So if insurance helps us afford all this great medicine, what’s the problem? The primary issue, as the NPLB video at the end of the last chapter alludes to, is that U.S. Insurance often leaves patients with high deductibles, co-payments, and out-of-pocket maximums, causing many to forego necessary treatments due to cost. This “cost-sharing” mechanism forces patients — especially those with chronic or serious illnesses — to bear a significant portion of their medical expenses. As a result, many insured individuals find themselves underinsured when they need care the most, leading to worse health outcomes and higher long-term costs for the healthcare system. It’s a lose-lose situation!
The fragmented nature of the U.S. Healthcare system exacerbates these problems. Different insurance plans have misaligned incentives, often ignoring the long-term benefits of early and consistent treatment. Additionally, Pharmacy Benefit Managers (PBMs, more on them next) often retain drug rebates meant to lower patient costs, further burdening patients and discouraging adherence to treatments.
And importantly, the U.S. Still hasn’t achieved universal healthcare coverage. As we mentioned, about 10% of Americans lack health insurance, and about an additional 10% are underinsured. Comprehensive coverage with minimal out-of-pocket costs is essential so that patients can afford the treatments their physicians prescribe without facing financial ruin.
The majority of Americans can and do afford the medicines they need, or else there wouldn’t be any innovation. About 80% of Americans have insurance and can afford their OOP costs. If most Americans couldn’t afford their OOP costs for medicines, investors wouldn’t fund innovation since most patients wouldn’t be able to get the medicines. So the fact that we do have robust investment in novel drug development tells us that actually the healthcare system is mostly working. Still, until it works for everyone, Americans will be understandably angry. And since some of that anger can spillover into misguided demands for price controls or at least price limits on novel medicines (as other countries have), innovation will be at risk for as long as even one patient goes without treatment due to unaffordably high OOP costs.
So, what if we waved our magic wand and convinced Congress to outlaw high out-of-pocket costs? What would happen? Either premiums would go up, at least in the near term, to make up the gap in the insurance budget from more patients being able to afford their medicines, or drug companies would need to offer greater rebates (essentially offer free drugs to the extra patients now being treated).
Nobody wants to be the lawmaker who is responsible for raising premiums, but consider that premiums already go up steeply, faster than inflation, every year due mostly to the rising costs of hospitals and doctors and nursing homes. Branded drug spending only accounts for about 8% of what we spend on healthcare and therefore of insurance premiums.
So it’s not that America can’t afford rising premiums… It already has to. But in attempting to curb rising premiums with drug price controls, we would shut off biomedical innovation and end up spending even more in premiums, since we’d need to rely even more hospitals and doctors, whose costs only rise and never go generic.
So outlawing OOP costs would likely make premiums go up by a couple of percent one time, which is less than they already go up each year due to rising cost of services. In the grand scheme, that would hardly be noticed. But suddenly all patients would find that they could get the treatment they need at the pharmacy counter without having to struggle with OOP costs. No patient would have to go without. And just maybe people could take more joy in the idea of new medicines coming to market, forever transforming diseases to be less threatening, painful, and debilitating. And we’d likely hear fewer calls for price controls on novel medicines since now they would be affordable for all who need them.