WHAT IF purchasing medical products and services was like buying peanut butter? Grocery stores have several brands and varieties: smooth, chunky, old-fashioned, natural, organic, no added sugar, reduced fat, no-stir, and pre-mixed with jelly--with clearly marked prices ranging from $1.75 for the store's generic brand to seven dollars for the overpriced Yuppie brand. After carefully examining the labels, our shopper chose a 16-ounce, five-dollar jar of no-added-sugar peanut butter. She paid the cashier five dollars for the peanut butter and went home.
If our shoppers were transported to the universe of medical billing with the five-dollar jar of peanut butter, the shopper with Medicare would pay one dollar but her grandchild will be presented with a bill for four dollars. When the shopper with private health insurance attempts to pay, the cashier becomes unglued. The shopper cannot say whether she met her deductible or has a copayment, and whether the brand of peanut butter is approved by the network. She really wants the peanut butter, so she grabs the generic from the shelf and pays the $1.75. Our privately insured shopper was pleasantly surprised at the generic's good taste and healthful ingredients; her wallet was happy for the cost savings; and she was glad not to have the middleman hassle.
Comparison shopping is one pillar of bringing sanity to the high cost of medical care, but the opacity of the pricing system for medical costs limits the value of posting list prices to encourage lower costs through shaming, competition, and choice. In addition to research and development, manufacturing, and distribution costs, drug costs are affected by additional layers of middlemen: pharmacy benefit managers (PBMs) and insurers. Using a "trade secret" process, PBMs negotiate discounts and rebates for private and government insurers. The money saved is supposed to go back to the government (taxpayers) or to insurers to lower premiums or otherwise benefit patients. PBMs typically are paid by a percentage of the rebate or discount off the list price. The higher the price, the bigger the rebate. Thus, the rebate system gives an incentive to raise list prices rather than placing the lowest-priced drug on the insurer's formulary. This same system is used by group purchasing organizations for hospital product purchases.
An analysis of the effect of California's three-year old drug price transparency law illustrates the complexity of pricing. Despite...