President Biden’s State of the Union Address hammered home the point that drug prices must come down. He reminded viewers that he and his Democratic colleagues are doing something about the problem, as he touted the Inflation Reduction Act’s drug pricing provisions. Moreover, the President reproached pharmaceutical companies for making record profits from insulin, adding that he seeks to expand the $35 per month cap on out-of-pocket costs to the entire population, not just Medicare beneficiaries. Furthermore, Biden said his recently enacted Inflation Reduction Act is “taking on powerful interests to bring your healthcare costs down.” Well, that may be true. But, absent from the speech was any mention of health insurers and pharmacy benefit managers. In the U.S., multiple stakeholders have created a dysfunctional healthcare system, in which an enormous cost burden is imposed on the patient. The ever-increasing financial hardship for many patients is a function of more than just the pharmaceutical industry’s pricing of drugs. Health insurers and pharmacy benefit managers Spiking health insurance premiums, higher deductibles, more limits on coverage, and rising co-insurance saddle the typical American patient with vastly greater healthcare costs than their counterpart living in any of America’s peers.
The average annual cost of health insurance for an employee was $2,471 in 2000. By 2021, that figure was $7,739. This figure rose every year between 2000 and 2021, sometimes by double digits. Since 2000, the average annual increases in premiums for family coverage were (often well) above inflation every year until 2020. And, between 2011 and 2021, the average family premiums for employer-based health insurance jumped by almost half, outpacing wage growth and inflation by a wide margin. Compounding the problem of rising premium outlays for families and individuals is the increase in the level of deductibles: The average annual deductible has soared almost 70% from 2011 to 2021; from $911 to $1,669.
And, looking at the big picture, while the percentage of uninsured is historically low at nine percent, 11% of working-age adults experienced a gap in coverage during the past year, and 23% were underinsured, meaning that their coverage didn’t provide them with affordable access to healthcare. Among people with employer-sponsored coverage, 29% were underinsured, and 44% of those with coverage purchased through the individual market and state or federal exchanges were underinsured.
The underinsurance phenomenon worsens annually. At the end of each year it’s formulary update season, which implies changes in health insurers’ drug coverage. These can be small and have minimal impact. But, insurers and pharmacy benefit managers (PBMs) often hike patient cost-sharing levels and increasingly impose conditions of reimbursement, such as prior authorization. Every year, it appears, on insurer formularies more drugs are tagged with a prior authorization designation. Ostensibly, this is for the purposes of patient safety and medically appropriate prescribing. However, in many instances prior authorization is used as a cost containment tool, in which the entity reaping the benefit of lower net cost is the insurer, not necessarily the patient. Besides, this adds time and work for healthcare providers and pharmacists.
Also, the numbers of drugs on pharmacy benefit manager (PBM) exclusion lists have been rising for more than a decade. Last month, PBMs once again increased the number of drugs they exclude from their standard formularies.
Among the big three PBMs, each exclusion list now contains about 600 products. PBMs deploy formulary exclusions to gain additional leverage as they negotiate lower net prices of drugs with manufacturers. Sometimes the threat alone of an exclusion can persuade drug makers to offer deeper rebates. The rebates accrue to PBMs, employers, and health plans, but not patients.*
As Adam Fein points out, all of this can harm the patient: “An individual patient’s access to a particular therapy and out-of-pocket costs is determined by formulary exclusions established by their plan’s PBM. Patients who change plans (or employers) can unknowingly lose access to their physician’s preferred therapy - unless they file a successful appeal. Exclusion lists also impact patients’ out-of-pocket costs, especially when low list price products are excluded in favor of equivalent products with higher prices [and therefore higher rebates for PBMs].”
In addition, exclusions raise the prospect of non-medical switching - modifying a patient’s drug regimen for reasons other than a drug’s efficacy, side effects, or clinical outcome. Certain formulary changes are more difficult to manage for patients than others. And, in some cases, a patient who has been using a drug for years may suddenly incur a much larger co-payment, which can lead to adherence and persistence issues.
Meanwhile, UnitedHealth Group, the largest insurer in the U.S., has seen its profits surge since 2015, reaching $20.1 billion in 2022. And it’s not the only large health insurer raking in huge profits.
Prescription drug costs
Proportionately, out-of-pocket costs for prescription drugs are significantly higher than other healthcare items, such as inpatient hospital and outpatient clinic services. Insurers levy substantially larger co-payments, in proportion, on (outpatient) drugs than they do other healthcare services. This is what makes the prices of pharmaceuticals more visible to the patient. The out-of-pocket cost, whether in the form of the full retail price or co-payment, confronts the patient at the point of sale; the pharmacy.
Therefore, we can’t leave the pharmaceutical industry off the hook for the steep prices of drugs, particularly branded medications.
Every January, drug manufacturers announce increases in the list prices of their drugs. Though the industry’s annual price increases on drugs didn’t noticeably spike this year, still some drugs saw double-digit growth. These price increases directly impact uninsured patients. But they also affect insured patients in their deductible and their coverage phase, as co-insurance is calculated as a percentage of the drug’s list price.
Then there are the high prices of newly launched medicines A recent study found that launch prices for new drugs have increased by 20% each year over the past 15 years. Roughly 50% of new drugs cost $150,000 or more per year in 2020 and 2021.
And so, the problem for patients of high healthcare costs, and pharmaceuticals in particular, is multifaceted. In the State of the Union Address, the President’s disproportionate emphasis on drug companies made it seem like they’re the only culprits. They’re not. There are multiple stakeholders that jack up healthcare costs at the expense of ordinary Americans.
* PBMs defend the use of rebates by saying they lower premiums. To some degree this may be so, especially in Medicare Part D; the outpatient drug benefit for Medicare beneficiaries. But, for the past 10 to 15 years while rebates have increased premiums have risen in parallel, particularly in the employer-sponsored commercial market.