What was Hillary Thinking When She Hatched Her Plan to Lower Drug Costs?

Newsflash! Hillary Clinton is concerned about your drug costs. Unfortunately, her plan could actually raise drug prices and force you to pay more, albeit indirectly. She proposes to accomplish both feats simultaneously by capping your prescription drug co-pays at no more than $250 per month. This reckless proposal is central planning of the ilk you would find in Cuba or Venezuela. But I’m getting ahead of myself.

Rising drug costs are now a political issue because the number of diseases and conditions that can be treated using drug therapy has grown tremendously over the past 25 years. Arguably, one of the main reasons patients visit their doctors is to obtain or renew prescriptions. When they visit their doctors’ offices, Americans leave with a prescription in hand about three-fourths of the time. This is hardly a travesty; patients aren’t drowning under the cost of prescriptions drugs. When patients swing by their neighborhood pharmacy to pick up their prescriptions, they generally pay only a fraction of the actual costs. Most prescription costs are paid for by prescription drug plans sponsored by insurers and health plans.

Insurers and health plans use multiple techniques to make drug benefits affordable. One of the ways employers, insurers and pharmacy benefit managers (PBMs) hold down costs is through formularies with multiple tiers. The purpose of tiered formularies is to steer enrollees to lower-cost alternatives when appropriate, using differing levels of cost-sharing. Drug plans typically encourage generic use by requiring little if any cost-sharing when a generic drug is filled. Generic drugs are cheap compared to brand drugs — accounting for less than three percent of health care expenditures. Because of their value, prescriptions are dispensed in generic form nearly 90 percent of the time.

However, drug plan formularies usually require higher cost-sharing (tiers) for patients who prefer to take more costly brand drugs — especially brand drugs for which cheap, effective substitutes exist. Some drug plans also have specialty tiers for the costly “specialty drugs.” Specialty drugs are used to treat serious health conditions like cancer, hepatitis C, rheumatoid arthritis and some rare diseases. These newer therapies are often derived from living substances and are very expensive to produce. These therapies are sometimes administered in hospitals and clinics, and are more expensive than typical brand drugs. Only about 1 percent of drugs fall into the unofficial category known as specialty drugs, while about 11 percent fall into the category of brand drugs. Due to the high cost of specialty medications and other brand medications, health plans must carefully manage these drugs. Specialty drugs tend to have the highest cost-sharing and would be most affected by a cap on co-pays.

For the most part, drugs are a bargain. Yet Hillary Clinton wants to pass legislation that would allow these high-priced drugs to rise even higher in price. She is not alone. At the federal level, Oregon Senator Ron Wyden has championed bills that seek to cap prescription drug cost-sharing for Medicare beneficiaries. At the state level, one-third of states have either passed legislation or have introduced bills that seek to limit cost-sharing. So far seven states have laws limiting cost-sharing for drug therapies. An eighth state, California, passed a law due to take effect in January 2017.

The forthcoming law in California would limit copays to $250 for a 30-day outpatient prescription ($500 for people with high-deductible plans). A law in Louisiana limits copays to $150 per prescription, while laws in Delaware and Maryland limit cost sharing to no more than $150 a month. A law in Vermont limits copays to no more than $1,000 per year. In Maine, copays cannot exceed $3,500 per year.

What’s wrong with these laws? Plenty! Increasingly, health care has become a gold rush with health care industry stakeholders looking for ways to swindle employers, insurers and taxpayers into reimbursing outrageous prices. About a year ago, drug maker Valeant Pharmaceuticals was accused of using various strategies to aggressively raise drug prices, most of which was charged to insurers, employers and health plans. One strategy was to partner with a pharmacy that agreed to not substitute generic drugs for brand drugs costing a multiple of the cheaper drugs’ price. Another strategy was to waive expensive co-pays so patients would not request a generic substitute. About the same time another drug company, Turing Pharmaceuticals, carefully sought out and acquired old generic drugs that had little competition, and then raised prices aggressively — in one instance by 5,000 percent.

Valeant and Turing developed these elaborate strategies because the firms realized there are limits to what consumers are willing to pay for goods and services. But if consumers can be insulated from high prices and discouraged (or limited) from selecting lower-priced options, only the sky is the limit to the prices that could be charged for drugs.

