When people talk about high drug costs, they are really talking about high out-of-pocket costs to them under their insurance plan – especially huge open-ended obligations if they become sick with cancer or a debilitating auto-immune or infectious disease. It is this understandable anxiety that feeds the political reaction to drug expenses. That reaction, in turn, leads to misdirected proposals that would further block patient access to medicines and deter investment in developing new medicines that save lives.
But there is another approach – reforming the design of insurance plans by limiting what insured individuals and families have to pay out of their own pockets. In the case of Medicare, a simple legislative change, already recommended by a government commission, would have a major effect; in the case of commercial plans, a sensible readjustment will do the trick. These changes could be shaped in a way that has minimal effect on premiums.
But before we get to details, let’s review what we are really talking about when discuss high drug spending….
So what is the problem?
Too Many People Reaching Too Deeply Into Their Pockets
It is that some Americans have to reach deeply into their own pockets to pay for certain medicines when they get sick. A big reason is that health insurance is different from other forms of insurance.
Insurance is meant to pay for the consequences of an adverse event you might not be able to afford yourself. For example, your auto insurance reimburses, not for a new set of windshield wipers after the old ones have worn out, but for expensive bodywork after your car is in a bad accident. Health insurance doesn’t work that way. Many generic drugs cost an insured patient nothing at all under a typical health plan, but certain cancer medicines, for example, can cost thousands or tens of thousands of dollars out-of-pocket.
Specialty drugs – treatments, for example, that miraculously harness patients’ own immune systems to battle cancer – are costly to develop and to provide. More and more of these specialty drugs, which treat a range of complex diseases, will be coming to market in the years ahead. There were 240 immuno-oncology drugs in development at the end of 2017.
Only a tiny slice of the population needs such drugs, and the aim of insurance is to protect such patients against the catastrophe of having to pay for expensive medicines on their own. Just three out of 1,000 Express Scripts members had annual medication costs greater than $50,000 in 2016.
A Cap for Medicare Part D
Even insurance under Medicare Part D has this flaw. Medicare insurance for prescription drugs is, overall, an excellent program. As Kenneth Thorpe, a professor of health policy, wrote recently:
Part D is a rare public-policy success story celebrated by Republicans and Democrats alike. It has a unique structure in which the government, instead of providing health coverage directly, manages a market of private options. Patients have the freedom to choose among dozens of competing plans.
Yes, but the federal government mandates a complicated payment structure for Part D. First, enrollees pay a $405 deductible; beyond that, their insurers pay 75% of retail drug costs up to $3,750 in a year. Then enrollees enter the “doughnut hole, which requires a payment of 44% of the cost of brand drugs and 35% of the cost of generics. In 2018, enrollees exit the doughnut hole when the prescribed drugs reach a total of about $8,400 in retail cost; next comes the catastrophic part of the plan, where the insurer and the government cover 95% of drug costs.
The doughnut hole is set to end next year, but, if you have high drug costs, your liability in the catastrophic zone of coverage is open-ended. There is no out-of-pocket cap. You pay 5%, and that obligation can be devastating for many families.
Express Scripts, for example, reports that in 2016, the average prescription for specialty drugs to treat inflammatory conditions like rheumatoid arthritis and Crohn’s Disease cost $3,600 per month, or more than $40,000 a year. This means that, after you have emerged into the catastrophic portion of Part D insurance, you will owe about $1,600 out of pocket. Oncology drugs are even more expensive, and, of course, many Americans have more than a single condition.
In 2016, the Medicare Payment Advisory Commission proposed that the government should “eliminate enrollee cost-sharing the out-of-pocket threshold.” The report pointed out that for the population of patients with high out-of-pocket costs, those costs persisted out into the future. That sounds like a sensible solution.
High Annual Limits in Commercial Plans
Most private health plans have annual out-of-pocket limits for total spending on covered services, but even with that limit, out-of-pocket spending can be high. This is especially true as plans continue to increase deductibles and shift more costs to enrollees. The Affordable Care Act, despite its title, has annual out-of-pocket limits that are astronomical for some Americans: $7,350 for an individual plan and $14,700 for families (and these figures do not count premium payments). The median household income in the U.S. is about $60,000, so, under ACA health plans, families can be spending one-fourth of their before-tax pay on health care.
