Ethics of Transparent Pharmaceutical Pricing Laws: The Harms Do Not Outweigh the Risks


Craig Klugman

Publish date

Tag(s): Legacy post
Topic(s): Health Care Health Policy & Insurance Health Regulation & Law Justice Pharmaceuticals

by Craig Klugman, Ph.D.

Despite campaign promises that drug prices would be lowered, the current administration and Congress seem on target for giving pharmaceutical companies more power over pricing, over keeping out competition and over expanding their monopolies. The President’s “Drug Pricing Innovation Working Group” is staffed by many current and former industry lobbyists. While the federal government is deliberating, some states are already acting.

Last week, Nevada passed a law that requires pharmaceutical manufacturers to disclose the prices, profits, and discounts of insulin. If they want to raise the price of insulin by more than inflation, they must submit a written explanation to the state. The new law comes into effect in October and the first reports are due April 1, 2018. If a manufacturer does not comply, they face $5000 per day fines. In addition, sales reps must register with the state and companies cannot insist on “gag rules,” conditions that prevent pharmacists from suggesting generics or alternatives. The limit of the law to insulin only was born of political expediency.

Only one year before, Vermont became the first state to require more transparency in drug pricing. Under its law, the state identifies 15 drugs that cost the most Medicaid dollars and whose price rose by more than 15 percent in one year or 50 percent in the last 5 years. The identified companies must then submit a justification for the price increase. In the first year of the law, 10 companies were investigated and asked to justify their increases.

In neither state’s law can the state require the company to reduce prices. And unlike a utility, the companies do not need to submit planned increases for state approval. If the state rejects a company’s reasoning or says that the price increase is too high, there is no mechanism for negotiating a price decrease. These laws could actually lead to increased drug prices since a company has an incentive to release its drugs at higher prices knowing that no justification is required for initial pricing, only for increases. Or they could cap increases to just under the trigger percent.

I have written in this space before that the idea (never mind the actuality) of making obscene profits off of the pain and suffering of others is immoral and unethical. By obscene, I mean an amount over costs and a modest profit. The profit margin on pharmaceuticals is 10% to 42% with a mean of 18% and among major manufacturers, averages 20%. In other countries where drug pricing is regulated, margins are much smaller. For perspective, luxury automobile manufacturers have margins of 7 to 12%. Even Apple’s profit margin (among the highest in the tech industry) is 27%, is lower than several drug manufacturers.

At the most recent meeting of the American Medical Association, the physician’s group is asking drug manufacturers to include the retail price of drugs in all advertising. The retail price would appear on television commercials and on brochures. One problem is that few people pay the retail price as there are discounts for patient prescription programs, insurers, large health care systems, and large pharmacy systems. Basically, everyone but the person paying out of pocket and the federal government receive discounts. Thus, the actual price depends on what hospital or pharmacy, what insurance plan, and whether alternatives are available.

The second problem in the AMA proposal, like the Nevada and Vermont laws, is that they are based on the assumption that if people are aware of the costs of drugs, then they can make consumer-wise decisions about what drugs to take. If drug A costs too much money, then they can go to drug b. That’s how we purchase cars and groceries and widgets. There are serious flaws with these assumptions. First, one does not go shopping for a disease. One is either infected, born with, or develops a health condition. We do not get to choose our maladies (though we do, to an extent, choose our habits that make us more likely to develop certain problems). Second, poor health does not follow a market model of supply and demand. Sometimes only one drug exists to treat a person’s condition. Even when there are several drugs, patients do not have access to choose what drugs to buy and where to buy them: Physicians, necessarily, are gatekeepers, making decisions with patients as to what the best drug is for the patient’s condition. Insurance companies tell patients where they can purchase drugs (specific pharmacies and mail order programs), what they will pay for them (co-pays, minimums, deductibles) and even what drugs from which their physicians can choose (formularies). Much of this system exists to protect the patient as it’s not possible for most people to have a full medical education and a pharmacy background to know what’s the best treatment for their conditions.

While the notion behind these laws can be noble—to help the patient have more information—the truth is that they will make no difference as to what patients spend on their medications. Medical care is not a product which one chooses to purchase-it is a basic human right to which all people are due. These laws do more harm by not only incentivizing companies to market drugs at higher prices to start, but they do harm philosophically by pushing a presumption that ill health is something we choose and medical care is a commodity. They also do harm by sleight of hand—appearing to take action (when it makes no difference) instead of looking at the real solutions of negotiating, government price setting, and a single payer. Do not let these empty efforts distract from the need for real changes.


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