June 12, 2004

Transparent drug pricing? Good luck. . .

In a quixotic quest for transparency, several large employers are trying to negotiate drug prices directly with the manufacturers, instead of relying on pharmacy benefit managers ("PBMs") to negotiate for them.

I don't know if this is going to work or not. What's interesting to me is what the article reveals about how opaque drug prices are now:

Consider this example: A 30-day supply of 40-milligram tablets of Lipitor, a cholesterol treatment that is the world's best-selling drug, costs $112.48 at the "average wholesale price.'' For the average employer drug plan it is reduced to $97.51, not counting various rebates from the manufacturer. But at the Drugstore.com Web site, available to anyone, the price is $94.99.

Buying drugs, it seems, is a byzantine labyrinth of buyer groups, rebates, pass-throughs, and (probably sometimes) kickbacks. The result is that it's hard to talk about "the price" for a brand-name drug, since everything depends on who you are and where you're buying.

A popular buzzword in health care reform circles these days is "consumer-driven health care." Its advocates claim that when consumers can see the real costs of various treatment options, they will choose the ones that are most efficacious and that cost the least.

I like the theory--it makes sense. But I'm skeptical about whether the theory can be put into practice without some profound changes in our healthcare delivery system, most of them involving changes that many of the game's major players are going to oppose. Articles like this one reinforce my skepticism, since it suggests that we have a very long way to go before the costs of care are reliably reflected in the prices for care.

It seems to me that this is another classic example of "market failure" (i.e., a real-world case that doesn't conform to the theoretical constructs of the laissez-faire economists and their champions in the policy arena). Whether the solution to this market failure can be achieved by the market alone is a question that can only be answered by experience. But I'm doubtful.

Most people, including myself, just don't have enough information and knowledge to make the kinds of idealized decisions that the pro-market advocates presume that we have. Even if I were presented with a list of perfectly transparent prices and forced to pay some percentage of these prices myself, I simply wouldn't know when I could safely choose the cheaper option and when my health depends on spending more. And my powers of discernment would only get worse when I got sick. I'd have to rely on my physician, and she's either going to be in a fee-for-service arrangement where she simply won't take costs into account at all, or she'll be in some form of capitated payment system, where her incentives will probably tilt too far in the direction of cost savings. The point is, the decision is not going to be made entirely by me, and the costs probably won't be entirely borne by me. That creates problems for the idealized market model. Health care isn't like toothpaste, at least relative to idealized, rational consumer behavior.

This doesn't mean there isn't room for an injection of some consumer accountability. Health savings accounts ("HSAs") might even make people get off their fat asses and exercise for the sake of keeping a bit more of their money. But even this model has limits, since our illnesses are often outside our control. My genes might spring the "Huntington's disease surprise" on me one day; or some yahoo with too much EtOH on board might run me over with his SUV. Life can be a real bitch.

Meanwhile, the incrementalists can try things like cutting out the PBMs and negotiating with drug companies directly. They can try HSAs. All of this, in my opinion, is mere beating around the bush. But if it shaves a percentage point or two off the annual cost increases of health care, and if that makes folks happy, I'm all for it. I remain convinced, though, that our system will eventually collapse under its own weight, and we will have to build a new one out of the rubble on an entirely different foundation and set of assumptions.

That's why I like health policy. It's like sitting outside in the rain, waiting for the approaching storm.

Posted by Carey at June 12, 2004 09:25 PM

This article was interesting -- I don't know if there really is a role for pharmacy benefit managers (PBMs) -- I see them as a middleman who only can stay in business if they take a slice of the pie (just like private insurance companies) that eventually gets cost-shifted onto employers and patients.

It was frustrating to see that pharmaceutical companies give rebates to PBMs on the most expensive, new drugs, creating an incentive for them to "sell" these more to employers and insurance companies. The result -- costly me-too blockbuster drugs are pushed more than effective generics, costs go up, cost-shifting in the end to the patients.

Thanks for the article.

Posted by: Anjali Taneja at June 13, 2004 10:34 AM