Wholesale Drug Price Transparency Laws Won’t Lower Costs

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Price transparency is an enormous benefit to consumers in retail markets. Consumers who make the effort to shop around often discover drug prices can vary from one pharmacy to the next. Retail drug prices are mostly transparent; patients generally encounter few problems when calling a pharmacy to ask what a given drug costs on their health plan. However, with the possible exception of buying an automobile, wholesale price transparency provides little benefit to consumers. The reason price transparency serves almost no purpose for consumers in wholesale markets is because consumers don’t buy from wholesale markets!

In wholesale markets, wholesale prices are often negotiated among parties with the details considered proprietary. A wholesale vendor may have a wholesale price for which all retail vendors qualify. But the ability to secure lower wholesale prices through volume discounts is often considered a competitive advantage of a volume purchaser like a big box store. More importantly, just because I don’t know the price Home Depot paid for a stick of lumber does not mean I don’t benefit from the negotiated price breaks that it passed down to its consumers.

Drug makers have pilloried in the press lately for the high prices charged for some of their newer drugs. Politicians have taken notice, including Hillary Clinton, Bernie Sanders — and even Donald Trump. Some drug makers and pharmacy trade groups have tried to pass off some of the blame for high prices by claiming drug plan administrators are jacking up the price consumers pay for drugs (or withholding rebates from plan sponsors). Some of these groups are calling on states to force pharmacy benefit managers (PBMs) to reveal their wholesale prices to prove they are not inflating what consumers and employer pay for drugs. Economists at the U.S. Federal Trade Commission (FTC) and some actuarial consulting firms are understandably skeptical of this claim. 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.

As is common in most other wholesale markets, wholesale drug prices also vary from one purchaser to the next. For many drug makers, wholesale prices are merely “list prices,” sort of like the sticker price on new cars. The manufacturers of brand-name drugs routinely provide discounts off list price in the form of rebates that lower the final cost from 20 percent to 30 percent, on average. When a consumer covered by a drug plan walks into a pharmacy, the prices they (or their health plan sponsor) pays has been negotiated on their behalf by PBMs. PBMs must also compete for the business of health plan sponsors (insurers and employers).

It is ultimately up to plan sponsors to decide whether they want to capture rebates or allow their plan administrators to profit from each claim adjudicated. Plan sponsors are free to negotiate whichever method suits them — and PBMs generally yield to the preferences of their clients. The two most common pricing methods drug plans use are Pass-through pricing and Spread-pricing. With pass-through pricing, PBMs agree to surrender all or part of manufacturers’ drug rebates to their plan sponsor in return for a higher negotiated management fee. With spread-pricing some employer plan sponsors prefer to allow drug plan administrators to earn a small profit on each drug reimbursed and retain some of the rebates in return for lower management fees.

According to a 2015 report, about three-fourths of employer plans share in the rebates negotiated by PBMs:
• More than one-fourth (28 percent) received the entire rebate.
• More than one-in-five (22 percent) received a flat fee per script (worth about $24).
• About 12 percent received a share of the rebate with a guaranteed minimum.
• About 12 percent received a share of the rebate with no guaranteed minimum.

The bulk of manufacturers’ rebates are ultimately passed on to employers, workers and consumers in the form of lower retail prices, lower management fees or lower premiums. Yet, some politicians and political operatives believe forcing drug plan managers to disclose the wholesale drug prices they pay would somehow magically lower consumer prices. This is misguided and is an attempt to move the discussion away from why some drugs are costly: manufactures of patented medications have significant pricing power and new drugs are often an order of magnitude more expensive than older drugs.

This article is based on the report A Bogus Solution for High Drug Costs

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