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 is Managing Partner & CEO of No World Borders, a leading healthcare management and IT consulting firm. He serves as an expert witness in Federal and State Court and was recently ruled as an expert by a 9th Circuit Federal Judge. He serves as a patent expert witness on intellectual property disputes, both as a Technical Expert and a Damages expert. He leads a team that provides Cybersecurity best practices for healthcare clients, ICD-10 Consulting, Meaningful Use of Electronic Health Records. He advises legal teams as an expert witness in HIPAA Privacy and Security, medical coding and billing and usual and customary cost of care, the Affordable Care Act and benefits enrollment, white collar crime, False Claims Act, Anti-Kickback, Stark Law, Insurance Fraud, payor-provider disputes, and consults to venture capital and private equity firms on mHealth, Cloud Computing in Healthcare, and Software as a Service. He advises self-insured employers on cost of care and regulations. Arrigo was recently retained by the U.S. Department of Justice (DOJ) regarding a significant false claims act investigation. He has provided opinions on over $1 billion in health care claims and due diligence on over $8 billion in healthcare mergers and acquisitions. Education: UC Irvine - Economics and Computer Science, University of Southern California - Business, studies at Stanford Medical School - Biomedical Informatics, studies at Harvard Medical School - Bioethics. Trained in over 10 medical specialties in medical billing and coding. Trained by U.S. Patent and Trademark Office (USPTO) and PTAB Judges on patent statutes, rules and case law (as a non-attorney to better advise clients on Technical and Damages aspects of patent construction and claims). Mr. Arrigo has been quoted in the Wall Street Journal, New York Times, and National Public Radio.

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