American Experiment testimony urges legislators to pursue price transparency, not price controls to lower drug prices
Today the Minnesota House Commerce Finance and Policy Committee will hold a hearing on a bill to impose price controls on drug manufacturers. The bill — House File 17 — proposes to prohibit excessive price increases on certain drugs and to establish a Prescription Drug Affordability Board with the power to set an upper payment limit on the price of drugs.
I provided written testimony explaining why these price controls are the wrong way to lower drug prices. In short, the bill will lead to the negative consequences that predictably attend government price controls. This includes shortages, lower quality, less innovation, and fewer new products. Most concerning, there is a clear tradeoff between lower drug prices through price controls and fewer new life-saving drugs.
These negative consequences assume the bill will actually force drug prices down as intended. But the bill may do little to nothing because drug pricing has not been a major contributor to rising health care costs. In fact, federal data shows drug prices have dropped for four consecutive years. In the midst of falling drug prices, this bill is a solution in search of a problem.
HF 17’s misplaced focus on drug pricing may very well lead to higher health care prices by drawing attention and energy away from more effective solutions to control the high and rising cost of health care. Instead of price controls, state lawmakers should focus on increasing price transparency. This approach would be far more effective at bringing prices down without the negative consequences that accompany government price controls.
Here is the full text of my written testimony:
January 22, 2023
Dear Members of the House Commerce Finance and Policy Committee:
My name is Peter Nelson and I am a Senior Policy Fellow at Center of the American Experiment. Thank you for the opportunity to provide comments today on HF17. This bill includes a set of price controls on drugs aimed at making the price of drugs more affordable to the state’s health care system and patients. These are laudable goals, but this bill is the wrong way to achieve them. Instead of price controls, this committee should focus on increasing price transparency. This approach would be far more effective at bringing prices down without the negative consequences that always accompany government price controls.
Price controls reduce access to life-saving drugs
HF17 proposes to prohibit excessive price increases on certain drugs and to establish a Prescription Drug Affordability Board with the power to set an upper payment limit on the price of drugs. Both of these policies operate as price controls. Unfortunately, there are always negative consequences when the government steps in to set prices. Time and again price controls lead to shortages, lower quality, less innovation, and fewer new products. St. Paul’s current work to impose rent controls offers the latest local example of these entirely foreseeable negative consequences. In the case of price controls on drugs, there is a clear tradeoff between lower prices and reduced investments in the development of life-enhancing and life-saving new drugs.
This clear tradeoff was a major part of the debate over the adoption of the Inflation Reduction Act (IRA) last summer. The IRA which became law in August allows Medicare to negotiate and effectively set prices for certain high-cost drugs and requires drug manufacturers to pay Medicare rebates when price increases exceed inflation. Everyone agrees these price controls will reduce the number of new drugs; the debate last summer was over how many. The Congressional Budget Office estimated a reduction of 13 new drugs over 30 years. By contrast, University of Chicago economists estimate the IRA will reduce research and development spending by up to 60 percent from 2021 to 2039, resulting in up to 342 fewer new drugs.
This committee should take into consideration that the federal government has already enacted drug price controls that will negatively impact the development of new drugs. It’s unclear how much HF17 would impact new drug development, but it can only make matters worse.
Focus on drug pricing is misplaced
The main problem with HF17 is that it fails to address the real pricing problems in the health care system. The fact is drug prices have been declining in recent years. In December, the Centers for Medicare & Medicaid Services published the most recent national health expenditure (NHE) data which shows retail drug prices dropped for the fourth consecutive year in 2021.
The NHE price indexes for major health spending categories allows for a rough approximation of how much price versus utilization contributes to higher health spending in these categories. This analysis shows retail drug price growth contributed just 1.2 percent to the overall growth in NHE between 2011 and 2021. Over the most recent 5-year period, a decline in retail drug prices actually pulled the overall growth in NHE down by $9 billion. By contrast, higher hospital prices increased NHE by $143 billion.
High hospital prices are a particular problem in Minnesota. The RAND Corporation reviewed medical claims data from every state “to document variation in negotiated prices for the commercially insured population.” To make this comparison, it established a standardized price for inpatient and outpatient hospital services based on the allowed amount—i.e., negotiated price—paid by the private health plan per service and standardized for a case mix using Medicare data. The results of this research show Minnesota had the third-highest standardized price for inpatient care in 2020. Only New York and Alabama had higher inpatient prices. Minnesota hospitals charged the sixth highest standardized price for outpatient care.
