The last few weeks have seen a drip-drip-drip of news headlines about the rising prescription drug costs in the US. The New York Times just reported that federal prosecutors are investigating Valeant pharma for drug pricing practices. The Chicago Tribune blared “Washington stands still despite drumbeat on high drug prices”. Coming on the heels of the uproar over Turing Pharma’s decision to exponentially increase the price of generic Daraprim, even presidential candidates have begun to weigh in on potential ways to make prescription drugs more affordable to patients.

Although prescription drug prices as a whole have seen only moderate increases (3-year CAGR of 3%), the cost of specialty pharmaceuticals has grown very rapidly (30% increase just in 2014) prompting various stakeholder groups to develop policy positions. The primary focus of most of the proposed solutions has been the reduction of out of pocket burden on patients, particularly for patients paying high co-pay and coinsurance for their specialty pharmaceuticals

A review of proposed and enacted legislation across the state and federal level indicates a range of options being looked at; Summary of Cap the Copay Initiativessome focused simply on created a ceiling on patient co-pay (typically $150) while others go further setting limits on how specialty products are placed in formulary tiers (at least one in a drug class should be on a non-specialty tier). Pharma has been supportive of these measures with some companies such as Pfizer saying “We stand with patients in their efforts to access the medicines and resources they need to fight life-threatening conditions”.

Patient advocacy groups believe that limiting the copay will help members get better access to medicines, be more adherent to therapy, and have better clinical outcomes. Pharmaceutical manufacturers, we assume, are expecting to benefit from improved adherence, higher treatment rates, and perhaps reduced need for co-pay card and other types of patient cost offset programs. We believe the real world impact of the proposed legislation will be much more modest than what’s advocated.

When co-pays are limited with no complementary caps on drug pricing by manufacturers, payers will find other ways to manage costs. In other words, when drug pricing is market-driven, insurance premiums are subject to regulatory approval, and patients are shielded from the cost of those high prices, some things will have to change. Here are a few things payers are likely to do in response:

  • Negotiate with pharma for additional discounts and rebates
  • Implement stricter utilization management through PAs and step-edits and minimize patient choice within a therapeutic class thereby creating incentives for manufacturers to contract, and
  • Modify benefit design to require separate deductibles for prescription drug coverage
  • Increase plan premiums (subject to regulatory approval)

Beyond these predictable measures, we believe that capping the co-pay will lead to drastic changes to how health plans are designed and marketed.

Two specific trends are likely to emerge:

  • Growth in separate deductibles for the pharmacy benefit
  • According to the 2015 Kaiser/HRET Survey of Employer-Sponsored Health Benefits, only 12% of all plans with prescription drug coverage currently require a separate drug deductible. This leaves a lot of room for payers to cut costs by requiring a larger proportion of the remaining enrollees to pay a separate drug deductible. Since there is no proposed limit on drug deductibles, the payers will also increase the deductible threshold for existing plans and set higher thresholds for the newer benefit designs.

Increased share of High Deductible Health Plans (HDHPs) within the payer product portfolio

To understand, what happens when patient co-pays are kept constant regardless of the cost of medication, let’s analyze the chart on Prescription Drug Coverage Benefit Design from the 2015 Kaiser Health Benefits Survey. Prescription Drug Benefit Design Distribution by Plan TypeHigh Deductible Health Plans (HDHP) are 5X more likely than other plans to offer uniform co-pays across all drug categories because those plans have already shifted some of the drug costs to the patient in the form of deductibles. Should some of the co-pay bills become law, most payers will adopt coverage and cost management principles from the HDHP playbook given their experience in managing such plans.

Cumulatively, the incidence of more plans with drug deductibles and the simultaneous growth in high deductible benefit designs will expose patients to the full cost of the drug at start of therapy even if the co-pays are smaller once the deductibles are satisfied. This will lead to larger abandonment rates of new Rxs and in some cases the patient could decide to forgo drug therapy or pursue other treatments.

So, are the proposed cap the co-pay initiatives the windfall that patients and pharma expect them to be? Time will tell, but there is enough evidence to suspect that the results may not fully reflect the legislative intent.

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