Will transparency in drug pricing force down costs?

Pharmaceutical companies selling prescription drugs to Californians will now have to submit information about price increases to the state. The new transparency provisions are part of a new groundbreaking law Gov. Jerry Brown signed Monday morning.

SB 17 requires drug manufacturers to submit their reasoning for price hikes of more than 16 percent over two years. Lawmakers say the new law takes aim at ever increasing health costs.

During a press conference that ended with the governor signing the measure, the bill’s sponsor, Senator Ed Hernandez (D-West Covina) called it one of the most comprehensive bills in the country. The chair of the senate health committee ended his remarks by challenging Washington lawmakers.

"I want to challenge our federal officials to do the same thing at a national level," said Hernandez. "So, that we can make sure that every single person in this country, not only has access to health care, but that they can afford their health care."

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The provision in the new law to give 60-days’ notice before raising their price goes into effect at the beginning of 2018. Starting in 2019 the state’s insurance regulators will keep an annual list of the 25 mostly costly drugs, the 25 most commonly prescribed drugs, and which 25 drugs’ prices went up the most. 

Hernandez told KPCC Monday the measure is one step forward to help control the continued rise in health care costs. He calls on federal lawmakers to strengthen the federal requirement to require everyone purchase health insurance and other measure to help stabilize the market.

"We have to look at how do we bring more competition," the state senator said.

UCLA health policy professor Stewart Schweitzer believes to the extent SB 17 creates more competition in the drug market, it could work.

“Insurers—for example—can certainly go out and look more aggressively knowing that the price of a particular product is about to go up sharply,” he said.

Schweitzer worries the part of the new law that will require the pharmaceutical industry to justify raising the costs of their drugs could be misleading.

"I think it’s not a reasonable step to ask people, 'why are you pricing that so high?'" he said.

The UCLA health economist explains there are too many factors that go into a price to completely answer the question.

"Prices go up because the market is willing to pay that price and that’s true in every single market," said Schweitzer.

For the health insurance industry, the concern is whether they have certainty in their market. Charles Bacchi, president and CEO of the California Association of Health Plans, said while the price of health insurance is set annually, drug costs can change at any time and that creates uncertainty.

"While this bill isn’t perfect, giving us advanced notice certainly allows us to plan for it much better," said Bacchi.

"This could be the first step in seeing the pharmaceutical industry join with others in the health care system who are starting to see that affordability is a critical concern," said Tony Barrueta, senior vice president of Government Relations for Kaiser Permanente.

He applauds the governor and the legislature what he calls a "critical response" to the rising costs of medications.

"Prescription drugs are running at a much faster rate of inflation than everything else in health care," said Barrueta.

Barrueta said the next legislative steps after this new law goes into effect will depend greatly on how pharmaceutical manufacturers respond.

"If the drug industry responds to this legislation by simply denying the appropriateness of having a little bit more information about what their pricing practices are, either by bringing lawsuits to challenge it or seeking to avoid providing this information, I think we will be looking at potentially more onerous types of public policy proposals," he said.

The pharmaceutical industry has long opposed the measure. Industry leaders say it will hurt innovation and do little to lower consumer costs.

"SB 17 ignores the reality that spending on prescription medicines remains a much smaller portion of overall health care spending. It also fails to recognize the value that medicines bring to patients and the health care system, as well as the enormous economic contributions that the research-based biopharmaceutical industry brings to the state of California," said PhARMA deputy vice president of public affairs Priscilla VanderVeer in a statement.