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There’s no doubt about the high level of distress that people across the nation are feeling about the rising costs of prescription drugs.
Prescription drug prices doubled between 2005 and 2013 and are continuing to spiral upwards. Legislators have become so concerned about the phenomenon that in eight states – Massachusetts, New York, California, North Carolina, Pennsylvania, Oregon, Vermont and Colorado – they’ve introduced “drug pricing transparency” bills designed to gather detailed internal information from pharmaceutical companies about the cost to manufacture drugs. The laws’ authors are trying to figure out the cost to manufacture drugs because they think that will give them an idea of whether the drug companies are charging a fair price or not. In at least one case, legislation has been introduced to authorize the state to set a “maximum allowable price” for drugs.
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It’s unclear whether these bills will pass when they’re put up for a vote. But there’s no doubt about the high level of distress that people across the nation are feeling about the rising costs of prescription drugs. Whether the laws’ proposed solution is sound (i.e., whether knowing the cost of manufacture will truly lead to a lower or fairer price), there is universal agreement about the problem: Today there is little-to-no drug price transparency. Prescription drugs are difficult to shop for and few people are really sure how prices are set.
Drug prices are based on a complicated combination of dispensing pharmacy, insurance company, and one’s prescription details. You simply can’t comparison shop for drugs the way you can for almost every other sort of good by comparing prices on the web. People generally don’t find out what a prescription costs until they show up to fill it at the pharmacy. If your insurance company pays, maybe you don’t care. But if you have to pay, as all uninsured and many underinsured people do, it matters a lot.
I run a prescription drug savings card company that’s devoted to helping consumers get better prices on their prescription drugs. I applaud the effort for more transparent prices – even though my company wouldn’t benefit from more pricing transparency, since lack of transparency largely causes the problem of high prices that my company solves. Still, I’m all for further drug transparency. Here’s why:
· Price transparency leads to lower costs. There is plenty of research that shows price transparency leads to lower costs in healthcare. When prices remain hidden, the consumer has less basis for choosing one drug or treatment regimen over another. This matters for the large number of people who don’t have insurance, as well as for people who have insurance but find that their insurance may not cover certain drugs or that their insurance will charge significantly higher copays for certain drugs. The drug manufacturer has less incentive to provide quality products at a low price. The market isn’t free.
· Price transparency is the root of choice. Most people today have no idea what a drug costs: They go to the pharmacy and only find out the price at the counter after their prescription is filled. Their doctor told them that someone in their family needs this medicine but they don’t have a complete picture of available alternatives. They might, for instance, choose to shop around at another pharmacy, consider generic alternatives, or ask about similar medicines offered at a cheaper price. When you don’t have price transparency, you don’t have these types of choices.
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· Price is among the top concerns consumers have today about healthcare. Credit-reporting agency Transunion released the results of a survey that found that 80% of respondents listed price transparency as a factor in choosing a healthcare provider. The same survey found that 79% said they'd be more likely to pay their bills in a timely manner if they had price estimates before getting care. Sixty-one percent of insured consumers say they are always or sometimes surprised by their out-of-pocket healthcare costs, and 55% are always or sometimes confused by the bills they receive.
· A growing number of high-deductible plans put consumers in charge of controlling costs. But consumers can’t control costs if they don’t know what prices are. Out-of-pocket costs for premiums and deductibles doubled to nearly 9.6% of household income between 2003 and 2013, according to data from the Commonwealth Fund. The dollar amount of policy deductibles is still growing. Many, many consumers are finding their deductibles under their new ACA policies are dramatically higher than they have been in the past. American healthcare consumers are more sensitive to price than ever before, and yet we are not providing them with the information they need to get the right drug for them at the best price.
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I should add an important caveat: price transparency alone isn’t of much use if you don’t have quality transparency too. It’s not unusual for a consumer to be offered two competing products and actually choose the higher-priced one because he or she mistakenly believes that it offers significantly higher quality. That’s the concept of value, and it’s the point where price and quality intersect. Having transparency on both price and quality is essential for any free market system to function. It’s rather ironic that the healthcare system in the U.S., ostensibly a capitalist country, lacks both price transparency and quality transparency.
Most people can’t offer you many data points about how effective one prescription drug is over another even though they can probably tell you exactly how many stars Yelp! gave to the burger joint they ate in last night. Part of the reason for this lack of quality may be that health outcomes are in some sense difficult to measure, but a lot of it is simply that the current system has little incentive to provide quality transparency. I hope that this trend changes with this upcoming legislation in the states.
Finally, as encouraged as I am about this new legislation, the few states that seek to put a cap on drug prices are, in my opinion, reaching too far. That’s price fixing, and it isn’t effective. Artificially setting below-market-rate prices for drugs would stifle innovation, create shortages, and works against the very market forces I believe will help to solve this challenge.
About the Author
Keith Jacobs co-founded RefillWise in 2014 to help Americans save money on prescription drugs. His company negotiates on behalf of its network of more than one million members for discounts on virtually every prescription from more than 50,000 pharmacies across America.