Drug Pricing Legislation and Inefficient Markets Theory

Drug Pricing Legislation Examples

Drug pricing legislation has attempted to deal with the cost of care.  As a result, pharmaceutical cost transparency bills introduced in several state legislatures in the last year seek transparency in pricing. New York’s pharmaceutical cost transparency act, following California, Oregon, Massachusetts, North Carolina, and Pennsylvania is New York Senate bill 5338 introduced by Senator Ruben Diaz.  The bill focuses on wholesale acquisition costs for the drug

Drug Pricing Legislation
Drug pricing legislation and cost of care

including average wholesale price and the cost of clinical trials.

The bill did not include language regarding medically necessary care.  The bill also had no provision for the policies of health plans to reimburse for the drug.

Investors Respond Rationally to Publicly Available Information

According to an article in the Financial Times, “For more than four decades, financial markets and the regulations that govern them were underpinned by what is known as the efficient markets hypothesis. All that changed after the financial crisis.  First expounded by the economist Eugene Fama in 1970, the theory holds that investors respond rationally to publicly available information. To clarify, this theory also assumes that market prices for assets incorporate all the publicly known information.  Therefore, the presumption is that when prices are too high given expected returns, rational investors sell.”

Unfortunately, risk data in mortgage-backed securities was not available.  The public and many sophisticated investors purchased MBS securities which were nothing more than aggregations and repackaging of high risk sub prime mortgages taken out by riskier borrowers.   In medical care, risk is generally associated with quality and outcomes.  Some drugs, in fact, ore prescribed to avert negative outcomes such as metastatic cancers.  Drug companies assert that high R&D and clinical trials costs justify higher charges for drugs.  A little known fact is that the federal government subsidizes these clinical trials if they meet certain criteria.

Centers for Medicare and Medicaid Fund Clinical Trials

On June 7, 2000, President Clinton issued an executive memorandum directing the Health Care Financing Administration (HCFA, now known as CMS) to “explicitly authorize (Medicare) payment for routine patient care costs and costs due to medical complications associated with participation in clinical trials.”

In keeping with the President’s directive, Medicare National Coverage Decisions (NCDs) were created to define the routine costs of clinical trials and identify the clinical trials for which payment for such routine costs should be made for eligible services furnished on or after September 19, 2000.

Examples of Price Transparency Legislation in California

The presumption in these theories is that the cost data is publicly available. California’s Hospital Fair Pricing Act, passed in 2006, aimed to protect uninsured patients from paying too much by requiring hospital chargemaster data to be publicly posted on  California’s Office of Statewide Health Planning and Development (OSHPD) web site.  In litigation, my experience is that a Plaintiff may have lien-based gross charges.  There are rules in some jurisdictions that insurance data (a ‘collateral source’) is not permissible. This is sometimes the case in personal injury litigation. Therefore, on a case by case basis charges may be higher for a Plaintiff.  Some hospitals follow OSHPD data and should, based on the legislation.  Other hospitals do not, based on individual lien based litigation.  Expert testimony is useful to assess  Plaintiff’s alleged damages.  Cross-checking with both OSHPD data and Usual Customary and Reasonable (UCR) charges of other hospitals is important.

Inefficient Markets Theory

The inefficient markets theory is being reconsidered after the 2007 financial crisis in the U.S.   Is it enough to provide the public with data on the cost of a service or alternative ways to purchase it?   In healthcare, the intersection of price, quality, and sources of suppliers alone does not determine whether pricing is appropriate.

Medical Necessity

In my opinion, the Medical necessity Standard, a method of determining whether a product or service should be used based on the accurate diagnosis of a patient, is also a factor.   Medical necessity is used by payors, including private insurance, Medicare and Medicaid to determine whether a medical procedure should be provided at all.

Ambulatory Surgery Center Billing Expert Witness
Michael Arrigo, Managing Partner of No World Borders serves as an Expert Witness regarding Usual Customary and Reasonable Charges (UCR) in medical care, diagnostic testing, medical devices, and prescription drugs.  Contact

Historical Methods to Mitigate High Costs

The U.S. Congress has sought to cap costs using episodic care rules. These include diagnosis-related grouping (DRG) and the Inpatient Prospective Payment System (IPPS). IPPS adds a relative weight to the cost of care. Relative weights are based on complexity and resource requirements. Base rates also adjust costs using local wage-price indices published by CMS.  However, these indices only adjust prices along a baseline and assume that the baseline price is reasonable and necessary.

Other methods are useful to establish reasonable and necessary criteria.  Having enough data about the patient condition and associating the patient’s condition via a detailed diagnosis with appropriate medical procedures is important.  New data types and new business frameworks are proposed include:

  • The international classification of diseases, tenth edition from the World Health Organization (ICD-10) is one component of new digital data scaffolding being built in the U.S. health care industry to address this issue.
  • Value-based care structures such as Medicare Advantage (Medicare Part C), Accountable Care Organizations (ACOs), as well as Patient-Centered Medical Homes are experiments to address price-value relationships.

These need to also be considered in light of insurance coverage determinations, which generally include guidelines on medical necessity.