Even a few thousand dollars can be a burden. Between 2005 and 2015, the proportion of enrollees in employer-sponsored health insurance plans with out-of-pocket expenses (again, not including premiums) that exceed $1,000 a year rose from 17% to 24%. Some 12% in 2015 had expenses exceeding $2,000 and 2% paid more than $5,000, according to an analysis by Peterson-Kaiser Health System Tracker.
A Bias Against Drugs
High out-of-pocket costs are symptomatic of the bias insurers have against drugs and in favor of other parts of the health-care system. For example, the actuarial value – that is, the percentage of total average costs for benefits that a plan will cover – is 72% for hospitals, 71% for professionals and other, and just 54% for drugs in silver ACA Exchange plans with combined medical and pharmacy deductibles. A rational health insurance plan would weight drugs at least equally and probably more heavily than hospitals and doctors given that they can lower costs for other services.
Medicare has the same problem. Hospitals represent 40% of total Medicare spending and only 9% of the average recipient’s out-of-pocket costs: a ratio of 4.4. But pharmaceuticals represent 12% of total spending and 19% of out-of-pocket costs: a ratio of 0.6!
In Issue No. 20, we reported on the Kaiser Family Foundation’s detailed annual survey of health benefits. One finding was that more and more insurers were adding a fourth, fifth, or even sixth tier to their policies for higher-priced, or specialty drugs. In 2016, some 32% of drug plans had a fourth tier for specialty, higher-priced drugs, compared with just 3% in 2004. Specialty tiers usually require a higher out-of-pocket payment from patients, and insurers are now more likely to require onerous coinsurance (that is, a percentage of the cost of the drug after the deductible) rather than copayment (a flat fee for a prescription drug that is predetermined by their health insurance plan).
Kaiser found that coinsurance for drugs on a specialty tier can exceed 25% in employer plans. According to the BCBS Network of Michigan website, their Medicare Advantage enrollees pay 45% of the retail cost of Tier 4 non-preferred brand-name and generic drugs and between 25% and 33% of the cost of Tier 5 specialty drugs.
Facing high out-of-pocket costs even when using their insurance, many Americans simply decline to fill their prescriptions.
A study in the Journal of Oncologic Practice by Sonia Streeter and colleagues found that “abandonment” rates for cancer-drug prescriptions soar when the out-of-pocket costs exceed $100. The researchers found that one-tenth of new oncolytic prescriptions went unfilled and that “claims with cost sharing greater than $500 were four times more likely to be abandoned than claims with cost sharing of $100 or less.” And this is cancer, a disease that everyone knows is frequently fatal.
In other words, high insurance out-of-pocket costs make Americans sicker – and that, in turn, causes total health-care spending to rise.
A Meaningful Out-of-Pocket Spending Limit
One way to address the problem is a flat out-of-pocket spending limit on drugs. A study last year by the consulting firm Milliman, commissioned by the Leukemia and Lymphoma Society, modeled the impact of a cap of $150 per prescription on popular Silver-tier individual exchange plans under the ACA. The cap would take effect regardless of whether or not a member had met their deductible. The analysis concluded: “Assuming no other changes to benefit design, a $150 prescription drug cost sharing cap per script for a typical Silver plan in the individual market would increase monthly premiums by about 0.7%, or less than $3 per month” in 2016 and an estimated 0.8% in 2017 or 2018.
The Milliman researchers noted that “only small copay increases in other benefits are necessary to approximately offset premium increases resulting from the $150 cap, such as increasing copays to PCP [primary-care physician] visits and generic medicines by $1 to $5.”
States like Colorado and Montana now require a subset of insurance plans sold within their states to offer this kind of real insurance – that is, plans with fixed copays and no deductibles for medicines. The action taken in these states helps enhance the choice of benefit designs available to patients – and provides patients with options with lower up-front costs and smooths out expenses over the plan year.
The federal government can help address high-drug-cost anxiety by ending catastrophic exposure on Part D Medicare policies, as the Medicare Payment Advisory Commission has recommended. This step of providing a “real cap” on out-of-pocket spending for Medicare drugs, plus state action and some public and official pressure, could encourage commercial insurers to offer sensible insurance too.
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