J&J Reduces the Information Gap for Consumers
Johnson & Johnson announced Thursday it will start adding the prices of its medicines to commercials by next month. They will include both the list price of a product and potential out-of-pocket costs bared by patients. The move was commended by Health and Human Services Secretary Alex Azar. Pricing transparency will force drug makers to compete on price and reduce information asymmetry for patients. When the information gap is reduced or eliminated, incentives are better aligned where providers and patients can work together to find the optimal quantity of care, where the marginal benefit of outcome is equal to the marginal cost.
We commend Johnson & Johnson for recognizing the value of informing customers about list prices and for doing so voluntarily. We call on other manufacturers to follow their lead,
Alex Azar, United States Secretary of Health and Human Services
Price transparency for healthcare, especially if other drug makers follow J&J, can allow for comparison shopping which rarely occurs in today’s environment. A 2012 survey of health plans found that while 98 percent of plans said they offer a cost calculator tool, only two percent of patient members use the tools. More salient pricing through the use of advertising could bring prices to the forefront of consumers’ minds and increase the propensity of comparison shopping. Comparison shopping works to reduce health care spending in two distinct ways. The first is the direct effect of consumers opting for lower-price medications and treatments. As low-price providers take a larger share of spending, total spending is decreased. The second is the effect on high-price providers. As high-price providers lose market share, they may choose to rein in their prices. When the California Public Employees Retirement System implemented a price-capping system that steered patients to lower-price hospitals, several high-price hospitals lowered their negotiated prices to retain patients. Additionally, upfront pricing allows patients to play a larger role in health care decisions. Patients have a much larger incentive to control the cost of their care than physicians, so it is logical for patients to be given the information necessary to act on their incentives.
West Health, a group of three nonprofit organizations committed to lowering healthcare costs believes that the focus on increasing patients’ access to information about out-of-pocket costs is too narrow, and should include physicians, employers, health plans and policy makers. Analysis by the Center for Studying Health System Change found that requiring all private plans to provide personalized out-of-pocket prices to patients would reduce total health spending by an estimated $18 billion over the next decade. They also estimated that using claims databases to gather and report hospital-specific prices might reduce spending by an estimated $61 billion over 10 years. J&J’s announcement to advertise drug prices is a solid step in the direction of full transparency and if other drug makers and health providers follow suit, U.S. healthcare spending could be dramatically lowered.
Some economists have tried to temper the enthusiasm for price transparency by calling attention to possible unintended consequences. One concern is that public prices could lead to low-price providers demanding “me-too” price increases. Releasing price data older than one year is less likely to produce this effect because it allows for competitors to undercut other providers and be rewarded with increased volume. In this scenario, it would be extremely difficult for competitors to maintain a collusive equilibrium because of the large incentive to cut prices and gain market share. Lack of transparency has resulted in the over allocation of healthcare for American consumers and steps to reduce information for patients like J&J’s latest move, along with physicians, employers, health plans and policy makers will allow for a drastic improvement in the ability of patients and providers to work together and find the optimal quantity of care.
SOURCES:
Reuters: J&J Becomes First Drugmaker to Add Prices to Television Ads