Government Hearings and Legislation Regarding Health Care Price Transparency 

Federal government inquiries and efforts to regulate drug pricing in include these drug pricing legislation initiatives:

  • H.R. 4700, the Transparency in All Health Care Pricing Act of 2010 ;
  • H.R. 2249, the Health Care Price Transparency Promotion Act of 2009 ;
  • H.R. 4803, the Patients’ Right to Know Act: hearing before the Subcommittee on Health of the Committee on Energy and Commerce, House of Representatives, One Hundred Eleventh Congress, second session, May 6, 2010
  • Price transparency: hearing before the Subcommittee on Health of the Committee on Ways and Means, U.S. House of Representatives, One Hundred Ninth Congress, second session, July 18, 2006

Conclusion: Data-Driven Healthcare that Enables Health Care Consumer Shopping is a Part of the Solution

Drug pricing legislation has led to complexity and it is not clear that it has resulted in transparency.  Price factors that indicate the cost to the consumer published publicly could be useful.

According to testimony at a hearing on July 18, 2006, before the House Ways and Means Committee,

“Since price is not the only thing to be considered, quality is to be considered; and there are lots of other things—the quality of communication with physicians and quality of services and so on. So, this is only one piece, never to be mistaken for the whole.”

When and how is quality being measured and what are the meaningful differences in these measures?  Is it only that the price and quality of medical services are at issue?

In the end, determining whether medical procedures should be provided at all is important from a perspective of patient satisfaction, efficacy and new value-based care tenets of the Affordable Care Act.  Quality is important, but if the U.S. patient population is paying significantly more than the rest of the world’s population for the same drug, perhaps cost transparency should be a priority.

Increasingly, the answer will lie in data-driven healthcare.

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Expert Witness

Michael F. Arrigo

Michael Arrigo brings four decades of experience in the software, financial services, and healthcare industries. In 2000, Mr. Arrigo founded No World Borders, a healthcare data, regulations, and economics firm with clients in the pharmaceutical, medical device, hospital, surgical center, physician group, diagnostic imaging, genetic testing, health IT, and health insurance markets. His expertise spans the federal health programs Medicare and Medicaid and private insurance. He advises Medicare Advantage Organizations who provide health insurance under Part C of the Medicare Act. Mr. Arrigo serves as an expert witness regarding medical coding and medical billing, fraud damages, as well as electronic health record software for the U.S. Department of Justice. He has valued well over $1 billion in medical billings in personal injury liens, medical malpractice, insurance fraud cases. The U.S. Court of Appeals considered Mr. Arrigo's opinion regarding loss amounts, vacating, and remanding sentencing in a fraud case. Mr. Arrigo provides expertise in the Medicare Secondary Payer Act, Medicare LCDs, anti-trust litigation, medical intellectual property and trade secrets, HIPAA privacy, health care electronic claim data Standards, physician compensation, Anti-Kickback Statute, Stark law, the Affordable Care Act, False Claims Act, and the ARRA HITECH Act. Arrigo advises investors on merger and acquisition (M&A) diligence in the healthcare industry on transactions cumulatively valued at over $1 billion. Mr. Arrigo spent over ten years in Silicon Valley software firms in roles from Product Manager to CEO. He was product manager for a leading-edge database technology joint venture that became commercialized as Microsoft SQL Server, Vice President of Marketing for a software company when it grew from under $2 million in revenue to a $50 million acquisition by a company now merged into Cincom Systems, hired by private equity investors to serve as Vice President of Marketing for a secure email software company until its acquisition and multi $million investor exit by a company now merged into Axway Software SA (Euronext: AXW.PA), and CEO of one of the first cloud-based billing software companies, licensing its technology to Citrix Systems (NASDAQ: CTXS). Later, before entering the healthcare industry, he joined Fortune 500 company Fidelity National Financial (NYSE: FNF) as a Vice President, overseeing eCommerce solutions for the mortgage banking industry. While serving as a Vice President at Fortune 500 company First American Financial (NYSE: FAF), he oversaw eCommerce and regulatory compliance technology initiatives for top ten mortgage banks and led the Sarbanes Oxley Act Section 302 internal controls IT audit for the company, supporting Section 404 of the Sarbanes Oxley Act. Mr. Arrigo earned his Bachelor of Science in Business Administration from the University of Southern California. Before that, he studied computer science, statistics, and economics at the University of California, Irvine. His post-graduate studies include biomedical ethics at Harvard Medical School, biomedical informatics at Stanford Medical School, blockchain and crypto economics at the Massachusetts Institute of Technology, and training as a Certified Professional Medical Auditor (CPMA). Mr. Arrigo is qualified to serve as a director due to his experience in healthcare data, regulations, and economics, his leadership roles in software and financial services public companies, and his healthcare M&A diligence and public company regulatory experience. Mr. Arrigo is quoted in The Wall Street Journal, Fortune Magazine, Kaiser Health News, Consumer Affairs, National Public Radio (NPR), NBC News Houston, USA Today / Milwaukee Journal Sentinel, Medical Economics, Capitol ForumThe Daily Beast, the Lund Report, Inside Higher Ed, New England Psychologist, and other press and media outlets. He authored a peer-reviewed article regarding clinical documentation quality to support accurate medical coding, billing, and good patient care, published by Healthcare Financial Management Association (HFMA) and is published in Healthcare IT News.

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