Soon after the Massachusetts Bay Colony was created in 1629, its leaders attempted to institute a “just price” for goods and labor.  Economist Gary North wrote in a May 1, 1974 article, “The Puritan Experiment with Price Controls,” that in 1630 “a law was passed which established wage ceilings for carpenters, joiners, bricklayers, sawyers, and thatchers.  Common laborers were limited to twelve shillings a day, or six if meat and drink were provided by the employer.  Any artisan violating this statute was to be assessed a ten shilling fine.  The effect of these wage ceilings must have presented itself almost immediately: an excess of demand for the services of artisans over the available supply.  Under such conditions, it is always difficult to recruit labor.  Within six months, these wage ceilings were repealed, leaving wages ‘free and at liberty as men shall reasonably agree.’”

North pointed out that even after the colony’s leaders’ first failed attempt at price controls, they endeavored to implement other restrictions in subsequent years.  In 1633, magistrates imposed a general profit margin of 33 percent on any imported good, but added a clause that warned citizens against violating the “intent” of the law forbidding “excessive wages” and “unreasonable prices for such necessary merchandise or other commodities as shall pass from man to man.”  The law gave its enforcement agents broad discretion on what exactly that meant, which led to “a considerable degree of uncertainty in economic exchanges.”  The law was repealed two years later.

Finally, after even more attempts by colonial leaders to control the market, in 1650 there was a relaxation of economic regulations.  As trade grew, so did market transactions, and the colonists saw more competition, more specialized production, greater economic productivity, and lower prices.

One would think Massachusetts legislators would know their history better and leave pricing to the marketplace, but apparently they cannot help themselves.  When elected officials think they can control prices better than the marketplace, the result is the same – a disruption of supply and demand.  Set the price too low, there is a shortage; set the price too high, there is excess supply. 

Now, the Massachusetts state legislature is considering S. 1048, an “Act to Promote Transparency and Cost Control of Pharmaceutical Drug Prices.”  According to FoleyHoag, an international law firm with a strong focus on the life sciences and healthcare, the bill “would require manufacturers of drugs included in a ‘critical prescription drug list’ to disclose certain information relating to the price of those drugs.  The bill would also authorize the Massachusetts Health Policy Commission (HPC) to cap whichever drug prices it determines to be ‘significantly high.’”

The HPC is an independent state agency established by the legislature in 2012 and its members are appointed by the governor, the attorney general, and the auditor.  It is charged with reducing healthcare costs, improving the quality of care, monitoring healthcare delivery, and payment systems.  In other words, implementing cost containment policies that will lead to rationing.  Apparently, Romney Care, which morphed into ObamaCare, has not worked to control costs.

FoleyHoag stated that the bill provides some guidance on how the HPC will determine when a price is significantly high.  This includes the cost of the drug, its utilization levels, and the “potential impact” on Massachusetts’ healthcare cost growth that has been determined by prior legislation, but it “does not provide specific measurements or standards by which the HPC  would determine if these factors are met, leaving further guidance on this topic to regulation.”  Thus, the HPC will be given the power determine exactly what these words mean and write hundreds of pages of new regulations.

According to the bill’s language, manufacturers of drugs placed on the “critical prescription” list would have to provide the following to the HPC:

• Total cost of production, and approximate cost of production per dose;
• Research and development costs of the drug, including costs that are paid with public funds, after-tax costs paid by the manufacturer, and costs paid by third parties.
• Marketing and advertising costs for the drug, apportioned by marketing activities that are directed to consumers, marketing activities that are directed to prescribers, and the total cost of all marketing and advertising that is directed primarily to Massachusetts consumers and prescribers;
• The prices for the drug that are charged to purchasers outside the United States, by country, for a representative set of countries determined by the commission;
• Prices charged to typical Massachusetts purchasers, including but not limited to, pharmacies, pharmacy chains, pharmacy wholesalers, or other direct purchasers; and
• True net typical prices charged to prescription drug benefit managers for distribution in Massachusetts, net of any rebates or other payments from the manufacturer to the pharmacy benefit manager and the pharmacy benefit manager to the manufacturer.

Many of these requirements are simply fishing expeditions and duplicative efforts that will drive up costs.  Drug companies provide research and development outlays, not only in their annual reports, but also to the Securities and Exchange Commission.  Furthermore, it is difficult to quantify exactly what was spent to create one drug and of course, there is a cost that must be recovered for dry holes.  Pharmaceutical companies spend a lot of money that is trial and error for formulas that are ultimately unsuccessful, or perhaps successful but not for the originally intended indication.

Some information is so competitively sensitive that its exposure could hurt competition by reducing the ability to negotiate, encouraging collusion, and driving up prices, not lowering them.  Although the law states the information “will not be considered record” and “shall be aggregated as to protect the financial, competitive, or proprietary nature of the information,” governments, especially the federal government, have failed colossally in protecting private information.

