The Loop

Prescription Drugs: Brand Name vs. Generic Coverage

Filed under: Benefits

There are two different types of measures for drug cost inflation: The list price of prescription drugs and the actual cost to consumers. A recent study revealed that while list price inflation grew by 159 percent (adjusted for inflation) over a 10-year period, net prices paid by consumers increased by only 60 percent. The latter number is still more than three times the rate of inflation, but it’s the former number that should be scrutinized more carefully.

 As the prices of prescription drugs continue to increase in the United States, all stakeholders are looking for lower-cost solutions that will help preserve their own best interests. Needless to say, many of these solutions work at cross purposes.

 Patient Discounts

The pharmaceutical industry has broached the issue by introducing patient discount cards. Also known as a drug coupons, these discounts can dramatically reduce the cost of medications for eligible patients through low/no co-pay and/or coverage for out-of-pocket (OOP) responsibility with a maximum OOP annual benefit. They are generally available for brand-name drugs that do not have a generic alternative. However, they tend to steer patients away from other brand-name alternatives that are cheaper and may be just as effective. By providing a means to afford an otherwise unaffordable drug, they give patients incentive to stick with the higher-cost brand name, even when cheaper options become available.

This creates a conflict of interest with health insurance plans, particularly in the group market, which has spent years and countless resources developing ways to control costs by shaping prescriber and member behavior. These include programs such as drug formulary tiers, mail-in orders and patient cost-sharing via deductibles, co-payments, and co-insurance. What happens when a patient uses a drug coupon is that his cost share is significantly reduced or eliminated, but the insurer has to cover a larger share of the cost.

Consequently, this leads insurance companies to raise premiums. Therefore while drug manufacturer coupons help make medications more affordable for patients who may not be able to afford them otherwise, they do not contribute to the long-term goal of reducing nationwide drug spending.

Perhaps even more detrimental to the effort is that manufacturer coupons increase brand-loyalty so that patients do not want to switch, even when a generic becomes available. According to National Bureau of Economic Research, this tactic can increase the sale of brand name drugs by 60 percent or more.

Drug Sale Rebates

Another stakeholder in this market is the pharmacy benefit manager (PBM). PBMs partner with health plans to create a formulary of drugs the plan agrees to cover, and then manages the claims process. This means that PBMs work with drug makers to decide which medications to cover and which formulary tier to place them in, usually based on price. Here, too, pharmaceutical companies offer rebate payments to PBMs as an incentive to add the drug to a plan formulary. When the drug is purchased by the patient, the drug company issues the rebate. PBMs keep a portion of that rebate money and some of it goes to the insurer.

Because the PBM market has consolidated substantially in recent years, it is largely concentrated among just three players in the US: CVS Caremark, Express Scripts, and OptumRx. These three PBMs cover more than 150 million people, which gives them tremendous negotiating power with drug companies. Between 2013 and 2018, they were able to demand higher rebates from drug manufacturers, doubling from $83 billion to $166 billion.

 Drug Spending Continues To Rise

Unfortunately, because drug companies are paying out higher rebates to PBMs and insurers, they’ve raised the list price of drugs to offset that cost. This means dramatically high prices for patients who do not qualify for drug coupons or for which none are available. Drug coupons, as we know, increase the cost for insurers. So, ultimately, either patients, insurers, or both end up paying out more in the long run – while pharmaceutical companies continue to recoup their costs.

 Drug manufacturer coupons are designed to accomplish three goals:

  • Compete with another brand name drug in the same therapeutic class
  • Compete with a generic equivalent when released
  •  Help patients afford drugs that would otherwise be unaffordable

All three objectives are designed to increase sales for pharmaceutical companies. Meanwhile, health insurers and employers work tirelessly to educate consumers to purchase generic or lower-cost equivalent drugs – so these efforts are inherently working against each other. PBMs fall in the middle, working for the health plan yet earning a significant portion of their revenues from drug manufacturers.

So, the question becomes: Should employer plans pay for a brand name drug if an equivalent generic is available? 

Copay Accumulators

While co-insurance and high deductible health plans have helped increase cost-sharing among members, they have little impact on the effect of drug company discounts offered to consumers at the point of sale. This means the insurer is responsible for a larger share of the purchase price.

To offset this expense, copay accumulator programs are the latest among health plan tactics to shift more of the cost of treatment to participant members. A copay accumulator eliminates the value of any drug manufacturer assistance toward the patient’s deductible or maximum out of pocket limit under their health plan. In other words, the consumer may save money at the drug store counter, but it will take longer for him to reach his deductible or out-of-pocket limits.

Group Plan Flexibility

Over the past year, the federal government has stepped in with guidelines designed to help health plans continue to shape consumer behavior but without having to carry a higher portion of prescription drug costs. After some earlier attempts, the Department of Health and Human Services (HHS) released a Final Rule on May 14, 2020, to guide group health plans through this quandary.

Effective July 13, 2020, group health plans may exclude all drug manufacturer coupons from participant cost-sharing, regardless of whether a medically-appropriate generic equivalent is available. Note that the language states “may exclude”, meaning that the plan has the flexibility to exclude or include these coupons. Also be aware that fully-insured benefit plans must still comply with any state insurance laws that regulate cost accumulator programs.

Clearly, there is a quagmire of complex tactics, programs, and state and federal regulations designed to control the way prescription drugs are priced and paid for in the US. Some programs reduce costs for certain stakeholders but raise costs for others. Then, subsequent tactics are designed to counteract those efforts – and puzzle pieces continue to be added with no clear indication of what the final picture looks like.

Employers are best positioned to communicate with their workforce health plan participants, as they have the closest personal relationship and greatest capacity for influence. This means continuing efforts to educate consumers on how to engage with healthcare decisions, such as always requesting generic medications if available. It may even be worth the time and effort to explain how alternative decisions contribute to the rising cost of healthcare in the US and the subsequent impact on higher premiums for all.

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