Increasing transparency on generic drug cost data could save $4 billion

Increasing transparency on the cost of generic drugs could save about $4 billion a year in overall healthcare spending in the U.S., according to a new paper.

Making actual generic drug acquisition costs available to third-party payers would empower health plans to negotiate lower rates and essentially level the playing field in a pharmaceutical supply chain that's shrouded in secrecy. Ultimately, patients would pay less at the expense of pharmacy benefit mangers' profits, researchers said. If the average prescription generic drug priced at $26 was reduced by $1, that would reduce health spending by $4 billion every year, data shows. The average price for branded drugs is $308.

The actual amounts paid to drug manufacturers for both branded and generic prescriptions, including reductions negotiated by PBMs, are protected as confidential trade secrets, according to analysis from the Leonard D. Schaeffer Initiative for Innovation in Health Policy, which is a partnership between the Center for Health Policy at Brookings and the USC Schaeffer Center for Health Policy & Economics. A disincentive to keep reimbursement low for their health plan clients poses a conflict of interest for PBMs, which get paid in part based on the "spread" – the difference between the high list price set by drug companies and the actual price paid by PBMs.

Researchers proposed making information about average actual generic drug acquisition costs available to health plans in a selective way, requiring wholesalers to report their net prices when selling drugs to retail pharmacies as a condition of licensure. When a pharmacy acquires a generic drug, it pays an average of 30% off the published list price, researchers said.

"Providing payers with the average net prices pharmacies actually pay for generic drugs would shed light on how limitations on effective competition leads to health plans paying excessively more than pharmacy and wholesaler costs," the paper reads.

The CMS would collect and aggregate the costs through national averages while the HHS would serve as the regulator, similar to the Medicaid drug rebate program. It would be paid through the Prescription Drug User Fee Act authorized by the Food and Drug Administration.

Yet, it would be important that the information would be kept confidential and protected as a trade secret to allay the Federal Trade Commission's concerns that increasing price transparency could lead to price collusion, said co-author Steven Lieberman from the Center for Health Policy at Brookings.

"Selectively reporting (cost) averages to (health) plans would not impair manufacturer competition nor would it facilitate price collusion," Lieberman said at the center's webinar Wednesday.

In 2016, U.S. payers and patients spent nearly $380 billion filling 4.45 billion drug prescriptions, which accounts for more than 10% of overall healthcare spending. Almost 9 of 10 retail prescriptions were for low-cost generic drugs, amounting to about $100 billion.

High-profile lawsuits have brought drugmakers' relationships with PBMs, which process drug claims and negotiate drug discounts with pharmaceutical companies on behalf of payers, into the forefront. PBMs take a cut from the rebates they negotiate, but it's hard to pinpoint how much they receive and how much is passed on to their clients.

Legislators and other healthcare leaders are tackling drug pricing through two main avenues: increasing competition in the marketplace and improving transparency.

"The real successes in transparency have not been giving consumers better information, it has been informing policy makers, large employers that make decisions," said co-author Paul Ginsburg, the chair of health policy studies at the Brookings, at the webinar.