Keeping American Healthcare Prices High: A Peep into the Circus Tent

By Mike Koetting August 1, 2023

I wasn’t planning to write a blog in August, but when I ran a across an article on how “drug coupons”—a relatively arcane item that I will describe below—drive up drug costs, I couldn’t resist. It is such a perfect illustration of why our healthcare is so complex and the costs so absurdly high. I felt it was like a little tear in the circus tent that allowed you to see inside to watch the circus-like complexities of our health system.

What Are Drug Coupons?

There are several versions, but the simplest version is a coupon provided by a drug manufacturer to a patient in order to reduce the cost of the copay, the amount paid by the patient after the insurance company has paid its share. This can be helpful for expensive copays. Do manufacturers do this because they are worried about people not being able to get the medical benefits of their drugs? Sometimes. At least a little. But more likely the reason is to undercut the directional effect of a copay. Which requires another explanation.

Most insurers use some kind of Pharmacy Benefits Manager (PBM) that manages the payments made for pharmaceuticals by insurance companies. Since the cost of pharmaceuticals are both high and variable depending on the outlet, and since patients typically take whatever drug is prescribed by their physicians, the insurance company wants to have some standard as to whether the price being charged is reasonable and whether there are lower cost alternatives that should be considered. They hire PBMs to do this. Based on various considerations, the PBM determines how much the insurance company will reimburse (either as a flat dollar amount or as a percentage of the amount billed the patient). The difference is patient copay.

One thing that PBMs do is recommend copay differentials to steer patients to less expensive drugs. Sometimes this is when there are two branded drugs and one is pursuing a different pricing strategy than the other. But often the case is where a patent has expired and a “generic” drug is available. (Generic drugs, of course, are drugs with typically the same ingredients that are manufactured by someone other than the original patent holder. Generics inevitably cost less, in some cases dramatically less.)

How Does This Work in Practice

Imagine a branded drug that costs $5,000 for one year of medication, and a generic drug that costs $3,000 for the same period. If an insurance plan pays a flat percentage of the cost—say 90%–the out of pocket expense to the consumer would be $500 versus $300 for the generic. The cost to the insurer would be $4,500 versus $2,700. The insurer obviously gains such an advantage from getting the consumer to choose the generic drug, it might even waive the copay, in which case it’s cost would still be $1,500 less than the branded drug. ($4,500-$3,000). Thus, both the consumer and insurance plan have an incentive to use the generic drug instead of the branded drug.

Not so good for the owner of the branded drug. So “drug coupons” to the rescue. The manufacturer of the branded drug can offer the consumer a “coupon” that lowers or even erases the difference in copay to the consumer. If the consumer then elects to use the branded drug—and why not since there is no cost difference to them—the insurance plan is on the hook for the higher priced branded drug and the manufacturer gets the $4,500 from the insurance company. The $500 “coupon” is a small price to pay to get the $4,500 payment; in the absence of the “coupon” the manufacturer of the branded drug would probably have gotten nothing since the patient would choose the generic drug with the lower copay.

Of course, it all gets more complicated from here. What I have described is the base case, but there are variants and a half-dozen ways of playing the game. (And one can probably assume that by Christmas there will be another one….or two.)

Medicare prohibits these coupons because there are “kick-backs” from the manufacturer to the patient as inducement to use its drug. For the same reason, Massachusetts and California ban use of such coupons, regardless of payor, for any drug where an equivalent generic exists. But elsewhere, their use continues to grow.

The issue is not limited to drugs where there are generic equivalents. Leemore Dafny and colleagues also addressed the use of coupons where there are no generic equivalents available but coupons are still used to undermine copay differences that might steer patients–or their–physicians to an equivalent lower cost branded drug. In the patient diagnosis that they chose for study, multiple sclerosis (MS), they estimated that banning use of coupons would save about 8 percent, or 1 billion dollars a year– for that diagnosis alone.

Broader Implications

The issue, of course, is not limited to the very specific issue of drug coupons. Drug coupons are merely one more example of how the jerry-rigged nature of our healthcare system allows endless innovation in ways to make it more expensive. As part of trying to better understand the drug coupon issue, I dipped my toes into the working of PBMs. From my read, it appears there is consensus that PBMs saved material amounts for payors in their early years (roughly, 2010-2016). But now analysts are not sure. Over the last several years, the PBMs have consolidated (three PBMs have 70% of the market) and their dealings have become so opaque there is very little consensus as to whether they are actually saving costs to consumers as opposed to generating profits for themselves.

A different set of problems—although in the same general family—is found in “medical credit cards”. These are essentially spot loans to cover a medical procedure—maybe the a procedure outside of insurance (e.g. cosmetic surgery) but increasingly are being used to deal with large copays or if the person is otherwise uninsured. Typically, the hospital or provider convinces the patient to use these “credit cards”. This insures the provider gets paid, often at charged rates. (The actual loan, however, is in fact being carried by a third party lender, mostly one of a few specializing in making these kinds of loans.)

There are two major problems with these loans, in addition to the basic problem that they are needed at all.

• They generally carry very high interest rates. The Consumer Financial Protect Bureau found that the average interest in these cards is 23% as opposed to 16% on common purpose credit cards.
• There are many ways for the marketing of these cards to go astray. Since the marketing is by the health provider, the patient may not realize they are making a deal with a bank. There are also frequent questions as to whether the patients understand the interest rate terms of the contract. Perhaps most fundamentally, the marketing of these loans often deflects patients from other possibilities that would be more advantageous to patient (e.g. applying for Medicaid or taking advantage of hospitals’ charity care obligations).

So, again, a financial arrangement is used to offer apparent financial protection to patients in order to insure prices stay high for providers. While I suppose these arrangements provide some service in the context of the current system, wouldn’t it make a lot more sense to scrap the current system in favor of something that doesn’t require these ad hoc fixes, each of which adds costs? Virtually every other developed country has evolved systems that provide healthcare in more straightforward, and materially cheaper, ways. Americans might not want every one of those systems, but collectively they make it crystal clear that there are models of providing care that do not require circus financing.