Where’s The Promised Transparency in Drug Pricing?


Hospitals are shoring up their balance sheets on the backs of cancer patients, according to a new study published in JAMA Internal Medicine.

Researchers looked at 25 of the top cancer medications distributed at 61 cancer treatment centers across the country over the course of six months. They found that the clinics charged private insurers anywhere from 118% to 634% above what it cost them to acquire the drug.

It shouldn’t take a team of medical researchers to find out how much providers are charging for their services. If price transparency were the norm in the healthcare marketplace, then providers wouldn’t be able to get away with such outlandish mark-ups.

But when the true costs of care are obscured, the forces of supply and demand break down, prices rise, and the quality of care suffers.

As the study’s authors note, these mark-ups are so excessive that “hospitals may earn greater revenue per unit from cancer therapies than the pharmaceutical companies that manufactured them.”

An executive order signed by President Trump in 2020 was supposed to address this problem by requiring hospitals to disclose pricing information to insurers and patients. But enforcement of that rule remains lax. Most cancer centers included in the study failed to disclose price information for any of the 25 cancer drugs examined, in direct violation of the rule.

Were insurers and patients aware of the actual cost of these medicines, they would almost certainly refuse to pay such inflated prices. Instead, they would seek out facilities charging more sensible rates, as happens in most other sectors of the economy. Hospitals would have to compete with one another to offer the highest-value care, which would improve quality and reduce costs.

Unfortunately, this isn’t the only example of an opaque drug-pricing system leading to higher costs for patients.

Consider the conduct of pharmacy benefit managers, the firms hired by insurers to manage their prescription drug plans. PBMs control insurers’ formularies — the lists of drugs an insurance plan covers. By threatening to withhold coverage of a drug — or by offering favorable placement on a formulary — PBMs can extract significant discounts from manufacturers. The value of those rebates and discounts was $175 billion in 2019 alone.

Patients aren’t typically aware of those discounts. Their cost-sharing responsibilities are often based on a drug’s list price, not the much lower price net of discounts that their insurer pays. In fact, a patient’s copay might be higher than the price the insurer pays for the drug.

Put differently, insurers and PBMs engage in the same sort of price-gouging as the hospitals in the JAMA Internal Medicine study.

Greater transparency can halt these abusive practices. Rules are already on the books that require hospitals to be transparent about their prices; the administration needs to enforce them.

Insurers and PBMs aren’t required to disclose what they actually pay for medicines after accounting for discounts and rebates. Forcing such transparency would make it harder for them to justify the hefty co-pays they often charge their beneficiaries.

The new JAMA study is a wake-up call that we need price transparency in health care now. It will spur competition, lower prices, and make us all healthier in the long run.

Sally C. Pipes is President, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Her latest book is False Premise, False Promise: The Disastrous Reality of Medicare for All (Encounter 2020). Follow her on Twitter @sallypipes.

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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