Due to its national implications, last week’s introduction of the Department of Health and Human Services’ (HHS) blueprint on drug prices is garnering all the attention. Despite its importance, HHS’ blueprint should not overshadow the many poor, and even unconstitutional, policy proposals that are occurring at the state level.
For example, Maryland passed a drug-price-gouging law in 2017 that empowered the Attorney General (AG) to take legal action against generic drug companies if the AG judged these price increases to be too large. A federal appeals court just ruled that this law is unconstitutional because it violates the interstate commerce clause.
Not to be deterred by the facts, the Illinois House of Representatives has passed HB 4900, a bill that would empower the Attorney General to declare when price increases on generic medicines are unjustified. Those manufacturers who are declared excessive price increasers could then be subject to costly penalties. The bill is now being considered in the Senate.
Not only would this law be unconstitutional based on the federal appeals court ruling on Maryland’s version, it would also be bad policy that would not address the fundamental drivers of the growing un-affordability of health care. Since this policy has already been declared unconstitutional, it is worthwhile to review why it is also bad policy.
If the Attorney General gains the right to define when costs are excessive, then she/he would effectively gain the ability to dictate to drug companies what prices they can charge for their medicines. HB 4900 is, consequently, a creative way for the state to impose price controls on pharmaceuticals without having to formally propose, or pass, such a controversial legislation.
De facto price controls will not solve the health care affordability problem. Despite the headlines about high-priced drugs, pharmaceuticals represent a small portion of overall medical costs. According to the Centers for Disease Control and Prevention, about 10 percent of all health spending goes toward prescription drugs nationally; that’s roughly the same share as in 1960.
Further, pharmaceutical expenditures are not growing faster than overall health care expenditures. According to the latest national health expenditure data, retail prescription drug expenditures rose 1.3 percent in 2016, less than one-half the growth in overall health care expenditures of 4.3 percent.
Generic medicines play an invaluable role creating these positive outcomes. The purpose of generic medicines is to enable a competitive market that drives down prices and creates significant budgetary savings. According to the Association for Accessible Medicines, generic medicines in 2016 (the latest data available) have enabled $9.6 billion in savings for Medicare, Medicaid, commercially insured, and uninsured patients in Illinois alone.
The competitive environment that generic medicines enable also means that these firms will typically operate with very small profit margins. Due to these thin profit margins, HB 4900’s price controls are particularly damaging for these manufacturers. Consequently, HB 4900 could have the perverse impact of driving out manufacturers. This would worsen the competitive environment and (ironically) lead to higher cost pressures.
More fundamentally, HB 4900 does not solve the problems that are driving the health care affordability problem. Illinois cannot fix the systemic un-affordability problem by imposing price controls on any individual part of the health care system. Instead, systemic reforms are necessary. There are many potential reforms that would help.
For instance, the health care system unnecessary obstructs competition in the practice of medicine and has failed to effectively embrace the information technology revolution. Other policies, such as the inefficiencies inherent in our current health care payment model or the excessive costs created by the tort liability system, are currently dis-incenting innovations and best practices. Fundamental reforms in these areas will meaningfully reduce health care costs while improving overall health care quality.
Coupling price controls with the threat of large regulatory fines will impose heavy costs on Illinois. Perhaps most importantly, this policy combination will discourage generic competition in the state that is essential for improving access to more affordable medicines. The result will be higher health care costs, and lower health care quality, in Illinois.
If the goal is to bend the health care cost curve, then it is important to recognize that reforms that target one part of the health care system, such as the ill-conceived price controls on pharmaceuticals, will not succeed. The better approach is to implement holistic reforms that directly address the problems that plague the health care system.