The largest problems in the health care industry are often created by reformers envisioning themselves as free market saviors, when in reality they are merely advocates for more intrusive government regulations. The Trump administration’s proposal to require that drug advertisements include the medicine’s list price is such an example.
On its face, requiring price disclosure appears to promote transparency and free markets. Why shouldn’t consumers know the price of a good before they purchase it? Of course, consumers should. The problem is that, like many products, it is not possible to convey one price that accurately reflects the cost that any individual consumer will pay. Prices for soda, a much simpler product, exemplifies the types of problems that can arise.
Soda can be consumed in 12 oz. cans, 64 oz. bottles, or by the glass in restaurants. Some restaurants may offer unlimited refills, others may offer steep price discounts to encourage patrons to purchase other higher-margin products. Now imagine that Coca-Cola or Pepsi must report a list price for soda in every television advertisement. What is the relevant price?
If the manufacturers report the price per bottle, then consumers will be shocked at the high prices for soda in restaurants. If they report the price per glass in restaurants that do not offer unlimited refills, then consumers may think that soda is too expensive and fail to purchase it at the grocery store. In short, there is not one meaningful list price that soda companies can use in a television ad that conveys an accurate price for all consumers.
The problems facing the soda market pale in comparison to the problems of conveying one accurate price for pharmaceuticals.
Unlike the soda market, a new price disclosure regulation on pharmaceuticals must first answer an important question: whose price should be disclosed? For example, when the administration demands that pharmaceutical manufacturers disclose prices, are they asking the manufacturers to disclose how much insurance companies pay for medicines? If this is the case, then the problem is that the prices insurers pay vary.
Health insurers do not simply pay the manufacturers’ price as if they are buying groceries at the supermarket. Instead, health insurers contract with pharmacy benefit managers (PBMs) to negotiate prices with manufacturers. The actual prices that insurers pay for medicines are the result of these complex negotiations, and these prices vary across insurers. Therefore, the actual price paid by a specific insurer on behalf of a specific patient is unknowable by the manufacturer because there is not one price.
There are also government programs that create further complications. Take the 340B program as an example. The 340B program mandates, for all intents and purposes, that manufacturers sell medicines to qualified hospitals and their contract pharmacies at steep discounts. Therefore, if a patient received his or her medicine from a 340B hospital, or its contract pharmacy, then there is another possible price for the exact same medicine. Should the advertised price also include the impact from these discounts?
Of course, it is likely that the new rule is not intended to convey the prices that large insurers pay. It is probable that the administration wants to let patients know how much they will have to pay when purchasing their medicines. But, here too problems arise.
The actual price a patient pays depends on many factors, most importantly their specific insurance coverage and their specific co-pays, which could vary depending upon how much they have already spent on medicines during the year. Due to these discrepancies, there is simply no way that a manufacturer can list an average price in its advertising that is meaningful to any individual patient.
Facing these insurmountable problems, the correct policy would have been to forgo the new regulation. Instead, the administration’s solution is to require that manufacturers report a price that is meaningless to everyone – the wholesale acquisition cost, or WAC. The WAC is best understood as a starting point for all of the negotiations detailed above. This price is not representative of the cost that any insurer, or any patient, pays.
It is simply a nonsensical policy to require manufacturers to convey a meaningless price to consumers when advertising their medicines. Implementing such a new regulation perpetuates misinformation in the pharmaceutical market and worsens outcomes for patients and the broader health care system.
Requiring That Drug Advertisements Include List Prices Promotes Misinformation
Wayne Winegarden
The largest problems in the health care industry are often created by reformers envisioning themselves as free market saviors, when in reality they are merely advocates for more intrusive government regulations. The Trump administration’s proposal to require that drug advertisements include the medicine’s list price is such an example.
On its face, requiring price disclosure appears to promote transparency and free markets. Why shouldn’t consumers know the price of a good before they purchase it? Of course, consumers should. The problem is that, like many products, it is not possible to convey one price that accurately reflects the cost that any individual consumer will pay. Prices for soda, a much simpler product, exemplifies the types of problems that can arise.
Soda can be consumed in 12 oz. cans, 64 oz. bottles, or by the glass in restaurants. Some restaurants may offer unlimited refills, others may offer steep price discounts to encourage patrons to purchase other higher-margin products. Now imagine that Coca-Cola or Pepsi must report a list price for soda in every television advertisement. What is the relevant price?
If the manufacturers report the price per bottle, then consumers will be shocked at the high prices for soda in restaurants. If they report the price per glass in restaurants that do not offer unlimited refills, then consumers may think that soda is too expensive and fail to purchase it at the grocery store. In short, there is not one meaningful list price that soda companies can use in a television ad that conveys an accurate price for all consumers.
The problems facing the soda market pale in comparison to the problems of conveying one accurate price for pharmaceuticals.
Unlike the soda market, a new price disclosure regulation on pharmaceuticals must first answer an important question: whose price should be disclosed? For example, when the administration demands that pharmaceutical manufacturers disclose prices, are they asking the manufacturers to disclose how much insurance companies pay for medicines? If this is the case, then the problem is that the prices insurers pay vary.
Health insurers do not simply pay the manufacturers’ price as if they are buying groceries at the supermarket. Instead, health insurers contract with pharmacy benefit managers (PBMs) to negotiate prices with manufacturers. The actual prices that insurers pay for medicines are the result of these complex negotiations, and these prices vary across insurers. Therefore, the actual price paid by a specific insurer on behalf of a specific patient is unknowable by the manufacturer because there is not one price.
There are also government programs that create further complications. Take the 340B program as an example. The 340B program mandates, for all intents and purposes, that manufacturers sell medicines to qualified hospitals and their contract pharmacies at steep discounts. Therefore, if a patient received his or her medicine from a 340B hospital, or its contract pharmacy, then there is another possible price for the exact same medicine. Should the advertised price also include the impact from these discounts?
Of course, it is likely that the new rule is not intended to convey the prices that large insurers pay. It is probable that the administration wants to let patients know how much they will have to pay when purchasing their medicines. But, here too problems arise.
The actual price a patient pays depends on many factors, most importantly their specific insurance coverage and their specific co-pays, which could vary depending upon how much they have already spent on medicines during the year. Due to these discrepancies, there is simply no way that a manufacturer can list an average price in its advertising that is meaningful to any individual patient.
Facing these insurmountable problems, the correct policy would have been to forgo the new regulation. Instead, the administration’s solution is to require that manufacturers report a price that is meaningless to everyone – the wholesale acquisition cost, or WAC. The WAC is best understood as a starting point for all of the negotiations detailed above. This price is not representative of the cost that any insurer, or any patient, pays.
It is simply a nonsensical policy to require manufacturers to convey a meaningless price to consumers when advertising their medicines. Implementing such a new regulation perpetuates misinformation in the pharmaceutical market and worsens outcomes for patients and the broader health care system.
Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.