The rift between the insurer industry and the prescription drug industry exposes a conundrum. Who is responsible for the high cost of prescription drugs? Insurers say drug prices are too high, and drugmakers say insurers pass on too much of the tab for drugs to consumers.
“Both are correct. So the solution is obvious. If drug companies do not charge excessive prices for drugs, then insurance companies should not charge excessive cost-sharing for the drugs,” said Topher Spiro, vice president for health policy at the Center for American Progress. “Everybody wins.”
Either way, voters think they’re paying way too much for their drugs, and high drug prices have made headlines for months. But insurers and drugmakers dug in their heels last week during dueling annual meetings for America’s Health Insurance Plans and the Pharmaceutical Research and Manufacturers of America in Washington.
“If there was a serious effort to lower Rx prices [on the part of the drugmakers], then insurers could be asked to give relief on cost-sharing,” said John Rother, president and CEO of the National Coalition on Health Care and who leads the Campaign for Sustainable Rx Pricing. “It’s kind of a Mexican standoff now.”
At their meetings, both industry groups dedicated time to talking about the other, suggesting actions the other group could take to make drugs more affordable.
“We need some real solutions. We cannot afford to keep bankrupting our elderly and ourselves over the cost of prescription drugs,” said John Bennett, president and CEO of Capital District Physicians’ Health Plans and one of the speakers at AHIP’s seminar on prescription drug prices.
At PhRMA’s conference, new Chairman-Elect George Scangos went so far as to say that “perhaps the greatest hope” for reducing overall health care costs is within the drug industry. PhRMA argues that breakthrough new medicines cost a lot in the short term, but they end up reducing overall health care costs by lowering hospital bills and reducing the use of high-cost procedures.
PhRMA announced a set of policy recommendations for promoting medical innovation during its meeting. Several of them directly target insurers. For example, one proposal calls for state and federal regulators to prohibit insurance plans from “structuring formularies in a discriminating fashion,” like placing all treatments for a certain condition on the most expensive price tier.
AHIP and PhRMA have good reason to dislike one another. As more specialty drugs have entered the market, drug prices have risen. Insurers have been forced to pay for a good portion of this spike. On the other hand, drugmakers say they should get a return on their considerable investment. When insurers pass on drug costs to consumers, the pharmaceutical industry argues, drug companies are the ones that get a bad rap. Instead of being life-saving innovators, they are the greedy villains of the health care world.
Drug spending has been slowing rising over the last several years, but has spiked recently. It was about $457 billion in 2015. In 2014, the cost was up 12.6 percent from the year before. Growth in 2015 was largely attributable to higher drug prices and an increase in the number of prescriptions per person, according to a report released last week by the Department of Health and Human Services’ Office of the Assistant Secretary for Planning and Evaluation.
Prices have gone up, but drug companies say insurers aren’t paying for them like they are reimbursing other providers. In 2014, 15 percent of prescription drug costs were paid out of pocket by patients, compared with only 3.2 percent of hospital costs were and 9 percent of physician and clinic costs, according to the Kaiser Family Foundation’s health system tracker.
While out-of-pocket spending for hospital care and physician services dropped in 2014, people’s individual expenses for drugs is estimated to have grown by 1.9 percent in the same year.
The actual cost of drugs rose much more rapidly, about 11.4 percent on a per capita basis. Insurers covered most of these costs, according to Kaiser.
The bottom line is that people are paying more for drugs, but so are the insurance companies. The unanswered question is where the appropriate balance should be. And how did we get here in the first place?
“The fact that patients pay a substantial share of drug costs out of their own pockets no doubt contributes to their frustration. Drug costs are rising faster than other services, and those costs are often passed on to patients,” said Larry Levitt, a senior vice president at Kaiser.
Insurers aren’t helping the situation by making newer drugs the most expensive through a tiering system for prescriptions. Generally, generics go on the first tier, preferred drugs on the second tier, non-preferred drugs on the third tier and, often, specialty drugs on the fourth tier. Co-payments and co-insurance generally get higher with each tier.
The system is designed to encourage consumers and their doctors to choose lower-cost drugs. But problems arise when all options for a specific condition are on the same high-cost tier. “What ends up happening is that patients don’t have a choice,” said Dan Mendelson, CEO of Avalere Health, an independent consulting firm. “They have that condition and they need the drug, so they end up in a position where there is no least expensive therapy.”
For insurers, picking up more of the patient’s tab isn’t as simple as it might seem. Insurance markets are sensitive to the major price fluctuations in the drug industry. Even if insurers covered more of the cost of expensive drugs, as PhARMA suggests, that shift could end up being reflected in higher premiums or greater cost-sharing elsewhere. This is particularly true in competitive markets.
No matter how many insurer-based solutions are discussed, the conversation inevitably circles back to the drug companies.
“The fundamental problem is unsustainable [prescription drug] prices,” Rother said. If the only thing that changed were cost-sharing models between insurer and patient, he added, “it would completely free PhRMA to keep raising prices without restraint.”