Capping Copays Will Raise Premiums and Drug Prices
Capping Copays Will Raise Premiums and Drug Prices
The number of diseases and conditions that can be treated using drug therapy has grown tremendously over the past 25 years. The vast majority of prescription drug costs are paid directly by drug plans sponsored by insurers and health plans, while the share of prescription costs Americans pay out of pocket has been falling for decades.
Drug therapy represents the greatest value in the U.S. health care system. Compared to the funds spent on doctors and hospitals, most prescription drug therapies are a bargain. Americans consume nearly $3 trillion in medical care annually, about half of which is spent on physician and hospital care. Spending on drugs has actually grown at a slower rate than other forms of medical care over the past 50 years.
Most prescriptions are filled with generic drugs that have lost patent protection. These drugs are inexpensive and require little — if any — copays. However, name-brand drugs still protected by patents can be expensive and often require significant copays.
Today, most health plans include some drug benefits and most Americans belong to a drug plan. Unaffordable drug cost-sharing is a significant problem for a small fraction of patients (less than 1 percent) and only for the duration of their therapy. Insurers and health plans use multiple techniques to make drugs affordable. One of the ways is through drug formularies with multiple tiers of patient costsharing and copays. Thus, pharmacy benefit managers (PBMs) and health plans steer enrollees toward generic drugs by requiring little, if any, cost-sharing, such as the list of common generic drugs available for $4 for a month’s supply at Walmart. Nearly nine of every 10 drugs Americans take are inexpensive generic drugs.
However, drug makers are increasingly developing very costly medications, unofficially known as specialty drugs. Only about 1 percent of drugs fall into this category, while about 11 percent are name-brand drugs. Some specialty and name-brand drugs are truly breakthrough therapies; but some are merely priced high in an attempt to test what the market will bear. Due to the higher costs for specialty medications and brand drugs, health plans must carefully manage the procurement and dispensing of these drugs.
To lower consumers’ drug bills, some policymakers have proposed limits on patient copays. Nearly one-third of states have either passed legislation or have introduced bills that seek to limit cost-sharing:
- So far seven states have passed legislation limiting cost-sharing for drug therapies.
- An eighth state, California, passed a law due to take effect in January 2017, that limits copays to $250 for a 30-day outpatient prescription ($500 for people with high-deductible Bronze plans).
- Montana also caps copays at $250 per prescription. Laws in Delaware, Maryland and Louisiana limit cost-sharing to no more than $150 per 30-day supply.
- A law in Vermont limits copays to no more than $1,300 per year (plus the deductible), while in Maine copays cannot exceed $3,500 per year.
- It is against the law in New York State for health plans to place specialty drugs into tiers that have higher cost-sharing than name-brand drug tiers.
At the federal level, Senator Ron Wyden (D-Ore.) has championed a bill that would eliminate all prescription drug cost-sharing for Medicare beneficiaries above the threshold (currently, $7,500 per year).
These proposals and laws are unnecessary and ill-advised. The Manhattan Institute estimates a $250 per month cap on out-of-pocket drug spending would benefit only about 1 percent of all Americans who take any prescription drug in a given year. Furthermore, nearly half of the benefits from a copay cap would accrue to families earning more than four times the federal poverty level. Such a law would also raise premiums for all policyholders and facilitate drug price hikes.
The purpose of cost-sharing is to align consumers’ incentives with the PBM and drug plan sponsor, and encourage use of preferred drug therapies. Drug plan formularies impose little cost-sharing for generic drugs because they are such a great value. But PBMs often require higher cost-sharing (and copays) for patients who prefer to take more costly name-brand drugs — especially brand drugs for which cheap, effective substitutes exist. Some drug plans also have tiers for costly, so-called “specialty drugs.”
Most Americans belong to a drug plan that manages drug benefits on patients’ behalf. Moreover, drug plans impose little in the form of cost-sharing. Nearly one-fourth of retail prescriptions are fully covered by insurers and require no copayment by the patient. Just over three-fourths of prescriptions cost the patient $10 or less. By contrast, less than 8 percent of prescriptions require copays of more than $30, and just over 2 percent require copays of $70 or above.
Cost-sharing is a method employers, insurers and drug plans use to hold down drug spending and keep premiums affordable, by giving enrollees an incentive to ask for generic drugs when appropriate. Costsharing also provides drug makers with an incentive to limit price hikes or risk alienating customers who could see their out-of-pocket costs rise.
Unfortunately, state and federal proposals to cap drug cost-sharing could actually lead to higher drug prices, higher premiums and force millions of Americans to pay more, albeit indirectly. If policymakers are successful in their attempts to limit cost-sharing, you can bet there will be drugs whose prices reach the stratosphere.
The number of diseases and conditions that can be treated using drug therapy has grown tremendously over the past 25 years. The vast majority of prescription drug costs are paid directly by drug plans sponsored by insurers and health plans, while the share of prescription costs Americans pay out of pocket has been falling for decades. Most prescriptions are filled with generic drugs that have lost patent protection. These drugs are inexpensive and require little — if any — copays. However, namebrand drugs still protected by patents can be expensive and often require significant copays.
Because of the increasing use of drug therapy, out-of-pocket drug costs have become a political issue in Washington and across many states. To lower consumers’ drug bills, some policymakers have proposed limits on patient copays. For instance, Hillary Clinton has proposed capping prescription drug copays at no more than $250 per month, and some state politicians have enacted or proposed similar caps. Unfortunately, these arbitrary limits could actually lead to higher drug prices and health insurance premiums, forcing millions of Americans to pay more, albeit indirectly, for drug therapies.
Managing Drug Benefits
Today, most health plans include some drug benefits and most Americans belong to a drug plan. Unaffordable drug cost-sharing is a significant problem for a small fraction of patients (less than 1 percent) and only for the duration of their therapy.
Drug plan sponsors — including insurers, employers, Medicare Part D drug plans and many state Medicaid programs — often employ pharmacy benefit managers (PBMs), large firms that specialize in designing drug benefits and managing drug plans. Health plans, which are responsible for reimbursing providers, have an incentive to encourage the appropriate use of drugs, because skimping on drug therapies often leads to higher medical costs. Thus, it makes sense for health plans to coordinate with PBMs to manage chronic diseases, to analyze the effectiveness of drugs and to track patient compliance.1 PBMs also check for