In Chapter 7, we covered:
The Role of Pharmacy Benefit Managers (PBMs): PBMs act as intermediaries between insurers and drug companies. They negotiate rebates with drug companies in exchange for placing their drugs on an insurer’s formulary (list of covered medications). When PBMs are allowed to keep a portion of that rebate, they are motivated to have drug companies raise their list prices each year to have more room to offer larger rebates, even if net prices don’t change much. In this way PBMs act like false heroes, and the downside is that drug companies come across as villains aggressively raising their prices, when actually net prices may change very little.
Rebates can sometimes motivate PBMs to steer patients to a high list price branded drug even when a cheaper generic is available so as to extract more from a patient via their deductible. Some PBMs offer complete pass-throughs of rebates to health plans, but they may charge drug companies other fees, such as distribution fees. These fees can also create an incentive for PBMs to guide patients toward a more expensive drug. (It’s also worth noting that if patients didn’t have high OOP costs, many of these tactics wouldn’t be effective.)
Impact on Patients:
Patients rarely pay the full list price for a branded drug, but they often still pay a percentage of that inflated price, through deductibles or coinsurance. The issue is that the actual cost to the insurer (the net price) is often much lower due to rebates. So patients can end up paying more than the insurer, which can feel unfair.
Insurers argue that these rebates help lower premiums for everyone. But when patients are charged more than the net price to subsidize premium savings for healthier members, it creates a situation where the sick are subsidizing the healthy --- the reverse of how insurance is supposed to work.
Patients already paid into the system with their premiums. Asking them to pay out-of-pocket costs, especially based on inflated prices, is essentially making them pay twice. If these costs are so high that patients can’t afford their medications, then they aren’t truly insured --- it’s like false advertising.
The role of insurance:
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Health insurance allows people to spread the cost of medical care across a large pool of individuals. It works best when everyone is bought in.
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Premiums paid to insurance companies are used to cover the cost of medical treatments, including medications.
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Only about 8% of these premiums go paying for branded drugs and therefore provide the incentives for investment in the development of new and better medicines.
The problem with the current system:
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A fragmented healthcare system with misaligned incentives discourages early and consistent treatment, costing more in the long run.
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Vertical integration. By owning PBMs, specialty pharmacies, and healthcare providers, companies like UnitedHealth can consolidate their control over the healthcare supply chain, reducing competition and potentially leading to higher prices for patients.
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High out-of-pocket costs (deductibles, copays) can prevent people from getting necessary treatments they had every right to expect they would be able to get during all the years they were paying their premiums.
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PBMs negotiate rebates on drugs, but, even when making patients pay for drugs out of their deductibles, PBMs don’t give patients the benefit of the lower net prices, adding the insult of being charged inflated list prices to the injury of having to pay an out-of-pocket cost when sick.
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Lack of universal healthcare coverage means many Americans are uninsured (~10%) or underinsured (~10%), meaning they can’t afford their out-of-pocket costs and have to forego treatment.
Solutions proposed:
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Cap or eliminate out-of-pocket costs, ideally with “first-dollar coverage” (i.e., without having to reach a deductible) with low/no copays, so patients can access the medicines they paid to access when they paid their premiums.
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Expand health insurance coverage to all Americans, likely by mandating that everyone purchase insurance and by providing adequate government subsidies so that everyone can afford insurance.
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Limit vertical integration (the consolidation of insurers, PBMs, and pharmacies) to increase competition in providing treatments to patients. Currently, the system is moving towards a monopsony (where only a few buyers control the purchase of medicines) and a monopoly, with fewer pharmacy options where patients can get their medications.
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Require that prior authorization be real-time, electronic, and truth-seeking, not a source of unnecessary friction to dissuade physicians from even bothering to prescribe a medicine. If a plan wants to deny coverage, it should just say so upfront rather than allowing patients to believe they will be covered but then demanding they jump through such impossible hoops as to functionally deny them access to the promised treatment.
A reformed healthcare system with affordable insurance for all is necessary to incentivize ongoing drug innovation and improve long-term health outcomes for everyone. If we don’t fix insurance so that it functions like proper insurance, there’s a risk that America’s rising anger at the injustice of some patients not being able to afford proper treatment will spillover into the wrong solution, namely price controls on novel medicines.