The slow growth in drug prices in recent years suggests HF17 is a solution in search of a problem. It’s entirely possible the pricing impact of HF17 will be limited or even nonexistent because drug price increases are already limited. That’s the best-case scenario. If HF17 works as intended, then it will result in fewer new drugs as well as the other negative consequences that usually accompany government price controls.
Price transparency offers a better solution
Minnesota lawmakers don’t have to make this tradeoff to bring drug prices down and make the health care system more affordable. Instead of price controls, this committee should focus on policies that increase price transparency across the entire health care sector, including greater transparency in drug pricing.
Hidden health care pricing is a key contributor to the high and rising cost of health care in America. Research shows this hidden pricing leads to wide variations in pricing with little relationship to the cost of care or the value to patients. Upfront pricing information is essential to an efficient and competitive market. Price transparency offers the opportunity to finally take advantage of real competition to deliver lower prices in the health care sector without sacrificing quality or access to care, including access to new drugs.
From late 2017 to early 2021 I worked as a Senior Adviser to the Administrator at the Centers for Medicare & Medicaid services. In that role I helped manage the administration’s regulatory agenda related to health insurance. Part of that work involved leading the Transparency in Coverage rulemaking which requires all health plans to publicly post their negotiated rates, including prescription drug pricing. During that time CMS also implemented a hospital price transparency rule which took effect on January 1, 2021.
These federal rules are historic steps that will upend the status quo and finally ensure access to pricing information patients need before they receive care. Any question over the staying power of these rules and the historic changes they put in motion was answered when President Biden issued an executive order on competition in July 2021 directing the Secretary of Health and Human Services to support these initiatives.
Unfortunately, despite the hospital rule being in effect for over two years, many Minnesota hospitals still don’t fully comply and those that do take advantage of loopholes to avoid being fully transparent. Drug manufacturers and pharmaceutical benefit managers have also been successful at delaying drug pricing disclosure under the health plan rule.
There are several additional steps Minnesota lawmakers can take to strengthen these federal price transparency rules which will be far more effective at lowering the overall cost of health care in Minnesota. The first step is to simply empower the state to enforce the federal rules. Last week American Experiment updated a policy brief that outlines several other steps to increase hospital price transparency.
HF17’s misplaced focus on drug pricing may very well lead to higher health care prices by drawing attention and energy away from real solutions. Instead of focusing on drug price controls, lawmakers should instead focus on better harnessing competition to control costs. Price transparency offers the most promising and bipartisan opportunity to bring real, value enhancing competition to the health care sector.
Senior Policy Fellow
Center of the American Experiment
 Congressional Budget Office, Estimated Budgetary Effects of Public Law 117-169, to Provide for Reconciliation Pursuant to Title II of S. Con. Res. 14 (September 7, 2022), available at https://www.cbo.gov/publication/58455.
 Tomas Philipson and Troy Durie, “The Evidence Base on the Impact of Price Controls on Medical Innovation,” Becker Friedman Institute for Economics at the University of Chicago Working Paper No. 2021-108 (September 14, 2021), available at https://bfi.uchicago.edu/working-paper/the-evidence-base-on-the-impact-of-price-controls-on-medical-innovation/.
 Centers for Medicare & Medicaid Services website, “National Health Expenditure Data,” at https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData.
 Christopher M. Whaley, et al., Prices Paid to Hospitals by Private Health Plans: Findings from Round 4 of an Employer-Led Transparency Initiative (RAND Corporation, 2022), available at https://www.rand.org/pubs/research_reports/RRA1144-1.html.
 See, e.g., Zach Cooper, et al., “The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured,” The Quarterly Journal of Economics (February 2019), available at https://academic.oup.com/qje/article-abstract/134/1/51/5090426.
 The White House, Executive Order on Promoting Competition in the American Economy (July 9, 2021), available at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/.
 Peter Nelson, Making health care prices more transparent in Minnesota, American Experiment Policy Briefing No. 10 (January 2023), available at https://www.americanexperiment.org/reports/making-health-care-prices-more-transparent-in-minnesota.