Dr. Michael Kapsa - To Address Drug Costs, Annapolis Should Look North to Trenton

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Why New Jersey Holds the Answers to State Spending on Prescription Drugs

Health care spending is the domestic challenge of our time. America is on track to hit $4 trillion in annual expenditures. And while a figure this large can seem daunting, the price tag should hit home: $11,000 each year—and rising – if we translate it to a per person cost. I urge our friends in Annapolis to turn their sights northward, to New Jersey, where lawmakers recently devised a solution to specifically address prescription drug spending and will save $1.6 billion in the process.

The proposed establishment of a Prescription Drug Affordability Board is an effort to stem heath care costs in Maryland by placing caps on state and local spending on prescription drugs. Unfortunately, this proposed approach acts as if the state purchases directly from manufacturers and, in so doing, really bungles its chance to reign in escalating drug prices the state faces.

Purchasers, like states, don’t negotiate directly with manufacturers when purchasing drugs – they actually buy from pharmacy benefit managers (PBMs). PBMs are “middlemen” who exploit consumer and health plan ignorance of complex PBM pricing schemes. Economists call this practice “arbitrage." Prescription drug purchasers don’t know the actual costs of drugs they are buying from PBMs, and without purchaser understanding of price, a competitive market cannot exist. PBMs set prices that boost their profit margins in an environment that looks more like a cartel rather than a well-functioning competitive marketplace.

Next time you are at the drug store, ask the pharmacist if your prescription copay is higher than if you were to pay cash for the drug. If it is, thank the PBMs. Too often, complex PBM pricing schemes result in a copay for a prescription drug through the patient’s PBM that is greater than buying the drug directly at full cost.

Maryland should look to the example of New Jersey, which has actually recreated a competitive PBM marketplace. By creating real price competition between PBMs, New Jersey has effectively broken up the PBM cartel (something the Affordability Board in Maryland is not looking at). Realizing that PBMs had been able to game the public health care system because of inadequate resources and lack of transparency at the negotiating table, New Jersey representatives instituted an online “reverse” auction marketplace, where PBMs were forced to underbid one another for the state’s business. The competition, as you might expect, pushed prices down. The result in New Jersey was a fat $1.6 billion in savings in drug spending for school teachers and government workers, alone, without cutting their prescription drug benefits, at all.

The status quo of higher drug costs for the consumer, decreased spending on innovative therapies for the industry, and, worst of all, unnecessary suffering for those most in need of care, is untenable. Maryland legislators now have a golden opportunity to duplicate New Jersey’s success. But it will require openness to innovative problem-solving and a determination to make the tough decisions. For the millions of citizens whose lives it will improve—and save—I don’t think this is asking too much.

Dr. Michael Kapsa, PhD is Chief Economist at America’s Agenda.

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