  The data will be assembled, examined, and placed into a report.  Presumably state officials will do “something” with the information, as if the collection efforts will drive down prescription drug costs.

Wash, rinse, repeat.

Pennsylvania is no exception to this trend, and its legislature is currently considering SB 637, a bill to establish a Pharmaceutical Transparency Commission.  Even worse, this legislation includes government price controls, which seems a bit odd since the bill’s sponsor, Sen. Donald White (R-41), was given a 91 percent rating by the Pennsylvania Chamber of Business and Industry for the 2015-2016 legislative term.  He could be losing his conservative bonafides, though, the American Conservative Union only rated him at 76 percent for the 2016 legislative session, dropping from 92 percent in 2015, and lower than his 86 percent lifetime rating.

It its December 2016 -, “Pharmaceutical Price Controls: A Prescription for Disaster,” CAGW discusses why price controls have shown time and again they distort the market and cause shortages.  From the Babylonian Code of Hammurabi, to Puritan laws in 17th Century Massachusetts, to President Nixon’s Economic Stabilization Act, all actions by political leaders to contain prices have hurt the very citizens they were purporting to help.  Nevertheless, there are politicians who continue to believe they can efficiently control markets.

SB 637 will lead to unwarranted and unreasonable fishing expeditions that will raise costs and lead to confidential information being leaked.  Like other legislative vehicles across the country, the bill utilizes the average wholesale price (AWP), or retail cost, as a marker for much of the commission’s respective reporting requirements.  But the AWP is the list price of a drug, and does not represent the final cost after intense negotiations that occur among pharmaceutical manufacturers, PBMs, insurers, and pharmacies.

The bottom line?  This legislation will do nothing to lower drugs costs; it will raise them and here’s why.

The commission would be charged with reviewing and analyzing reams of data pertaining to a particular drug’s production expenses, such as total research and development costs, including any costs paid by a predecessor in developing the drug; clinical trials and regulatory costs, including those of a predecessor developer; material, manufacturing, and administrative costs attributed to the drug; any costs paid by another entity in developing the drug, such as any funds from a government program; any costs utilized to acquire the drug from another corporate entity who owned the rights to the drug; total marketing and advertising costs attributed to the drug, including costs such as direct-to-consumer coupons and amount redeemed; total marketing and advertising costs for the promotion of the drug, either directly or indirectly, to prescribers; a cumulative history of the AWP, including the weighted average costs expressed as percentages; overall profits attributed to the drug, both in total dollars and as a percent of the company’s total profits; a description of the manufacturers’ patient prescription assistance program, including the amount of, but not limited to, the total financial assistance provided; and… Well, you get the picture: A whole lot of data that will be “investigated” by commission members who know little about pharmaceutical research and development.

Once the commission reviews all the aforementioned information and perhaps thinking they have been given King Solomon’s wisdom, it will then determine if the drug’s retail price exceeds certain costs reviewed by more than 20 percent.  If the commission believes the drug’s “profit margin” is more than 20 percent, it will be declared “unreasonable” and no insurer or PBM would be required pay to more than 20 percent.

The drug companies will also be required to pay the state of Pennsylvania an annual fee for all the “investigating” and “reviewing” and “analyzing” by the commission.  Of course, there will also be internal costs to the manufacturers for the accountants and lawyers that will be needed to provide the information to the commission in an appropriate and timely manner.

Again, it would be wise to pay attention to the FTC’s July 2015 report.  It notes that while more information can be useful for consumers to make choices among available options, it “is not universally good.  When it goes too far, it can actually harm competition and consumers.  Some types of information are not particularly useful to consumers, but are of great interest to competitors.  We are especially concerned when information disclosures allow competitors to figure out what their rivals are charging, which dampens each competitor’s incentive to offer a low price, or increases the likelihood that they can coordinate on higher prices.”

Furthermore, it is difficult to quantify exactly what was spent to create a drug.  Pharmaceutical companies spend tens of billions of dollars testing different compounds, many of which end up being discarded or shelved because they do not work or are unsafe.  If a drug should fail after several years of research, the scientists still need to be paid.

As with any product, an environment that fosters competition is the best way to lower drug prices.  Under current conditions, it takes between 10-12 years to get a new drug through the Food and Drug Administration (FDA) approval process, and it costs, on average, $2.6 billion to do so.  The 21st Century Cures Act, which was signed into law on December 13, 2016, has proposed new ways, such as utilizing biomarkers and real-world evidence, to modernize and speed up clinical trials.

In addition, Congress will be considering reauthorization of the Generic Drug User Fee Amendments (GDUFA II) in 2017.  One of the law’s primary goals is to expedite the availability of generic drugs to consumers, which make up about 90 percent of all prescriptions, yet only account for 27 percent of all drug costs.  Currently, with more than 4,200 pending generic drug applications in the pipeline, the FDA has a lot of work to do.

Rather than enacting bills such as SB 637, Pennsylvania state legislators should instead prod their U.S. representatives and senators to hold the FDA’s feet to the fire to make sure the agency quickly adopts the new methods envisioned in the 21st Century Cures Act and to ensure that GDUFA II will force the FDA to focus like a laser beam on reducing the generic drug approval backlog.  That would be the most effective solution to bringing down the costs of pharmaceuticals.

Wash, rinse, repeat.

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