Are Prescription Drug Prices Becoming as Meaningless as Hospital Charges?

Professor Jack Hoadley of Georgetown University recently gave an excellent presentation discussing prices of prescription drugs. Two slides stand out. First, a slide showing how much prescription spending is controlled by insurers and governments versus patients directly:

As recently as 1990, patients controlled over half of drug spending. Today, it is under 20 percent. Has this cost shift made drugs more “affordable”? Obviously not: 8 percent of patients do not take medicines as prescribed, because of cost. Hillary Clinton promises to impose government price controls on drugs if she becomes president.

The second slide shows rebates given by drug makers to insurers in Medicare Part D, the prescription benefit that was launched in 2006:

Rebates have almost doubled from 8.6 percent to 16.8 percent. In other words, if a drug maker says it charges $10 for a drug, it actually receives $8.32 from the insurer.

There is a lot of discussion these days about price transparency. However, it appears price transparency is very difficult once third-party payers (governments and insurers) dominate spending. After decades of being dominated by third-party payers, hospital charges are meaningless. On average, hospitals charge Medicare 3.77 times more than what Medicare pays, with a range of 0.42 times to 16.23 times. In other words, if a hospital sends a claim to Medicare for $10,000, the hospital is most likely to be paid $2,653, but the payment could be as little as $616 or as much as $23,810.

This has evolved over the years as a kind of symbiosis: It allows insurers to assert they are negotiating impressive discounts from hospitals; and allows hospitals to complain they are being pinned to the mat by insurers. Both actually do pretty well from this arrangement.

A few years ago, patients benefitted from low, transparent prices for generic drugs dispensed by pharmacies. The $4 prescription is still a mainstay of retail pharmacy. Unfortunately, prescription pricing is becoming less transparent as government expands its reach.