Editorial Board

Take the Mystery Out of Drug Pricing

It’s hard to lower prices if you don’t know why they’re so high in the first place.

Why so expensive?

Photographer: Doug Griffin/Toronto Star/Getty Images

Americans have clear reason to think they’re paying too much for prescription drugs. The cost of medicines is rising faster than any other category of health-care spending, standing at almost 17 percent of total health costs.

What’s harder to discern is what to do about it, in part because so little is known about how drug prices are set, what discounts and rebates drugmakers negotiate with wholesale buyers, and to what extent savings are passed along to customers at the pharmacy counter. Addressing this lack of transparency would be a good first step.

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Many politicians suspect that some companies are “getting away with murder,” as Donald Trump put it a few months ago. Efforts have begun in Congress and state legislatures to find out, by demanding more information on drug price-setting.

In the U.S. Senate, Ron Wyden of Oregon has put forward a bill that would force pharmacy benefit managers, or PBMs -- the middlemen that oversee prescription-drug arrangements for group health-insurance plans -- to disclose the discounts and rebates they negotiate with pharmaceutical companies, and how much of their savings they pass along to consumers.

Drug companies, themselves facing criticism for high prices, say they routinely rebate to PBMs more than a third of the list price for brand-name medicines -- but when PBMs charge consumers their co-insurance share, they calculate it according to the full list price. Wyden’s bill would find out the degree to which that’s true, and eventually require a certain share of PBM discounts to be passed along. That could lower drug costs for many patients.

As for their own tendency to continually raise drug prices, pharmaceutical makers argue that they have to, because it’s so expensive to create new drugs and bring them to market. This is the part of the picture that several state legislatures are trying to illuminate, by requiring drug companies to disclose their research and development costs.

A new law in Vermont, for instance, requires drug companies to submit detailed cost breakdowns to justify price hikes of more than 50 percent over the past five years. The Maryland legislature has just passed legislation that would procure similar information, and empower the state attorney general to sue for “price gouging.” And a bill in the California Senate would force drugmakers to announce big price hikes and say why they’re needed.

Here again, the sunshine could help, if only to reveal the extent to which drugmakers are genuinely bound by the costs of innovation. It’s not obvious, however, how states could use the information to push prices down, given that their Medicaid programs are required to cover almost all drugs approved by the Food and Drug Administration. In any case, the final goal should be to see that prices reflect not just R&D costs but medical value.

To that end, the transparency that’s most needed in the U.S. involves how well individual drugs work in comparison with other treatments. The U.S. should support comparative studies, as several other countries do, to get a clearer picture of each medicine’s cost-effectiveness. This information could guide all efforts by government -- and by doctors and hospitals, as well -- to lower spending on prescription drugs.