Drug prices are getting more transparent, too

We’ve covered the waves of price transparency that are washing over health care the past few weeks in the KBGH Book Club and here in the blog: no more surprise medical bills, new public tools for comparing procedure prices, no more gag clauses on cost or quality, and others. But we haven’t talked about what’s coming in drug pricing transparency. Americans pay far, far more than peer countries for prescription drugs. Drug prices account for almost a fifth of our excess health spending, even more than administrative overhead and salaries. How bad is the problem? Americans make up less than five percent of the world’s population, but we account for 80% of pharmaceutical revenues.

It is easy to cast the pharmaceutical manufacturers alone as the bad guys here; they spend far more on advertising than on research and development, they are far more profitable than any other sector in the economy, they cannibalize profits to gift to shareholders, and they lobby Congress far harder than any other industry. But manufacturers are not the only players. The manufacturers only set list prices, which are publicly disclosed. Manufacturers negotiate rebates with insurers and pharmacy benefit managers (PBMs) in order to move their drugs up the list on the insurers’ and PBMs’ formularies. Rebates and discounts like this have grown to an astonishing extent over the past few years, leading to “net” prices for many brand-name drugs that are lower than list prices. As we’ve pointed out before, insulin has a typical rebate of 66%. Because the process is so opaque, consumers have no way of knowing the actual price paid for the drugs. Payers argue that this “confidentiality” (if you’re charitable; “secrecy” if you’re cynical like me) allows them to more effectively negotiate because transparency would only allow drug manufacturers to get net prices closer to their very high list prices. This is transparently false. If secrecy were such a tool for keeping costs down, the industry would not be fighting transparency rules. Instead, the manufacturers would be demanding more transparency to allow prices for their products to rise naturally. 

Manufacturers and PBMs have reason to be concerned because of the “Transparency in Coverage” final rule that was issued in 2019 as part of the usual flurry of executive orders that precede and accompany any presidential transition. The rule, which takes effect for plan years beginning January 1, 2023, requires that:

1.     insurers disclose the 1) current list price and 2) historical net price for prescription drugs,  

2.     the data be available in “machine-readable” files (that is, not blurry .pdf scans) online to allow for comparisons, and

3.     insurers provide real-time personalized estimates of cost-sharing. 

 Legal challenges may slightly change the final product prior to 2023. But the rule has unusually solid bipartisan support: both Presidents Trump and Biden support it, along with a clear majority of congressional Republicans and Democrats. So it will be difficult to overturn completely. This is all the more reason to make sure our employees are educated shoppers for health services moving forward.

As the Medical Director of the Kansas Business Group on Health I’m sometimes asked to weigh in on hot topics that might affect employers or employees. This is a reprint of a blog post from KBGH.

Transparency is Trust

As the Medical Director of the Kansas Business Group on Health I’m sometimes asked to weigh in on topics that might affect employers or employees. This is a reprint of a blog post from KBGH:

In 1963, Stanford economist Kenneth Arrow published the landmark paper “Uncertainty and the Welfare Economics of Medical Care.” He argued presciently that health care was an unfair system in which to bargain due to “asymmetric information.” The doctors, hospitals, and nurses simply know more than the patients, and this imbalance in information keeps the patient from being able to comparison shop or argue for fairer prices. If a doctor tells you you need a stent in your heart, after all, don’t you need it?

Equip patients with information and they usually make the right choice

There is data to suggest that patients, when given the right information to work with in a digestible way, make responsible decisions in health care purchasing. My favorite study on the topic looked at parents of children with appendicitis. Parents were randomized to see one of two videos: one group of parents saw a video that simply went over the difference between old-fashioned “open” surgery to remove the appendix and newer laparoscopic surgery that uses small “keyhole” incisions to put a camera and small instruments into the abdomen to remove the diseased organ. The video seen by the other half of parents explained the differences in the surgeries but also explained the price difference between the techniques (laparoscopic surgery is more expensive). Both videos stated that patient outcomes are similar with either procedure.

The parents who saw the video with the charge estimate were 1.8 times as likely to choose the open procedure. In fact, the effect of simply stating the charges in the video reduced the average price of the surgery from $10,477 to $9,949, a difference of $528, since more parents chose the open procedure when presented with good data. And more than a quarter of the parents choosing the open procedure said cost was the primary factor in their decision-making! This point is worth restating: parents, when confronted with a surgical choice in an emergency situation that, if handled incorrectly, could harm their own child, still took cost into account in their decision-making.

Things we’d hoped would work… but didn’t.

Many hoped the internet would solve the knowledge gap in medicine and empower patients. After all, in the business of buying and selling cars, some argue that information asymmetry is long-gone. If I were to buy a new Chevy Bolt today, I would simply choose my desired features on Edmunds.com, print the price sheet, and offer to pay my dealer a price in the ballpark of what Edmunds suggested was fair. But in spite of efforts from companies like Castlight, CashMD, and others, we haven’t seen a big dent in healthcare costs due to transparency alone. Some of this is due to the fact that doctors themselves–outside of the radical transparency of many Direct Primary Care physicians–aren’t always privy to the price of tests, drugs, or even their own services. And even those DPC doctors can’t necessarily share other outcomes we’re interested in, like rates of screening for cancer and metabolic diseases, mortality rates, and other quality indicators.

So the government has tried to step in. The Trump administration released an executive order in fall of 2019 requiring that by 2021 all hospitals must publish their “standard charges” online in a machine-readable format so that other software can begin to compare prices. This is a good start, but it is unlikely to work. Those “standard charges” are, in most cases, “chargemaster” prices that have little bearing on reality. Medicare, for example, pays about 31% of the chargemaster price. Second, patients mostly care about out-of-pocket payments, not insurance payments. To have an idea of their own liability, patients need the “bundled price” for the entire episode, which chargemaster prices do not provide. Instead, the chargemaster prices are for individual charges for materials and procedures

What CAN we do?

But we can’t just throw our hands up in frustration. As employers we should control what we can control. We can control state and federal policy as voters, but our power may be better wielded locally. We’ve pointed out previously in this blog that a lack of transparency was one of the big drivers of health care costs. That transparency extends beyond the operating room, exam room, or pharmacy. It reaches into the relationship between you and your partners, such as your broker, your PBM, and medical providers you may directly contract with. A good first step, if you weren’t able to attend our recent webinar with Dave Chase of Health Rosetta, is to ask for those partners to disclose all their revenue streams. Their undisclosed revenue streams may surprise you. Once everyone’s revenue is transparent, we believe that partners can work together in a more trusting relationship, to the benefit of both parties.

Note: KBGH works with Team IBX to introduce transparency in the insurance RFP process, but Team IBX was not involved in the writing and did not influence this post.