New Marketplace

Can Transparency Legislation Help Control Medication Costs?

Article · June 24, 2016

Interview with Dr. Ameet Sarpatwari on state bills that aim to reduce drug spending by requiring companies to disclose R&D costs.

 

Spending on prescription drugs has risen sharply in the United States over the past 2 years.1 Although thousandfold price increases for a few generic products in limited use have attracted much attention, overall spending growth has been driven more by the widespread use of costly new agents such as sofosbuvir (Sovaldi) and cumulative markups in prices of common brand-name drugs such as rosuvastatin (Crestor), imatinib (Gleevec), and etanercept (Enbrel). Coverage of these products has strained payers’ budgets, forcing difficult funding choices.2

With little relief coming from federal legislation, states have started experimenting with their own novel approaches to the problem. One tactic has been to tighten eligibility requirements for some high-cost drugs. In the case of the hepatitis C drug sofosbuvir, for example, most state Medicaid programs have limited coverage to patients who already have liver damage. Similarly, several states have required publicly funded recipients of these drugs to abstain from drug and alcohol use.

Such coverage restrictions have come under fire for being non–evidence-based and discriminatory, and particularly problematic when used to limit access to highly effective drugs.3 In an alternative strategy, some states have contracted with nonprofit “academic detailing” organizations to assess the most current evidence about medications and educate prescribers about the relative efficacy, safety, and cost-effectiveness of their therapeutic choices.

Yet many policymakers argue that still more is needed. To evaluate the industry’s controversial argument that high drug prices are a fair and necessary reflection of the high costs incurred to bring a product to market,4 10 states have introduced bills that would require pharmaceutical companies to disclose those research and development costs (see table). Many of these proposed laws would apply to drugs with wholesale acquisition costs of at least $10,000 per patient per year or per course of treatment, and several would mandate disclosure of profits. A few proposals would further compel reporting of prices charged in other countries as well as those paid by other purchasers in the state, including pharmacy benefits managers, which often receive substantial rebates from manufacturers that are kept secret as proprietary information. These transparency bills have been met with strenuous opposition from the pharmaceutical industry, and only Vermont’s had been enacted as of June 3, 2016.

State Bills That Would Require Pharmaceutical Company Disclosure of Research and Development Costs

State Bills That Would Require Pharmaceutical Company Disclosure of Research and Development Costs. Click To Enlarge.

The impetus behind such efforts is the idea that the price of a drug should reflect not only an assessment of its clinical benefit — represented by its cost-effectiveness or economic value — but also the effort and resources expended in its creation. Proponents of the bills argue that payers have a right to know how a drug’s current price relates to such factors as its development, manufacturing, and marketing costs and that this information would assist policymakers in determining when a price is reasonable and in pushing back when it is not.

Opponents of the bills dispute this claim, pointing out that the information that the states receive would not necessarily account for expenditures on failed products or unsuccessful research programs, which constitute a large component of the development costs of the minority of drugs that reach the market. Of course, nothing would prevent drug companies from also supplying the cost of failures, nor are states prevented from amending their bills to include such information.

Proponents of transparency bills contend that even without data on the cost of failures, requiring drug-specific cost information would provide states with a better sense of what it took to create a drug than they currently possess. According to this position, reporting requirements could help identify cases in which drug development was heavily subsidized by the public through funding by the National Institutes of Health or a public–private partnership program such as the Biomedical Research and Development Authority. They could also alert state purchasers to problematic business practices engaged in by companies such as Turing or Valeant, which bought the rights to limited-source generic drugs that they played no role in developing and then sharply raised their prices.

Advocates of transparency bills also suggest that such laws could encourage manufacturers to invest more heavily in research and development to justify the high prices of their products, in part on the basis of previous reviews that have found that only about 15% of pharmaceutical company revenues are currently invested in research and development — substantially less than is spent on marketing.5 They add that more widespread knowledge of the cost of drug development could lead to establishment of better incentives to drive innovation to areas of high public health importance, including the development of prizes for the creation of novel antibiotics.

Laudable as these intentions are, several factors could limit the effectiveness of these measures. First, giving fair consideration to “sunk costs” that went into researching other products that did not make it to market is no easy task. Would companies be allowed to recoup the costs of a failed drug for Alzheimer’s disease by raising the price of a new drug for diabetes? Should states or private-sector payers have the right to make such resource-allocation decisions?

A further question arises about the most appropriate metric for a fair assessment of a drug’s selling price. If a company had a tortuous and perhaps inefficient process for developing yet another statin that was no more safe or effective than existing statins, would that justify a higher price? The economics literature would suggest that the fair price of a product should be aligned with the actual value (clinical utility) it provides, an assessment traditionally based on a drug’s cost-effectiveness, rather than how much it cost to develop.

Finally, it is unclear how any required research-cost data would be verified. Of the eight state pharmaceutical transparency bills still pending, only three would require certification by third-party auditors. The prospect of multiple metrics for calculating development costs, potentially applied differently in different states, is not encouraging.

Equally important, defining development costs is of limited value without the power to use that information to determine reimbursement — a much harder sell politically and one that has not yet found much traction. Federal law, for example, mandates that state Medicaid programs cover nearly all drugs approved by the Food and Drug Administration, a requirement that undercuts states’ ability to extract price concessions. Federal law also prohibits the Centers for Medicare and Medicaid Services from negotiating the prices of drugs paid for through the Medicare Part D drug-benefit programs, even though the agency uses its purchasing power to negotiate reimbursement for nearly all other medical goods and services. A few states have tried to bridge this gap by connecting transparency to reimbursement. The Tennessee proposal, for example, would authorize the state’s department of health to set price caps on drugs.

