James K. Glassman: An Unconscionable Mess as Maryland Attempts Drug Price Controls

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Many states have decided to tackle the problem of rising health costs with regulations on pharmaceutical makers. But Maryland is going them one better. It wants to be the first state to empower its attorney general to take drug companies to court for “price gouging.” A judge can then fine the companies or force them to issue refunds.

The legislature’s attempts to control drug prices, however, are turning into a debacle. The object of contention is how to define words like “gouging” and “unconscionable” and “excessive” – or whether to define them at all.

After a half-dozen hearings, a price-gouging bill passed Maryland’s House of Delegates, 137-4, on March 20. Then, as the Baltimore Sun put it, “A funny thing happened on the way to the Senate Finance Committee.”

The bill bans “price gouging,” which it defines as “an unconscionable increase in the price of a prescription drug.” As for “unconscionable increase”: The bill says that’s a hike that is “excessive and not justified by the cost of producing the drug” and that results in consumers having “no meaningful choice” because they need the drug for their health and there is “insufficient competition in the market.”

Of course, “excessive,” “justified,” “meaningful,” and “insufficient” are awfully vague themselves, so the bill required a state health agency to notify the attorney general if the price of an “essential” generic drug goes up by 50% a year, if the medicine is produced by three or fewer companies, and if it costs more than $80 a month. That solution was hardly ideal, but it satisfied 97% of the Maryland House.

Then, in a surprise late last week, Maryland’s attorney general, Brian Frosh, decided he wants to remove the reporting requirements because he thinks there’s confusion over whether they actually define an “unconscionable increase” or are just there as a nudge. If the Senate goes along and the House concurs, then, at least in Maryland, “unconscionable” will finally be precisely defined. It is whatever Brian Frosh says it is.

Some states have price-gouging laws that apply in natural disasters and other emergencies, but Maryland will be unique in giving the AG power to control prices – and under nebulous rules.

Price controls inevitably lead to trouble, and Maryland’s current mess may merely be a prelude. If Frosh’s version becomes law, access to drugs will be limited (price controls always produce shortages), and biopharmaceutical companies will have second thoughts about continuing to invest in the state’s unpredictable and inhospitable environment.

It’s also worth stepping back and taking a broader look at health costs. Working for insurers and big employers, pharmaceutical benefit managers (PBMs) have enormous clout in negotiating with manufacturers of medicines. Generics, which are marketed after patents expire, and competition among branded drugs themselves serve to lower costs over time. That’s a dramatic contrast with other parts of the health-care system, where labor and facility costs increase year after year.

Express Scripts, a giant PBM, reported recently that the unit cost of traditional drugs for its members actually fell in 2016 compared with 2015 and that, all told, unit costs rose just 2.5%, in line with inflation. By contrast, Cleveland Clinic, a respected hospital chain, recently reported that labor costs jumped 9% over the past year – even though inpatient admissions dropped 2% over that period.

The Maryland legislation focused on specialized generics and off-patent drugs -- though that may be just for starters. Still, it’s true that regulatory deficiencies at the federal level are unnecessarily restricting competition among some generics. The result is anomalies like last fall’s Epi-Pen scandal. The good news is that Scott Gottlieb, the physician and think-tank scholar who has been nominated as head of the federal Food & Drug Administration (FDA), has said he wants to change the rules and get more specialized generics into the marketplace

Just as important, the obsession of states like Maryland with pharmaceuticals betrays an ignorance of health-care spending in general. Drugs are a small part of the picture. Last year, spending on hospitals, doctors and other health professionals $1.8 trillion, compared with $348 billion for prescription drugs – and medicine costs are rising more slowly than other health costs.

This is not to say that drug spending can’t be contained further. But the place to do that is the FDA, not the states. The answer is smoothing and speeding the medicine-approval process and fostering more competition, not endowing an attorney general with the power of a philosopher king, determining what’s conscionable and unconscionable. That’s unconscionable in itself.

Ambassador James K. Glassman, former Under Secretary of State for Public Diplomacy and Public Affairs, is chief health editor of “Our American Stories” on nationwide radio.

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