The Perverse Effects of Maryland Drug-Price Bill
As President Trump said, health care is “complicated.”
When it comes to health care in America, virtually everyone claims to have the same broad goals: Accessibility to decent care that is affordable and not have it cost businesses and government (read: taxpayers) a fortune.
Good intentions abound, but politically feasible solutions are in short supply, and many bad or simplistic ideas are bandied about by policymakers on both sides of the aisle. A case in point is a Maryland bill that would crack down on “price gouging” by prescription-drug makers. The bill, which passed the House of Delegates on March 20 with an overwhelming, bipartisan margin of 137-4 and will probably be taken up by the Senate in the next few days, seems like a no-brainer. As Maryland Attorney General Brian Frosh said: "We've seen in Maryland and all over the country drug prices [are] skyrocketing."
However, the devil is in the details, and devilish it is. The bill, H.B. 631, excludes pricey brand drugs and only targets generic-drug makers, whose medicines save Maryland residents and taxpayers about $3.7 billion a year. If the bill becomes law, the state Attorney General could take generic drug makers to court for price increases that are vaguely described as “unconscionable.” Unconscionable is a legal doctrine used when consumers have no option to purchase an essential product at inflated prices. However, under the proposed Maryland law, it could be invoked when a generic maker increases the price of a pill from 15 cents to 50 cents but not when the manufacturer of a brand drug increases its price from $300 to $500 per pill.
Generics are a proven solution to high drug costs that saved America approximately $227 billion in 2015, including $90 billion for Medicare and Medicaid. Generics account for 89 percent of all prescriptions written, but only 27 percent of U.S. spending on medicines. In short, generics and a new class of off-brand drugs called biosimilars reduce health care costs and get affordable medicines into the hands of patients who need them most.
The well-intentioned Maryland bill would have the perverse effect of putting a chill on the development and sale of lower-cost generic drugs. Since generic makers operate on a narrow margin and prices fluctuate with demand, the threat of litigation for charging what is subjectively deemed an “excessive” price could drive generic makers out of business or deter companies from bringing new drugs to market. This would reduce competition and innovation, likely drive up prices, and could even create drug shortages.
Certainly not what most Maryland lawmakers or patients want, but a boon to high-price brand drug makers.
The story of this bill is emblematic of a larger problem with many health care (and other policy) proposals. Politicians want to claim a “win,” releasing rosy press releases saying that are fighting high drug prices. In search for this victory, they fail to understand the many drivers of costs and how new legislation designed to drive prices down is doing just the opposite.
Big Pharma is entitled to a premium for new, health-enhancing drugs that are introduced. Yet once their patent expires, generics should be approved by the Food and Drug Administration and promoted as a way to drive down health care costs. Of course, there are bad actors, like the much-publicized case of Turing Pharmaceuticals increased the price of the HIV drug, Daraprim, by 5000 percent.
Making drug prices affordable for Americans requires a multi-pronged approach. Medicare and Medicaid, the nation’s biggest payers, have proposed rules that would limit payments and pay based on assessed value. A move toward value-based pricing “is certainly a good step in the right direction,” according to Patricia Danzon, Wharton professor of health care management. Legislation to make drug-pricing decisions transparent are supported by 86 percent of Americans. The bipartisan federal CREATES Act, introduced last year by Senators Patrick Leahy (D-VT), Chuck Grassley (R-IA), Amy Klobuchar (D-MN), and Mike Lee (R-UT), and likely to be reintroduced in the current Congress, is intended to “end inappropriate delay tactics that are used by some brand-name drug manufacturers to block competition from more affordable generic drugs.”
Reducing prescription drug prices is only one piece of reducing costs at the macro level--the $3.3 trillion (18 percent of GDP) that the United States spent on health care in 2016. It follows that it is also only one piece of cutting the cost burden of high prices on individuals and families. The typical worker with employer-sponsored coverage spent 9.6 percent of their income on out-of-pocket costs in 2013, up from 5.3 percent a decade earlier.
No approach to cutting America’s crushing health care costs is perfect, but lawmakers should be careful not to pass legislation like the Maryland bill that could have the opposite effect of what its sponsors intended.
Andrew L. Yarrow, a former New York Times reporter, author of four books, and a senior fellow with the Progressive Policy Institute, writes frequently on healthcare issues.