Who Should Pay for Really Expensive Drugs?

When is the last time you saw a news headline about cancer patients who died because they were unable to afford a drug that could have saved their lives?

I bet you haven’t. One reason is that drug companies that make expensive drugs can’t afford the political backlash that would follow such a headline. Another reason is that large employers who provide health insurance can’t afford such a headline, either.

Yet, despite the fact that Big Pharma and big business agree on the end result (people get the lifesaving drugs they need), they don’t always agree on who should bear the bulk of the cost. In fact, in the modern era there has been a continuing tug of war between the two that has been largely unreported.

Enter the politicians to tilt the scale. A letter signed by a number of Democrats and Republicans in Congress supports a Biden administration proposed regulation that would remove many employer options.

Instead of allowing normal market forces to play out, this regulation would allow drug companies to sell brand-name drugs at monopoly prices for virtually all patients with employer-provided health insurance. The result would be higher drug company profits and lower employee wages.

Specialty Drugs

The most expensive drugs are generally called “specialty drugs.” These are primarily used to treat chronic, complex, or rare conditions such as cancer, autoimmune disorders, and genetic diseases. They can also cost thousands of dollars. For example, among the top ten most prescribed specialty drugs, the monthly expense ranges from $3,587 to $33,981.

Including the treatment of HIV infection, only 5.9% of the US population uses a specialty drug. But those drugs now account for over 50% of total drug spending in the United States.

Within the U.S., people with private health insurance tend to face very high out-of-pocket costs when it comes to specialty drugs. If a drug costs $2,000 a month, for example, an employee might have to pay the full cost for 3 or 4 months before reaching the deductible; then the employee’s health insurance takes over. For many people, this out-of-pocket cost may pose a significant barrier to obtaining the prescribed drug.

Drug Companies

To overcome that obstacle (at least in the short run), drug companies issue copay cards to use at a pharmacy to cover the initial cost. This gets patients started on the drugs their doctors say they need. Although it is not generally known, just about anyone starting out on an expensive drug regime can get copay cards for the first few months of treatment—regardless of income.

(Remarkably, in issuing copay cards, drug companies are doing something that would be completely illegal if done by d octors and hospitals. If a doctor or hospital waived the patient’s out-of-pocket portion of the bill, they would be violating anti-kickback laws.)

The drug companies’ second line of attack is the creation of Patient Assistance Programs. These are charitable enterprises that give financial assistance to people who are uninsured or underinsured. The amount of help generally depends on the patient’s income—with the goal of making the drug affordable.

Large Employers

In a free market for health insurance, a typical plan would leave the enrollee responsible for small expenses for which patient discretion is affordable and desirable, and have the health plan pay for large expenses that would otherwise be unaffordable.

However, government regulation (which has become more onerous with the passage of time) forces employers to ignore the health condition of prospective employees. These regulations, along with the rising cost of health care, have induced employers to adopt health plans that turn traditional health insurance principles upside down. That means, for example, low out-of-pocket costs for primary care and high out-of-pocket costs for hospitalization. This is the type of plan that appeals to potential employees who are healthy and does not appeal to those who expect to need a lot of care.

Drug coverage often fits this pattern. No employer wants to hire an employee whose family member needs a specialty drug. The employer could end up paying more in medical costs than in wages. Since it is illegal for the employer to ask about expected medical expenses at the point of hiring, the same end can be achieved by not covering the drug in the first place, or by covering it with a high deductible. This makes employment at the firm unattractive to anyone who needs the drug.

The Tug of War

We saw above how drug companies try to get private group health plans or health insurance to pay most of the cost of expensive drugs. Employers have been using strategies of their own.

One straightforward approach is to not cover a specialty drug in their health plan or to cover it with high patient cost-sharing (which large, self-insured companies are allowed to do). When a doctor prescribes the drug, the employee is then directed to the drug company’s Patient Assistance Program (PAP) as someone who is not fully insured for the needed drug. Some advocacy companies actually specialize in helping the employee fill out the paperwork and navigate the byzantine PAP system.

What happens if patients are rejected by the PAP, say, because their income is too high to qualify for financial assistance? Then the employer often makes a hardship exception and pays for the drug through its health plan.

The congressional letter signers (noted above) want to put an end to these employer options. They want to force large employers to cover expensive drugs the way they cover other drugs—giving the drug companies a big win. And since employer health insurance benefits are ultimately paid for by lower employee wages, the drug company win would be an employee loss.

There is no right or wrong solution when a monopoly seller clashes with buyers trying to avoid paying a monopoly price. That’s why government regulators should be held at bay and normal market forces should be allowed to play out.