A Bogus Solution for High Drug Costs
June 23, 2016
Most of the drugs Americans take are lower cost generics -- accounting for about 88 percent of prescriptions, according to NCPA Senior Fellow Devon Herrick. Generics are cheap because they are no longer protected by patents and different manufacturers compete on price. Yet, drugs whose patents have not yet expired can sometimes be very expensive; especially those recently approved and those derived from living substances. As a result, national spending on drug therapies increased by nearly one-quarter (23 percent) in the past two years. Much of that increase is on expensive brand-name drugs and high-tech, specialty drugs -- such as those used to treat cancer, hepatitis, rheumatoid arthritis and multiple sclerosis.
Lately, a few politicians (and lobbyists for pharmacies and drug makers) have been attempting to divert some of the blame for high drug prices to the administrators of employee drug plans. They worry that pharmacy benefit managers (PBMs) mark up drug prices well above the PBMs' costs or fail to pass along manufacturers' drug rebates and other discounts to their clients (employers and insurers) and consumers with drug plans. The blame-shifters have suggested that employers and their workers could potentially benefit if PBMs were forced to disclose the (net) wholesale prices they paid for drugs.
Economists, the U.S. Federal Trade Commission (FTC) and even the actuarial consulting firm Milliman, Inc. are rather skeptical of this argument. The FTC is responsible for preventing unfair or deceptive trade practices and unfair methods of competition. The agency has conducted numerous studies of the business practices of PBMs -- including the effect of mandatory price transparency on competition. The FTC is concerned that mandating price disclosure will remove a bargaining tool used by some firms to compete with others. The FTC also worries the loss of proprietary pricing information could reduce aggressive bargaining or potentially encourage price collusion among manufacturers.
According to the FTC, "…harm may result if plan sponsors are denied the ability to choose the level of transparency that best suits them, within the context of their overall plan design." This is because the market for drug plan managers (that is, PBMs) contains both large and small firms. Small firms often attempt to differentiate themselves by offering different pricing models.
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