It’s hard to lower drug prices, if you don’t know what they are

State and federal legislators have gotten the message: Their constituents want them to make prescription drugs more affordable and to do it without delay.

House Speaker Nancy Pelosi (D-Calif.) recently laid out a plan that would allow the government to negotiate the price of as many as 250 name-brand drugs for Medicare beneficiaries and would impose penalties on drug companies if they didn’t extend those prices to private insurers. 

The Senate Finance Committee is considering legislation to require drug companies to pay rebates to Medicare if they raise prices faster than inflation. At the state level, at least 166 drug pricing bills were passed between 2015 and 2018 and so far this year 33 states have enacted another 51 such laws.

The problem with all these bills is that they are shooting in the dark. Lots of information is available about drugs’ published list prices. But the drug distribution system is so complex — involving numerous middlemen and confidential negotiations for myriad rebates, fees and discounts — that manufacturers’ list prices are almost meaningless. 

The net prices manufacturers receive after all discounts and rebates are more useful, but the difference between what manufacturers receive and what consumers and insurers pay is still shrouded in mystery. 

Until regulators and legislators understand where the profits are flowing in the drug business, writing bills to control prices risks serious misfires that could target the wrong participants in the distribution chain. 

The critical first step is mandating price and profit transparency throughout the supply chain, including manufacturers, wholesalers, pharmacy benefits managers, pharmacies and insurers. 

Such a sweeping demand for information requires congressional action. Some states have attempted price transparency, but their efforts are incomplete and can be misleading. 

In a new first-of-its-kind study of state drug pricing laws, my colleague and I found that 22 states had passed 35 bills that included some kind of transparency component between 2015 and 2018. But only seven of the bills went beyond requiring information that is already available. 

Only two states required that net prices be reported: by insurers in Vermont and by manufacturers in Maine. Only Oregon and Nevada required that profits be reported by manufacturers.

Only Connecticut, Louisiana and Nevada required that pharmacy benefit managers — the big intermediaries that negotiate prices for insurers and employers — report rebates that they receive from drug makers. But even then, the requirement is only for aggregate reporting, not drug-by-drug.

Tracking how money flows in the aggregate is important, as a previous study shows. That will not substitute for drilling down into individual drug cases. For example, the reasons why insulin prices are rising may be very different than the dynamics affecting other generic drugs. 

Importantly, no state passed laws that together revealed true transaction prices or profits across all supply chain segments. 

To compound the problem, states have created a thicket of requirements that add to administrative costs without securing meaningful results. The laws vary widely, including the timing of disclosures (before or after a price increase), the type of information (price amounts, justification for increases, etc.) and what thresholds trigger disclosure. In many cases, the information submitted to the state is confidential, which inhibits media and academic oversight of the process. 

Earlier this year executives from drug makers and other sectors of the distribution chain appeared before congressional hearings and pointed fingers at each other over who is most responsible for soaring prices. The only way Congress will know who is right — if any of them — is to see pricing and profit information from each stage in the supply chain. 

Such information could directly influence legislative or regulatory strategy. Speaker Pelosi is advocating federal negotiations with drug makers, but in some cases negotiations with pharmacy benefit managers or other participants in the supply chain might be the better course. 

Just as Pelosi has targeted a top segment of drugs in her proposed legislation, policymakers could start by requiring transparency for drugs with the largest budget impacts. Once armed with that data, they can fashion informed rules that drain unjustified profits from the chain and start making important drugs more affordable. 

Neeraj Sood is a professor of public policy at the USC Schaeffer Center for Health Policy & Economics and the Price School of Public Policy. He is also vice dean of research and vice dean of faculty affairs at the Price School. He has consulted for various health care and life sciences companies, associations and foundations.