Patients benefit enormously from safe and effective drug therapies. Drug therapy is the most efficient method to treat most ailments — often substituting for more expensive hospital and surgical treatments. Campaign rhetoric about unaffordable drug costs is much ado about nothing. The proportion of drug costs Americans pay out of their own pocket has been falling for decades. Around 1960, Americans paid for nearly all of their prescription drugs. By 1980, that figure was down to about 75 percent. By 1995, the figure was 50 percent. Today, Americans pay for only about 16 percent of their prescription drugs. Moreover, an estimated 70 percent of Americans belong to a drug plan that manages drug benefits on patients’ behalf. As a result, nearly one-fourth of retail prescriptions are fully covered by insurers and require no copayment by the patient. An additional one-third cost the patient $5 or less. Just over three-fourths cost the patient $10 or less.

Cost-sharing is a method employers, insurers and drug plans use to hold down drug spending and keep premiums affordable by giving enrollees an incentive to ask for generic drugs. Cost-sharing also provides drug makers with an incentive to limit excessive price hikes. If Hillary Clinton is successful in her attempt to limit cost-sharing, you can bet there will be even more drugs with prices that reach the stratosphere.

A version of this also appeared in Town Hall.


Comments (10)

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  1. jimbino says:

    Campaign rhetoric about unaffordable drug costs are much adieu about nothing. Not very Shakespearean! Besides which, one says, “rhetoric is” in English.

  2. Gary Ferone says:

    Gary Ferone,Stamford,CT is the franchise owner of Assisting Hands Home Care which provides home care services such as preparing meals,helping with daily routines,housekeeping,assisting in shopping,etc.
    Gary Ferone

  3. bob hertz says:

    If a specialty drug costs $10,000 a month, then even with a high copay, the financial burden falls mainly onto the insurance plan.

    My state’s Blue Cross plan has stated publicly that paying for specialty drugs has had a material role in causing the rise in major medical insurance premiums.

    So as you say, the public will be hurt and not helped by Hillary’s little grandstanding.

    I personally would like to see a candidate advocate federal price limits on drugs with no substitutes. Such limits exist in many other advanced nations which are much freer and more prosperous than Cuba or Venezuela.

  4. Barry Carol says:

    While specialty drugs account for only 1% of prescriptions written and one-third of drug costs and they don’t affect very many people directly at any given time, all of us know that we can become one of those affected at any time. If we do, most of us won’t be able to afford the ruinous 33% co-pay which is typical for the specialty tier of a drug formulary. It creates a feeling of both financial and healthcare insecurity that seems to call out for a solution of some sort. When asked why they charge so much for specialty drugs, their answer boils down to: because we can. If they weren’t so greedy, they wouldn’t be facing the political backlash that they face now.

    I spent my career in the money management business and I’m a free market guy for the most part. However, I would ask drug companies how profitable do you need to be to compensate your investors with a reasonable risk-adjusted return on their capital that includes covering the cost of research and development failures? At some point, the doctrine of enough is enough needs to prevail when it comes to drug pricing.

    • Devon Herrick says:

      The problem is getting worse. As Avik Roy pointed out in a recent Forbes blog post, some of the cost for specialty drugs is attributed to physician spending (if administered by doctors) and to hospitals if infused at a hospital. Whereas the National Health Expenditures counted by HHS claims drug spending is 10 percent of health spending, industry data puts the figure at nearly double that proportion when all drugs are totaled. The reality is that maybe 12.5 percent of drugs account for 85 percent of all drug spending, while 1.5 percent accounts for about half of all drug spending.

      • Barry Carol says:

        Insurers have told me in the past that when they break down their medical claims costs, 40% is for hospital based care, both inpatient and outpatient combined, 40% is for physician and clinical services, and 20% is for prescription drugs.

        The specialty drug manufacturers are playing with political fire when their drug pricing strategy boils down to maximize what the market (insurers) will bear.

        • Devon Herrick says:

          Many economists worry about market failure, as a condition when public goods are under-produced if not paid collectively. Public health advocates worry about market failure when a private “merit good” like health care is under-produced because the cost is higher than an individual can afford. Health advocates then want the costs socialized and funded collectively. But no one seems to discuss the market failure that occurs when the market consists of sellers, payers and consumers rather than buyers & sellers.

  5. Barry Carol says:

    Sellers, payers and consumers vs. buyers and sellers is a good part of what makes healthcare and health insurance different from other areas of commerce. Maybe different solutions are required too.

    • Devon Herrick says:

      Maybe different solutions are required too.

      Very true. In other areas of consumption there are mechanisms consumers use to decide when more of a good is no longer as desirable as an alternative good. Not so in health care. Under the market system, market-clearing prices are established by the intersection of the supply and demand curves. Prices are a rationing system. Yet, in health care the word “rationing” is a dirty word. A system of rationing scarce resources is as necessary in health care as it is in other markets. The result of having no effective health care rationing mechanism is the costly, wasteful system we have today.