The Problem with ‘Price Transparency’ in Prescription Drugs

By Naomi Lopez Bauman & Timothy Sandefur

Thursday, May 23, 2019

There’s strong bipartisan support today for doing something about prescription-drug costs. Unfortunately, a deceptively simple new regulation that the Trump administration rolled out earlier this month will likely make things worse.

Beginning this summer, drugmakers will be required to state the prices for their medicines in all direct-to-consumer TV advertisements — an idea that sounds wise, until you learn that in practice, the information provided is meaningless at best and inaccurate at worst.

The rule requires drug manufacturers participating in Medicare and Medicaid to disclose the “wholesale list price” of either a 30-day or “typical” regimen whenever they run television ads for their medicines (unless that price is under $35). The price will be followed by the statement “if you have health insurance that covers drugs, your cost may be different.”

The problem is that drug manufacturers do not set the prices consumers pay. Instead, middlemen buy these drugs in bulk with discounts and rebates. These middlemen then sell to retailers, with another round of rebates and reductions. As a result the “wholesale list price” that the regulation forces manufacturers to provide in their ads doesn’t actually exist.

And when it comes to insurance plans, “your cost may be different” is an understatement. What patients end up paying often has more to do with what kind of prescription-drug coverage they hold than with anything else. An insurance plan requiring a co-pay for the drug will result in one price, one with a high deductible but a negotiated discount will result in another figure, and the customer whose plan includes no drug coverage will pay still a different amount.

Worse still, the regulation defines “wholesale list price” in a way that contradicts existing law. A decade ago, a federal court defined that term as meaning “the amount that goods actually cost,” with all applicable discounts and rebates factored in. But the administration’s proposal specifically forbids advertisers from factoring in any discounts or rebates. And the regulation doesn’t specify what a “typical regimen” of a drug is. Every patient, of course, is different — and it’s impossible to guess what federal bureaucrats will consider “typical.”

The bottom line is simple: The disclosure of the manufacturer’s “list price” is meaningless. Worse, it’s likely to be drastically misleading.

Imagine an advertisement that says, “The list price for typical course of treatment with Drug X is $500. If you have health insurance that covers drugs, your cost may be different” — which is the language the regulation requires ads to use. A patient planning to pay cash would believe his price to be $500, even though, after rebates and discounts, his pharmacy might charge only $300. Even a patient with insurance might not realize how drastic the difference could be; perhaps she would owe only a $40 co-pay.

For this reason, the regulation is also vulnerable to a constitutional challenge. Courts have held that the government may force businesses to disclose true information about products, but the First Amendment prohibits the government from forcing them to state untrue or misleading information.

Patients would certainly be better served by better information, and our health-care system often falls woefully short on that front. But a rule requiring disclosure of mythical prices won’t improve patient outcomes or make drug treatments more affordable. The real danger is that it will result in greater confusion or even discourage patients from seeking care altogether.