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.
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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 drug interactions and inappropriate or duplicate prescriptions. Finally, they assemble pharmacy networks, contract with mail-order pharmacies and process payments.
Pharmacy Benefit Managers. Insurers and health plans use multiple techniques to make drugs affordable. Large, national PBMs with many clients negotiate lower prices from manufacturers and have far more bargaining power than individual firms. They also partner with pharmacies and build preferred pharmacy networks.
One of the ways employers, insurers and PBMs hold down prescription costs is through drug formularies with multiple tiers of patient costsharing and copays. PBMs also consult with health plan sponsors to determine which drug therapies to include in plan formularies. Within the same therapeutic class, multiple drugs with vastly different costs may be available. The purpose of tiered formularies is to encourage enrollees to choose lower-cost alternatives when appropriate. Thus, PBMs and health plans steer enrollees toward generic drugs by requiring little if any cost-sharing for them, 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.
State Laws and Legislative Proposals. Nearly a third of the states have debated legislation to limit cost-sharing, and so far, eight have passed bills.2 The caps on copays vary. For instance [see the table]:
- Delaware, Maryland and Louisiana limit cost sharing to no more than $150 per 30-day prescription.3
- Vermont limits copays to no more than $1,300 per year (plus the deductible).
- Maine limits copays to $3,500 per year.4
- In addition, it is against the law in New York State to place specialty drugs into tiers that have higher cost-sharing than the tiers for other brandname drugs.
Some states, such as Montana and Florida, have used regulatory oversight through their state insurance departments to disapprove plans that impose coinsurance and copays on specialty drugs, arguing the practice violates the antidiscrimination rules of the Affordable Care Act. It is too soon to determine the full effects of these measures, but premiums are rising across many states and PBMs report high-cost drugs are a significant driver of spending.5
In 2015, Covered California became the first state health insurance exchange to limit cost sharing. The limit is $150 to $500 per month, depending on the plan.6 The California Assembly later passed legislation restricting cost-sharing by private insurers in both the exchange and the commercial market, to take effect in January 2017.7 The law limits copays to $250 for a 30-day outpatient prescription ($500 for people with high-deductible Bronze plans).8
Other states are considering similar measures. For instance, in 2015, bills were introduced in both Illinois and Oregon.9 In 2016, legislation was introduced in New Jersey.10
Capping Medicare Coinsurance. Most Medicare-eligible seniors are enrolled in Part D prescription drug plans. In 2016, once a senior’s total drug spending (including the deductible and spending by the drug plan) has reached $3,310, he encounters an initial coverage limit. This threshold varies slightly by plan. At this point, a senior’s out-of-pocket costs may have been only $1,000 to $1,100, while the drug plan paid $2,200 or more in reimbursements. Seniors then face a coverage gap until their personal out-of-pocket drug spending has reached $4,850 in 2016. While in the coverage gap, seniors receive 45 percent discounts on name-brand drugs and 58 percent discounts on generics, as required by the ACA.11 Yet, seniors receive credit for the nondiscounted price toward their out-ofpocket spending, allowing them to emerge from the coverage gap sooner. The coverage gap, also known as the donut hole, is being slowly phased out under provisions of the ACA and will close by 2020.12
However, seniors also face unlimited cost-sharing of 5 percent on drug spending that surpasses about $7,500 per year.13 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).
Do Copay Caps Help?
How much of a difference would capping drug costsharing make? Manhattan Institute Fellow Yevgeniy Feyman estimates a $250 per month cap in out-ofpocket drug spending would benefit only about 1.5 million people annually, because that is the number of patients who face higher drug cost-sharing. This is less than 1 percent of all Americans who take any prescription drug throughout the year. Patients affected by a $250 per month drug cap would save about $3.5 billion per year in cost-sharing, nearly half of which (45 percent) would benefit families earning more than 400 percent of the federal poverty level.14 The drug costs not paid by patients would presumably be shifted to health plans and ultimately borne by all Americans through higher health plan premiums. Feyman also argues that copay caps obscure the ability to determine a given drug therapy’s value. Drug caps encourage costly therapies, taking away the tools PBMs use to encourage patients to be sensitive to prices. Otherwise, patients might have little reason to reject a costly drug with little additional benefit over a cheaper, effective therapy.
The National Coalition on Health Care believes provisions limiting cost-sharing are unlikely to succeed for long because the underlying problem is the rising cost of some newer drugs. Limiting cost sharing may lower costs for a few individuals, but increase premiums for all enrollees.16 Moreover, many consumers willingly trade higher cost-sharing in return for lower premiums. “Cap the Copay”
regulations take away this option. Finally, the ACA already caps out-of-pocket medical spending for the privately insured, including drugs, at $6,850 in 2016.
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