Price Transparency Occurs in Markets, Not Government Offices

The wrong model, no matter how hard it is worked, always provides the wrong answer. And, so it is with a bill being considered in Sacramento (SB 17).

SB 17 is supposed to address the problem of skyrocketing health care costs by requiring pharmaceutical manufacturers to give 60-day notice for any price increase above a certain threshold (generally a 16 percent list price increase).

This mandate would not only be costly, it is also unworkable because the prices of medicine vary due to differences in formulations, package sizes, doses, etc. Due to these complexities, much of the data collected would be difficult to interpret at best.

SB 17 would also dis-incent pharmaceutical innovation. To see why, imagine a rewrite of SB 17 that required hospitals to report on payment increases to doctors above a set threshold. Such a proposal would be viewed as ridiculous, and rightly so.

Clearly, a proposal geared toward reducing doctors’ compensation would pressure practicing physicians to pursue other opportunities, and discourage young people from entering the profession in the first place. The result, over time, would be a doctor shortage. The same is true for pharmaceuticals. Arbitrary pressure to control prices discourages investment and will lead to shortages of new innovative medicines.

Further, while the proposal claims SB 17 creates price transparency, price transparency can only occur in an effective market. Reams of government reports rarely create transparent market prices.

The problems with SB 17 are even greater. The refrain that expenditures on pharmaceuticals are driving the health care affordability problem is repeated so often, it is becoming an illusory truth.

In reality, systemic problems are driving costs higher, and dis-incenting innovations that could create more health care value at less costs for patients. These ingrained systemic problems include:
• health insurance functioning like pre-paid health care, not insurance that effectively manages risk;
• pharmacy benefit managers creating a sclerotic pricing system for pharmaceuticals, to the detriment of patients’ welfare; and,
• rules that are thwarting effective competition that could bring needed innovations to the practice of health care.

When combined with the problems of defensive medicine, the inevitable result of these problems is declining quality and out of control costs.

Imposing price reporting requirements on pharmaceuticals does nothing to address these problems and will, consequently, do nothing to address the problems plaguing the health care system.

Wayne Winegarden, Ph.D. is a Senior Fellow in Business and Economics at the Pacific Research Institute and Managing Editor for EconoSTATS.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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