High Drug Costs - Blame The 'Playa' Or The Play?

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There has been a lot of talk in the last week about high prices for medications. But before allowing the smoke and mirrors of the modern media, politicians, insurance companies, and manufacturers to completely cloud the issue; consider a tag line I see more and more at the end of direct to consumer medication advertising. “If you take certain Company A medicines, and you cannot afford them, you may be surprised to learn that Company A may be able to help.”

Before we go off to blame the playa, perhaps we should consider the game.

Playa 1 – The patient. I am a man of a certain age. An age best characterized by Billy Crystal as “peeing in Morse Code.” And I have found solace in the healthcare system, specifically in medication. The brand name version of this solace is about $400/month while its generic competitor is $120/month.

As a single consumer those prices are not negotiable – so I decided to join a buying cooperative, you know like BJ’s or Sam’s Club. You know them as Part D Medicare prescription drug plans, but nearly all health coverage includes some degree of medication coverage. I pay $45/month to be in the buyer’s club; again for those of you with health insurance of other types you spend a similar amount although it is not broken out or itemized in your premiums.

Now my generic drug cost consists of a co-payment of $11 and for the branded version a $300 co-payment. I am taking some fictional liberties at this point because the reality is that branded version is not available on the formulary at all. So for me, the choice is branded ($300+$45=$345) or generic ($11+$45=$56). The generic works as well as the branded, at least for me, so I go with the generic.

Playa 2 – The buyer’s club The buyer’s club is, in reality, an insurance specific formulary of medications with varying co-payments (from nothing to a few hundred dollars) organized by a pharmacy benefits manager or PBM. They have lots of patients (they call them beneficiaries) who want the same drug and can leverage that volume to get discounts.

  • The amount of those discounts is their propriety secret
  • Discounts are based upon list prices – and this is critical
  • They use this information to determine both the monthly premium to belong to the club and the copayment associated with the medication
  • They earn enough to pay for the drugs and their salaries

So let’s make us some number so you can understand the game. They buy the generic medication for $10 and the branded version for $325. So if I purchase the generic they spend $10 for the $56 I gave them – they have a profit to use for salaries and other administrative costs of $46. If I get the branded version, their $325 cost is deducted from my $345 payment leaving a profit of $20. They like the profit from the generic much better than the branded version, and so they set the co-payment as high as they believe I will tolerate.

Economists call these co-payments “skin in the game”, meaning I have a financial interest in my medication choices – and that’s okay, but since I am unaware of the amount the buyer’s club is getting as the intermediary, other “skin” is not in the game. The high co-payment nudges work and as a result, let us say that only 20 people out of the 100 needing the medication opt for the branded version.

Playa 3 – the medication manufacturer We often call these people Big Pharma when we are speaking about branded drugs, but in truth, the generic manufacturers are part of Big Pharma too. But the branded manufacturer sees that they lost 80% of their potential volume because of the buyer’s club. How can they get those people back? And here is where Company A’s "help" comes, in the form of a coupon. Company A, the maker of the branded medication offers to “pay” a portion of my copayment to equalize the discrepancy between the $300 for their product and the $11 for the generic. They offer to pay $289 meaning that I can now get the branded medication for the same cost as the generic (my new $11 copayment after their coupon + $45 premium = $56). They, in turn, sell more of their product to the buyer’s club – admittedly at an even great discount ($325 - $289 = $36) But $36 is infinitely larger than the $0 they were getting before.

Only the PBM of the buyer’s club is unhappy because they are out that money, now my $45 premium yields them only $9. The game is simple, for a given amount of money, who takes the larger share, the buyer’s club or the manufacturer? And the initial set point is the medication's list price. If they are unnecessarily high, they allow more room for a discount, more space for shifting expenses. Neither one of them are spending anything in these transactions: my discount from insurance is not based on real dollars, the coupon I get from the manufacturer is not based on real dollars either.

Here is a critical concept you must always remember in the discussions of health care costs.  

  • We pay for all of our care – through taxes, insurances, discounts, and coupons. The American public, not the government, not the insurance companies and not the manufacturers of devices or medications, pay for all of our care.

 And one last thought. Other healthcare providers have recognized how to shifting revenue.  In the recent weeks, there have been several articles detailing how dialysis companies are making insurance payments on behalf of their patients so that they continue to receive private insurance with their higher rates for dialysis coverage than to let them be transferred to Medicare or Medicaid with their significantly lower payments.

It is the same shell game, just a different audience. Congress designs this game, requiring Medicare to work with list prices and protecting the secrecy, lack of transparency for the manufacturers and insurance companies from the true payers – the American people. So who you are gonna blame, the playas or the play?