But it isn’t their fault. It’s the logical result of a complex, subversive system designed to warp incentives and create market power.
November 2018 was an interesting month for prices.
On the 23rd (or, in some cases, the 22nd), millions of U.S. shoppers took to the streets to find great deals at low prices. Black Friday has become an iconic, American exercise in consumerism, allowing customers to temporarily stretch their budgets to the limit and get the brand name coat, purse, or device that’s normally a little too expensive. People live for it.
Another price shift happened that month, but far fewer people took notice of it. On the 16th Pfizer announced it would increase the list prices of 41 medicines, set to take effect in mid-January 2019. Approximately 10% of the drug-making giant’s medicines will see about a 5% sticker price increase. And as anyone who’s read the news or had to pay a medical bill recently can attest, another healthcare price increase just isn’t tolerable. HHS Secretary Alex Azar criticized the increases by claiming they “further illustrate the perverse incentives of America’s drug pricing system.”
What exactly is Azar talking about here? And what do these two scenarios have to do with each other? More than you think.
Why Drug Prices Are Out of Control
There are hundreds of graphs out there illustrating drug price increases, but this one will suffice. It documents total U.S. spending on prescription drugs rising from $2.7b in 1960 to $333.4b in 2017, an outrageous increase of 12,000%. And for those of you who rightly point out that a 1960 dollar was worth far more than a dollar today, the Bureau of Labor Statistics’ CPI data indicate that inflation only accounts for about 728% of the increase. So, we’ve got 11,272% of a price increase left to explain.
U.S. Expenditures on Prescription Drugs 1960-2018 ($ Billions)
What’s in the rocket fuel for drug prices’ liftoff? Well, the short answer is “It’s complicated.” But one reason stands out as particularly harmful, convoluted, and even immoral: Manufacturer coupons. They should be illegal.
Part of Manufacturer coupons’ appeal, and why they never get any flak, is that they seem harmless. Compassionate, even. A drug company provides a coupon that pays for a patient’s back-breakingly expensive medicine in full. The patient pays nothing out of pocket. What a hero!
No, what a sham. Look a little closer and the actual mechanics of drug coupons begin to materialize. There’s no free lunch here.
Must watch video:
the Addiction to Medical Coupons!
An All Too Common Situation
Susan’s life was upended 3 months ago with a diagnosis of Multiple Sclerosis (MS). She, and the company plan, have been scrambling to find a solution. Her physician assesses her situation and prescribes her Copaxone®. Even though the drug costs $6,000 dollars per month (far more than the generic version, which costs $2k per month), Copaxone’s manufacturer steps in to provide her a coupon that covers Susan’s entire out-of-pocket maximum, which also happens to be $6,000 in this case. Susan begins regular Copaxone injections to stymie the effects of her MS and doesn’t have to pay a cent. So far, so good.
Unbeknownst to Susan, Easy Target’s health plan takes a big hit. Copaxone’s manufacturer pays for one month out of the year to cover Susan’s out-of-pocket expenses, but that leaves the other 11 months of the year unpaid.
11 months × $6,000 = $66,000
The employer picks up the tab. $66,000 billed to the plan. Not the $24k that would have been billed to the plan had Susan begun treatments with the generic alternative to Copaxone, which the FDA has approved as “bioequivalent and therapeutically equivalent to…Copaxone.” However, Susan doesn’t want to switch to the generic. Why? Because there’s no manufacturer coupon to cover her out-of-pocket expenses if she does.
What’s Wrong With This Picture?
Here’s the problem with this massive constraint on choice: everyone pays for that $66,000. The rest of Easy Target’s employees end up paying for it when their healthcare premiums go up the following year to make up for the huge hit to the plan. And when this situation plays out over and over again in the healthcare marketplace with hundreds of employers, the price index of drugs rises (since drug manufacturers, like Pfizer, can profit tremendously by raising their drug prices without affecting individual patients’ choice of drug). In short, every employer and anyone who’s paying a healthcare premium loses. The net effect of manufacturer coupons is:
- Drug prices are not constrained by normal economics;
- Patient drug choice is completely decoupled from prices since they pay nothing out-of-pocket;
- Patients are addicted to manufacturer coupons because they can’t pay for the drug without them;
- Drug prices incrementally increase at everyone else’s expense; and
- Generic drugs, which are dramatically cheaper and are proven to have the same effect, are not utilized.
Manufacturer coupons distort the market by economically forcing the patient to take a more expensive drug. No reasonable individual would refuse the offer of “Here, pay nothing.” We do not blame them, particularly when the patient’s primary concern is to simply get better. The blame lies with the drug manufacturers, who know exactly what they’re doing.
So does Uncle Sam! Even the government had the foresight to make manufacturer coupons illegal through Medicare and Medicaid under the 1972 federal anti-kickback statute because they “influence the referral of federal health care program business.” Manufacturer coupons are kickbacks. They are illegal under publicly funded health plans, and they should be illegal under privately funded ones too. Hopefully, our regulators will come down decisively on the side of correcting this market failure and exploitation.
You (And Your Employees) Deserve Better
If only the drug markets worked like the consumer goods markets on display on Black Friday, where companies competed with each other upfront and had to lower their prices to entice buyers to purchase their wares. Consider for a moment the outrage that would ensue if electronics and clothing manufacturers engaged in the same kind of market manipulation that drug companies do. Samsung would be able to not only hold you captive to their brand, but could drive up the price of TVs and phones to consumers by 500% without consumers being able to do anything about it. We wouldn’t stand for it. It’s fundamentally un-American. We expect more. We ought to from our health plans as well, considering how much healthcare expenses eat into the average American’s take-home pay.
Wincline was formed on the idea that transparency and fair dealing absolutely must be found in employee benefits and healthcare. One of our own clients had a situation very similar to Susan. We identified the situation and advised our client on a solution that resulted in the member transferring to the generic with the plan paying for the entire cost. This resulted in saving the plan $42,000 at no cost to the member. Could we do the same for you?
 In a reference-based pricing model, the employer sets an amount based on the Medicare reimbursement rate (i.e., 130% or 150% of Medicare) that it is willing to pay for a claim. This allows employers to exert control over their healthcare costs while also allowing plan members to freely choose between providers and facilities rather than being restricted by a PPO network.