Study: Are Drug Prices Driving Healthcare Cost Growth?

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Study: Requiring Drug Companies to Disclose Price Methodologies, Other Proprietary Information Would Discourage Drug Development, Lead to Higher Long-Term Healthcare Costs

Promoting competition, looking more closely at healthcare price opacity would be more effective ways to limit cost inflation

Read coverage of this report in The Boston Globe, MarketWatch and State House News Service.

BOSTON – State policy and legislative recommendations requiring pharmaceutical companies to disclose proprietary information would discourage the development of new innovative medicines, lead to higher healthcare costs over the long term, and potentially damage a big driver of Massachusetts’ business economy, according to a new report by Pioneer Institute.

The report comes on the heels of recommendations from the state Health Policy Commission (HPC) and prior to an upcoming legislative hearing on S.1048, which would require drug manufacturers to provide their pricing methodologies and potentially lead to caps on the price of certain drugs. Similarly, the HPC’s 2015 Cost Trends Report recommended requiring companies to disclose proprietary information.

“The topic of reducing healthcare costs is one we must address, and the HPC report provides a valuable analysis of a broad range of critical issues,” said Pioneer Executive Director Jim Stergios, co-author of Are Drug Prices Driving Healthcare Cost Growth?  “But policy prescriptions for legislatively mandated drug cost disclosure deserve closer examination.”

The HPC report, which compares 2014 healthcare spending in Massachusetts to 2013 spending, finds large increases in prescription drug costs.  Much of the rise was driven by the Hepatitis C Virus (HCV) drug Sovaldi, which was the nation’s top-selling drug in 2014.

HPC price calculations were based on Sovaldi’s list price of $84,000 per patient for a full course of treatment.  But many users get significant discounts.  MassHealth, for example, generally recoups about half its prescription costs in rebates and discounts.

By focusing narrowly on comparing 2014 to 2013 costs, the commission failed to take into account a 46 percent price cut on Sovaldi that was implemented in February 2015 in response to federal approval of another HCV drug.  A longer view reveals that prescription drug spending rose by less than 1 percent annually in Massachusetts between 2010 and 2013.

Sovaldi has a high cure rate, few side effects and requires a shorter course of treatment than previous HCV drugs.  Left untreated, Hepatitis C attacks the liver and can lead to cancer and liver failure, which require treatments that are far more expensive than Sovaldi.

One reason for the high cost of prescription drugs is the time and expense required to gain federal approval and get drugs to market.  From discovery to launch, the process takes about 15 years and averaged $2.6 billion in 2014.  That amount represents a 145 percent increase over 2003.

“By adding to administrative costs, S. 1048, the bill pending in the state Senate that would require companies to reveal their price methodologies, would discourage drug development and result in a less attractive marketplace for innovation,” said Pioneer’s Research Director Greg Sullivan.

Stergios and Sullivan recommend that policymakers use multi-year data that includes discounts and rebates before considering policy changes that could affect drug development.

Rather than forcing drug companies to reveal pricing methodologies and other proprietary information, they recommend that the commission look more closely at price opacity as a driver of healthcare cost inflation.

The authors also urge state policymakers to promote the kind of competition that resulted in Sovaldi’s price being cut nearly in half to the entire healthcare sector.  Specifically, they call for more minute clinics or urgent care centers that can handle routine cases far less expensively than hospital emergency rooms, and allowing lower-cost nurse practitioners to do more when seeing patients.

About the Authors

Jim Stergios is Executive Director of Pioneer Institute. Previously, Jim was Chief of Staff and Undersecretary for Policy in the Commonwealth’s Executive Office of Environmental Affairs, where he drove efforts on water policy, regulatory and permit reform, and urban revitalization. His prior experience includes founding and managing a business, teaching at the university level, and serving as headmaster at a preparatory school. Jim holds a doctoral degree in Political Science from Boston University.

Greg Sullivan is Pioneer’s Research Director, and oversees the Centers for Better Government and Economic Opportunity. Prior to joining Pioneer, Sullivan served as Inspector General of the Commonwealth of Massachusetts and was a 17-year member of the Massachusetts House of Representatives. Greg is a Certified Fraud Investigator, and holds degrees from Harvard College, the Kennedy School, and MIT.

About Pioneer

Pioneer Institute is an independent, non-partisan, privately funded research organization that seeks to improve the quality of life in Massachusetts through civic discourse and intellectually rigorous, data-driven public policy solutions based on free market principles, individual liberty and responsibility, and the ideal of effective, limited and accountable government.