Transparency laws could help provide some additional information for state policymakers in a historically opaque area of the marketplace, particularly the now-hidden value of secret rebates made to prescription benefit managers, Medicaid programs, and other payers. But methodologic complexities and political realities may hamper their ability to use them to lower drug prices. In the short term, we believe that more promising policy approaches are likely to come from using currently available data to measure the relative benefits, risks, and costs of treatment alternatives and then actively disseminating those insights to prescribers, policymakers, payers, and patients. Such work is currently being done by the Institute for Clinical and Economic Review, the Drug Effectiveness Review Project, Alosa Health, the Memorial Sloan Kettering Cancer Center, the National Institute for Clinical Excellence in Britain, and the Institute for Quality and Efficiency in Health Care in Germany, among others. Ultimately, more effective use of such approaches may be the most practical weapon to enable states to drive better choices based on information that is already in the public domain.


SOURCE INFORMATION

From the Program on Regulation, Therapeutics, and Law (PORTAL), Division of Pharmacoepidemiology and Pharmacoeconomics, Department of Medicine, Brigham and Women’s Hospital and Harvard Medical School, Boston.

1. Medicine use and spending in the U.S. — a review of 2015 and outlook to 2020. IMS Institute for Healthcare Informatics, 2016 (https://www.imshealth.com/en/thought-leadership/ims-institute/reports/medicines-use-and-spending-in-the-us-a-review-of-2015-and-outlook-to-2020).
2. Barlas S. States try to control Medicaid pharmaceutical costs: numerous, diverse cost pressures force myriad reform efforts. P T 2015;40:260-262.
3. Barua S, Greenwald R, Grebely J, Dore GJ, Swan T, Taylor LE. Restrictions for Medicaid reimbursement of sofosbuvir for the treatment of hepatitis C virus infection in the United States. Ann Intern Med 2015;163:215-223.
4. Avorn J. The $2.6 billion pill — methodologic and policy considerations. N Engl J Med 2015;372:1877-1879.
5. Anderson R. Pharmaceutical industry gets high on fat profits. BBC News. November 6, 2014 (http://www.bbc.com/news/business-28212223).

This Perspective article originally appeared in The New England Journal of Medicine as “State Initiatives to Control Medication Costs — Can Transparency Legislation Help?”

Call for submissions:

Now inviting expert articles, longform articles, and case studies for peer review

Connect

A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »

More From New Marketplace
Pronovost04_pullquote payer interoperability data exchange

Promoting Interoperability: Roles for Commercial Payers

Interoperability is a business imperative for enhancing value in health care, and providers and payers must collaboratively meet the demands for data exchange.

Health Care Snapshot - Chinese Health Care and U.S. Health Care

Perspective from the East: Health Care in China

Context is the key to understanding China’s health care system and its emphasis on population health.

GordonWang01_pullquote - digital health care China

Digital Health Care in China: Benefits and Pitfalls

China’s experience offers insights for integrating digital and non-digital health care services.

Dale04_pullquote_disrupting the value-based vs fee-for-service payment model

Disrupting the Payment Model

We should modernize our payment mechanisms to reflect the reality of our digitally enabled lives.

Percentage of Patients Choosing a Reference-Based Pricing Facility for Knee or Hip Replacement Surgery - 2008-2012 - value-based benefit designs

The Evidence for High-Value Benefit Designs

Innovative models are showing promise, but limited transparency and peer-reviewed research hamper expansion.

New Evidence on Stemming Low-Value and Overprescribing - Nudgind Physicians Toward Better Prescribing Practices

New Evidence on Stemming Low-Value Prescribing

New research suggests that deploying strong and surprising messages could help to address overprescribing of opioids and other drugs.

Wang01_pullquote medical devices - medical device innovation in China

Accelerating Medical Device Innovation in China

Promoting collaboration between clinicians, researchers, device-makers, and regulators.

Health Care Costs - Cost Transparency Is the Main Change Needed to Support Patients in Lowering the Cost of Care

Survey Snapshot: Is Transparency the Answer to Rising Health Care Costs?

NEJM Catalyst Insights Council members say that while transparency might be necessary, we have to change the way care is delivered.

Many Stakeholders Share Responsibility for Lowering the Cost of Care

New Marketplace Survey: Patients Lack Information to Reduce the Cost of Care

Efforts to mitigate rising health care costs have left most industry participants — patients, providers, and payers alike — frustrated at the lack of progress. While there is plenty of blame to go around, a significant open question remains: how responsible are patients for reducing costs?

Hip or Knee OA Care Management - Musculoskeletal Institute and Bundled Payment Program at Dell Medical

Bundled Payments Are Moving Upstream

Dell Medical School at The University of Texas at Austin has improved outcomes and reduced costs for musculoskeletal care with a multidisciplinary Musculoskeletal Institute and bundled payment model.

Connect

A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »

Topics

Perspective from the East: Health Care…

Context is the key to understanding China’s health care system and its emphasis on population…

Perspective from the East: Health Care…

Context is the key to understanding China’s health care system and its emphasis on population…

Challenges and Best Practices for Health…

When done right, value-based contracting for medical devices can ameliorate shrinking margins at health systems,…

Insights Council

Have a voice. Join other health care leaders effecting change, shaping tomorrow.

Apply Now