Incessant increases in prescription drug prices have created tremendous difficulties for patients. The bipartisan consensus is clear: 92% of Americans cite lowering prescription drug prices as the top health priority for Congress.
Ironically, two of the root causes of skyrocketing prescription drug costs are the very same tools the pharmaceutical industry says will help with price-reduction: rebates and coupons.
Rebates are payments from drug manufacturers to pharmacy benefit managers (PBMs), then from PBMs to insurers. A primary reason drug manufacturers provide rebates is to improve a drug’s status on insurers’ formularies — the lists of drugs covered by insurance. Insurers could pass on these rebates to patients by way of reduced copays for specific drugs, but this rarely happens. Thus, incentives are misaligned: insurance companies do not bear the full cost of drugs due to rebates, but their coverage of these drugs encourages patients to use them.
Meanwhile, drug manufacturers can make up lost revenues from rebates by increasing the prices of these drugs for other payers (including patients). Insurance companies often claim rebates are used to lower premiums, but without direct tracing of rebates back to patients, discounts create an uneven distribution of benefits.
Coupons (or “copay assistance”) entitle patients to discounts on drugs. Unlike “normal” coupons in other industries, the users of the pharmaceutical coupons (patients) do not directly bear the majority of the cost of the discounted product. And the primary payer (insurers) receive no discount. This bizarre dynamic creates two perverse incentives.
The first incentive is for drug manufacturers to distribute coupons to patients that entirely — or almost entirely — waive the cost of the drug to the patient. This increases profits because, despite discounts to patients, drug manufacturers still get paid every dollar owed by insurers.
To make up for lost revenue from discounts to patients, drug manufacturers can simply raise prices paid by insurers. This creates an apparent win-win: drug manufacturers make more money and patients pay less. However, coupons eventually increase costs to all patients because insurers raise premiums to help pay for costly drugs. Worse still, some patients with automatic refills on “free” drugs have no incentive to halt shipment — they simply discard unneeded drugs and costs are passed on to the masses.
Further, coupon spending — the amount that would have been paid by patients without the coupon — often counts towards deductibles. Thus, a second perverse incentive is for patients to use coupons to buy drugs to reach their deductible. Indeed, patients are incentivized to sign up for inexpensive, high-deductible insurance, and fill the most expensive drug their doctor will prescribe, so long as there is a coupon that goes toward their deductible.
In the Utah Senate, SB184, Prescription Cost Amendments, has been approved by the Senate and sent on to the House of Representatives. This bill aims to codify a requirement for both PBMs and insurers to count coupons towards patient deductibles. This would further contribute to the continual increase in pharmaceutical prices in Utah while establishing a precedent for other state legislatures.
This policy is bad for the U.S. health care system, bad for Utah, and, most importantly, bad for patients who will eventually bear the cost through higher premiums.
There is a better way that will provide a “win-win-win” to patients, drug manufacturers, and insurers. Drug manufacturers can continue to offer price incentives, but when an incentive is offered, via a rebate or coupon, the discount should be shared equally by all payers: the patient and the insurer get the same deal. For coupons, when discounts are shared between both the patient and the insurer, it would eliminate the “patients pay nothing” scenario that leads to the purchase of more expensive drugs. Alternatively, for rebates, requiring insurers to pass rebates directly to patients through reduced copays still protects insurers’ margins while keeping a lid on out-of-pocket costs to patients.
Mandating shared coupon and rebate benefits will help reduce avoidable health care costs, a necessary step in formulating a sustainable health care economy. This solution will not be immediately popular to everyone: many patients will see increases in their coupon-adjusted drug prices — so a phase-out period for these coupons is advisable. However, because these adjustments correct incentive misalignment, the overall and long-term effect on drug prices will benefit everyone.
Bill Tayler
Bill Tayler is the Robert K. Smith Professor of Accountancy at Brigham Young University.
Dan Liljenquist
Dan Liljenquist is a former Utah state senator and chief strategy officer of Intermountain Health.
Pierce Bassett
Pierce Bassett is recent neuroscience graduate of Brigham Young University. The views expressed in this article are their own and do not necessarily represent the views of their respective employers.