New prescription drug law will increase transparency, help consumers

Written by Derek Monson

March 18, 2020

Originally published in Deseret News.

If you or someone you care about have struggled to pay the cost of prescription drugs, a new health care law in Utah should grab your interest. The law is contained in legislation recently passed by unanimous vote of the Utah Legislature and sent to the governor for his signature.

The new law primarily addresses pharmacy benefit managers, or PBMs, who are the middlemen in the prescription drug market — they negotiate rebates from drug manufacturers on behalf of health insurers, and then involve themselves in determining what prices you pay for drugs at the pharmacy. The law seeks to require modest financial reporting from PBMs — as well as drug manufacturers and insurers — and regulates some contracting practices that PBMs have used with pharmacies and insurers.

State policymakers listened as both supporters and opponents of this new health care law invoked the principles of the free market to advocate their position on the legislation. Proponents argue that a lack of market transparency means that a free market in prescription drugs is not possible without policy reforms like those in the new law. Opponents argue that the policy reforms of the new law undermine the free market by infringing on private contract rights. So where do free market principles really lead?

A historical example can provide some insight. In 1934, Congress enacted the Securities Exchange Act in response to the 1929 stock market crash. This law was intended to:

  1. Create greater financial market transparency through limited financial reporting from businesses, and
  2. Restrain harmful business practices that generated fraud and insider trading.

Today, through increased market transparency, the financial health and investments of public and private companies are analyzed through their financial statements, generating competitive pressure to manage companies profitably to attract investors. Additionally, investors are protected from fraudulent claims about investments, making capital investment and business growth healthier. These are positive outcomes from a free market perspective.

Similar to how the the Securities Exchange Act of 1934 works, the policy reforms in the new prescription drug law will:

  • Create greater prescription drug market transparency through limited financial reporting from pharmacy benefit managers, drug manufacturers and insurers, and
  • Restrain harmful contracting practices by PBMs that reduce competition by favoring PBM-affiliated pharmacies over independent pharmacies.

In the future, because of increased market transparency fostered by the new law, the effectiveness of PBMs will be analyzed through more detailed reporting of drug rebate information to insurers, generating competitive pressure for PBMs to ensure they are delivering the best deal on drug costs. Additionally, insurers and independent pharmacies will be better protected from anti-competitive contracting practices used by PBMs, leading to more favorable pricing and delivery of drugs to patients. All of these outcomes are positive from a free market perspective.

Under the new law, business will certainly become more difficult for some in the prescription drug market — market competition tends to have that effect. But while the new law will likely challenge PBMs, it will also generate competitive pressure that encourages lower out-of-pocket costs for patients down the road.

Tracing changes in prescription drug costs directly back to the new law will be difficult. However, by promoting a free market for prescription drugs through market transparency and restrained anti-competitive practices, this law will offer financial relief to patients by encouraging more affordable prescription drugs. That is something Utah families sorely need.

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