Could banning discounts on drugs be good medicine?

Out in ever-progressive California, Gov. Jerry Brown is this month pondering whether to sign into law a crackdown on ruthless corporate profiteering recently passed by his legislature.

The legislation (Assembly Bill 265) would prohibit prescription drugmakers who face generic drug competition from offering consumers any "discount ... voucher, or other reduction in an individual's out-of-pocket expenses ..."

Will the Big Pharma scoundrels stop at nothing?

Now, California's a strange place. But the world of health care finance is even stranger. It's a place where outlawing certain kinds of discounts really could save us all a fair bit of money.

Understanding why that's so is worthwhile, because it reveals a lot about why health care costs are devouring America.

I recently had several drug experiences that help explain it.

I stopped by my pharmacy one day to refill a prescription. For reasons that aren't important here they said they could give me the medication but didn't yet have authorization for payment from my insurance provider — so maybe I'd just want to wait a couple of days.

When I regained consciousness, I vaguely recalled the friendly pharmacist's assistant saying it would be over $400 more. I decided the refill could wait.

A few weeks after this reminder of the hidden distortions so common in health care pricing, a friendly letter arrived from my insurance plan about this same prescription. It informed me that if I switched to a generic alternative it would "cost [me] less!"

Again, I wondered how much.

As always in the Wonderland of health care, it took several phone conversations to extract a straightforward dollars-and-cents answer. Turns out they were offering a $15 discount on my $35 copay. Meanwhile, my insurer seems sure to save many times that if I make the switch.

I'd frankly be in a bigger hurry to hassle with calling my doctor and changing the prescription if the insurer would arrange to share more of its savings with me. But I don't fault them for dangling a little discount in hopes of cutting big costs for themselves. Ultimately, lower overall drug spending should translate into lower overall insurance premiums.

When the maker of a high-priced brand name drug that faces cheaper generic competition offers to reduce your out-of-pocket costs, its aim is the opposite of my health plan's aim. The drug company aims to reduce your incentive to switch to the lower-cost alternative — and thus to keep the insurer paying the full freight for the higher-cost brand name drug (and passing the cost along to all of us in premiums, of course).

Insurers and drug companies have been playing this high-stakes chess game for years. Insurance firms and employer health plans have steadily sought to impose more "cost-sharing" through deductibles and especially copays, often requiring bigger out-of-pocket payments from patients who choose higher-priced drugs, out-of-network providers and so on.

As my example shows, the reason for this isn't mainly that the co-payments we make cover much of the total costs — it's that giving consumers an incentive to choose lower-priced alternatives can shrink insurers' backstage costs impressively.

Meanwhile, drugmakers have countered by coming up with various ways of "protecting" consumers from those much maligned copays — the better to keep the big money flowing to their coffers through the insurance system.

Thus it is that California lawmakers (following the lead of Massachusetts, which already has a copay-coupon ban) hope to indirectly lower costs for all health care consumers by denying individuals direct discounts on high-priced drugs. It's icky medicine, but maybe good for us.

It also doesn't illuminate much to pronounce moral judgments about all of these maneuvers. All concerned — the drug firms, the insurance plans and we consumers — are pursuing their own best financial interests. What's important to keep in mind as we try to reform health care is that this is what everyone is going to keep doing.

Maybe the drug and insurance companies ought to be satisfied with less profit. And maybe I ought voluntarily to go out of my way to use the lowest-cost drugs and medical services, even when it doesn't "cost me less" directly.

But in the real world, we may need laws to limit the self-interested strategies companies can use — and we may need "cost-sharing" to avoid what economists call "market failure" when consumers are insulated from the costs of the drugs they choose, the clinics they visit and the services they demand. Only then will providers have reason to compete on quality and price — rather than dreaming up clever ways of outfoxing consumers and one another.

Advocates for single-payer health care would have government set prices and manage the resulting shortages with rationing. The great obstacle to more market-based approaches is that we've created a system in which consumers spend too little of their own money in health care, even for routine and predictable medical needs. Forcing consumers to feel cost differences in health care personally is the key to unleashing marketplace forces.

It is odd, and oddly pleasing, to see some of America's most liberal states leading the way to this understanding.