The Swine Line: The Staff Blog of Citizens Against Government Waste

Pharmaceutical Transparency Legislation – Sounds Good but Foolhardy

The Swine Line 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.

Legislation to create “transparency” in drug costs has been 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 on the theory that the collection efforts will drive down prescription drug costs.

Nothing could be further from the truth.  This type of legislation will lead to unwarranted and unreasonable fishing expeditions that will raise costs and lead to confidential information being leaked.  For an example, two new “transparency” bills, HB 436 and SB 59, were introduced in the Louisiana legislature on March 28, 2017.  At least HB 436 admits the real purpose involved – establishing price controls.  The bill states, “in order to contain prescription drug costs, it is essential to understand the drivers of those costs, as transparency is typically the first step toward cost containment.”

Competition drives down costs, not government price controls.  As Citizens Against Government Waste discussed in its December 2016 Issue Paper, “Pharmaceutical Price Controls: A Prescription for Disaster,” price controls throughout history have caused market disruption and 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 trying to help.  Yet, for some reason there are politicians who continue to believe they can efficiently control markets.

Like other legislative vehicles across the country, both Louisiana bills utilize the average wholesale price (AWP) as a marker for much of their 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.

HB 436 requires pharmaceutical manufacturers to provide information on a variety of production outlays such as cost per dose; research and development costs; marketing and advertising costs; after tax research and development costs; charges to purchasers outside of the U.S. (which utilize price controls); prices negotiated with pharmacies and other direct purchasers; and, true net prices charged to PBMs.

Some of the information required constitutes a trade secret, and other figures could disrupt and jeopardize sensitive negotiations that occur among manufacturers, PBMs, pharmacies, and other purchasers.  The Federal Trade Commission stated in its July 2, 2015 issue paper, “Price Transparency or TMI,” 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 also 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.  Furthermore, research and development outlays can be found in annual company reports and are also reported to the Securities and Exchange Commission.

SB 59 requires similar burdensome transparency cost reports but places them on pharmaceutical detailers.  The bill’s requirements will cut into their time to educate physicians about the proper use of their manufacturer’s prescription drug as they fill out lengthy forms concerning the AWP at different stages of its life cycle, such as its cost when first marketed, for each new labeled indication, and each time and day the AWP changed.  Since the AWP represents a list price, and not a negotiated price, these reporting requirements will do nothing to lower costs and will burden physicians with even more unnecessary documents and paperwork.

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 best way to lower drug costs is to speed up the FDA approval process so more pharmaceuticals can enter the market.  The 21st Century Cures Act, which was signed into law on December 13, 2016, has proposed new ways to modernize and speed up clinical trials, such as utilizing biomarkers and real-world evidence.

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 80 percent of all prescriptions.  Currently, with more than 4,000 pending generic drug applications in the pipeline, the FDA has a lot of work to do.

Rather than enacting bills such as HB 436 and SB 59, 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 any perceived, or imagined, problems with the price of pharmaceuticals.

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