Unfortunately, Massachusetts is not the only state considering this kind of legislation. According to Inside Health Policy, the Ohio legislature will be considering price controls due to a ballot initiative and Pennsylvania is considering a price-setting bill, possibly as a negotiating tactic to force drug companies to disclose their research and development spending.  California and Minnesota are also considering drug pricing transparency bills.  Transparency bills that were considered but failed to pass occurred in North Carolina, New York, and Oregon.

Much of the uproar concerning drug pricing is due to the marketing of drugs such as Solvaldi®, manufactured by Gilead Sciences, that essentially cures hepatitis C, but costs approximately $84,000 for a 12-week treatment schedule.  Gilead has defended the cost of its drug, and as noted in a June 16, 2015 Investor’s Business Daily editorial, “if some drugs do cost a lot, it doesn't make sense to look at just one side of the ledger.  A cure for Hepatitis C could save billions in health costs elsewhere, to say nothing of the economic gains of having these people as productive citizens.”

According to the Department of Health and Human Services, hepatitis C begins as an acute viral infection of the liver, but the virus remains in the body for 75 to 80 percent of those infected, becoming a long-term chronic infection.  It is estimated that 3.2 million people in the U.S. have chronic hepatitis C, with 17,000 new cases each year.

The C. Everett Koop Institute reported there are “few prospective long-term survival and health care cost studies” available for hepatitis C, but by studying chronic hepatitis B health costs, one can get an idea of the magnitude of the price tag.  For the 150,000 hepatitis B patients “with significant liver damage, the lifetime health care costs in the U.S. have been estimated to be $9 billion.”  Because hepatitis C infects 3.5 times more people than hepatitis B, and 80 percent of hepatitis C patients will have chronic liver disease compared to 20 percent of those with hepatitis B, the costs will be far greater.

Ironically, many of those who complain about high drug prices also lambaste drugs companies for researching and developing an overabundance of “me too” drugs; pharmaceuticals that are similar to existing class of drugs, such as ACE inhibitors or statins, as opposed to investing in a new, innovative drug for a different condition.  But “me too” drugs provide more choices for patients, keeping in mind one drug often works better than another for some people, and the competition helps to drive down costs.

Perhaps politicians should pay attention to former Vermont Governor Howard Dean, who was a 2004 Democratic presidential candidate and head of the Democratic National Committee from 2005 through 2009.  As a doctor, he appreciates the need for pharmaceutical research and understands that price controls, which are utilized in Europe and many other countries, leads to fewer choices and anemic pharmaceutical research.  According to Paul Roderick Gregory, a research fellow at the Hoover Institution, “95 percent of the new drugs coming on the market are developed for sale in the United States.  They are paid for by American consumers, while other countries, such as Canada, Germany and France, free ride at our expense.  The United States is the last major country that allows the market to set prices high enough to compensate pharmaceutical companies for their R&D investments.”

Another reason drugs are expensive is the Food and Drug Administration’s regulatory hoops that each new drug must jump through.  It can take 15 years for a new drug to go from the lab to the patient.  Improvements that could speed up the process are included in the 21st Century Cures Act, H.R. 6, which passed the House of Representatives on July 10, 2015 and is now in the Senate.

Politicians considering price controls should also look at the success of Medicare Part D, one of the few government programs that has cost less than predicted due to the “non-interference” clause found in the Medicare Modernization Act (P.L. 108-173), the law that created the benefit plan.  The clause prohibits the government from interfering in the vigorous negotiations that occur among drug manufacturers, pharmacies, and prescription drug plan sponsors.  In 2004, the Congressional Budget Office projected the cost of Medicare Part D would be $123 billion in 2012; its cost was instead $55 billion.

Before politicians upheave the entire pharmaceutical benefit structure with onerous laws and regulations, they should also remember that according to the Generic Pharmaceutical Association, 86 percent of all drugs dispensed are generics.  In March 2015, the Medicare Payment Advisory Commission reported with respect to Medicare Part D, “there has been a shift toward use of generic drugs, with generics accounting for 81 percent of all prescriptions filled in 2012 compared with 61 percent in 2007.”  Furthermore, data released in April 2015 by the Centers for Medicare and Medicaid shows that within the five top specialties with the highest total costs, generics were dispensed more often in Medicare Part D.

Chart 3. Generic Dispensing Rate by Specialty, 2013

CMS Chart May 2015

These figures prove the market works.  Generics save money for patients and taxpayers.  Patients can also get access to branded drugs when no generic is available or they must use a particular brand name drug because it is the only one that works well for them, or there may be a worry with drug interaction.  This can be of a particular concern with the elderly, low-income patients, and those with several chronic illnesses.

It is disconcerting that even though it has been aptly demonstrated that price controls and over-regulating the free exchange of goods between consenting parties do not work, legislators are still naively trying to control costs.  Patients and taxpayers should help to ensure that history does not repeat itself in Massachusetts and elsewhere.