Shining a light on prescription drug pricing
After years of failed efforts, the California Legislature may finally pass a bill that responds to the problem of rising prescription drug costs. But temper your enthusiasm: Though this measure (SB 17) has been fiercely resisted by the pharmaceutical industry, it wouldn’t actually stop manufacturers from raising their prices as high as they think the market will bear. 

After years of failed efforts, the California Legislature may finally pass a bill that responds to the problem of rising prescription drug costs. But temper your enthusiasm: Though this measure (SB 17) has been fiercely resisted by the pharmaceutical industry, it wouldn’t actually stop manufacturers from raising their prices as high as they think the market will bear. It would just make them reveal more about the cost and value of their drugs as they do so.

Some lawmakers and consumer advocates would like to go further, capping drug prices in some fashion. But efforts to control drug prices through legislation or the ballot have failed, in part because of heavy industry opposition and in part because of concerns that price caps might lead to drug shortages or other unintended consequences. The state also could be on shaky ground in federal court if it took steps that impeded interstate drug sales.

In short, the Legislature’s options are limited. Worse, it’s hard for policymakers to find lesser measures that might be helpful because of the cloud of mystery surrounding how pharmaceutical companies price their products. Although publicly traded companies report broadly on their expenses and revenues, those numbers don’t provide much explanation for specific pricing decisions, such as why an EpiPen that sold for $104 in 2013 was priced at $225 two years later. The companies’ typical explanation is that every successful drug has to cover the cost of developing many other drugs that don’t make it to market.

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Even after their patents expire, drug makers sometimes face so little competition that there’s nothing to stop them from jacking up prices exponentially.

That’s where SB 17 by Sen. Ed Hernandez (D-West Covina) comes in. It would gather data from insurers about which drugs are the most commonly prescribed, which are the most costly and which saw the largest increase in total sales, as well as what percentage of premiums and premium increases were attributable to prescription medications. So much for the non-controversial portion of the bill. More contentiously, it would require drug makers to give notice weeks in advance of a major price hike. It would also compel manufacturers to lay out the rationale for such increases, along with documentation of any improvement in “clinical efficacy” that their drugs offer over alternative treatments. The same disclosures would be required for newly approved specialty drugs.

The drug companies’ biggest fear seems to be that the measure is a stalking horse for price caps, which they say would dry up the investment they rely on to fund R&D. But that’s a wholly separate debate, and one that should be informed by the kind of industry data that SB 17 aims to collect.

Nor can drugmakers argue with a straight face (although some do) that the Legislature should simply trust competition and market forces to protect consumers. Not to put too fine a point on it, but pharmaceutical companies enjoy goverment-awarded monopolies on their products that last for a decade or more, and that they often manage to extend by tweaking their formulations. And even after their patents expire, drug makers sometimes face so little competition that there’s nothing to stop them from jacking up prices exponentially (see, e.g., the exploits of “pharma bro” Martin Shkreli). On top of that, consumers aren’t trained to diagnose their own ailments and prescribe the right pills — they rely on medical professionals to make those choices for them. That’s why pharmaceutical companies spend so much time and money marketing their wares to doctors and clinicians.

Drug makers insist that their products are being demonized in the debate over healthcare costs, and that their prices aren’t as high as they appear because of the rebates and discounts obtained by pharmacy benefit managers such as Express Scripts — powerful middlemen that process claims for prescription-drug benefits and negotiate with drug makers on behalf of insurers and large employers. They complain that Hernandez’s bill doesn’t account adequately for the role of these middlemen.

There are a host of questions surrounding pharmacy benefit managers, which critics say pocket some portion of the discounts they negotiate rather than passing them along to their customers. And a bill is moving through the Legislature (AB 315) to offer a bit of needed clarity by requiring these companies to disclose to their clients the discounts they obtain, while also reporting aggregate information to the state about the prices they pay for drugs.

If the industry is worried about SB 17 painting a misleading and prejudicial picture about drug prices, it should be working with Hernandez to generate better data for state policymakers, not trying to stymie the push for transparency. The fact that pricing is complicated is all the more reason to develop a clearer picture of the factors involved. It’s not as if this issue is going away — as drug prices continue to rise along with healthcare spending in general, so will the pressure on lawmakers to ease the pain.

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