The Price of Pharmaceutical Drugs: Why Health Insurance Companies May Not Push Back
The relationship between pharmaceutical companies and health insurance providers has long been a contentious issue. Pharmaceutical companies have the unique ability to control drug prices due to their exclusive rights and dominance in the market. This power allows them to implement price increases without facing significant resistance from health insurance companies. However, this isn't the only reason. Insurance companies have their own motivations and structural challenges that prevent them from fully fighting back against rising drug costs.
Pharmaceutical Dominance and Market Power
Pharmaceutical companies can control drug prices because they are the sole producers of many medicines. This market dominance allows them to set high prices without fear of losing significant market share. When pharmaceutical companies release new drugs, they often do so with a decade or more of patent protection. This protection ensures that no other company can produce or sell the same medication, thereby allowing the original company to set and maintain high prices.
Administrative Costs and Profit Margins
Health insurance companies do not have the same profit margins as pharmaceutical companies. While the latter can have profits in the hundreds of millions or even billions, insurance companies are often regulated to have a more modest profit margin based on a percentage of premiums. This means that reducing drug costs would directly impact their financial performance. Some insurance companies might offset this by hiring additional administrative staff, but this strategy often shifts costs and does not solve the underlying problem.
The Incentive Misalignment in Healthcare
The healthcare industry is unique in that it is often not driven by consumer choice but rather by necessity. Unlike buying a TV, patients do not have the luxury of waiting for a sale or comparing prices from different providers. In cases of urgent medical conditions, such as a broken leg or a critical medication need, patients do not have alternatives. This creates a situation where pharmaceutical companies can charge exorbitant prices without patients having much recourse.
Examples of Resistance from Insurance Companies
It is not entirely accurate to say that insurance companies never push back on pharmaceutical companies. For instance, Humana and Walmart have partnered on a program called Humana-Walmart Part D, which significantly reduces the cost of prescription pharmaceuticals for their customers. Walmart's volume purchasing power allows them to negotiate better prices and pass these savings on to consumers.
Why Not a National Health Plan?
While some argue that there should be a National Health Plan (NHP) to negotiate drug prices on behalf of consumers, the fragmented and for-profit nature of the current system means that patients are often left to bear the brunt of rising costs. For example, in 2007 to 2009, the cost of a specialty drug skyrocketed from $1,700 per month to $5,000 per month, exacerbated by a layoff due to the high cost of the medication. Research shows that countries like Australia and Costa Rica have successful NHPs that can negotiate better prices. However, even these systems face challenges in negotiation.
Case Study: Kaiser Permanente and Specialty Drugs for MS
Kaiser Permanente, a large insurance and healthcare provider, provides an interesting example of how drug costs are managed. They decided to switch from Copaxone to a biosimilar called Glatopa, citing reasons of lower cost. The pharmaceutical company Teva, which produces Copaxone, released a new version, Copaxone 40mg 3 times a week, to maintain its high profits. Meanwhile, when another drug, Rituxin, is released with a new chemical structure, causing it to be priced at $300,000 per year, Kaiser will continue to use the older, cheaper version or its biosimilar. This decision is not driven by ethical or moral considerations but by the need to manage costs and maintain profit margins.
Conclusion
While there are instances where insurance companies push back on pharmaceutical companies, the overall trend is that the current system favors high drug prices due to the lack of direct financial incentives for patient cost savings. A National Health Plan could potentially address this issue, but the implementation and enforcement of such a plan are complex and fraught with challenges. As it stands, the fragmented and for-profit nature of the current healthcare system often leaves patients and taxpayers bearing the brunt of rising drug costs.