Drug Discounts Which Raise Health Care Costs

I’m a value shopper. Like many people, I want to be guaranteed that I’ll get the lowest price around.   I like my clothes with large “percent off” labels.  But there is growing evidence that apparent deals to help us get lower prices on medications are costing American insurers and consumers billions of extra dollars.

Here are four examples of apparent discounts that are anything but a good deal.

1) Medicaid “Most Favored Nation”

Medicaid is guaranteed rebates from the pharmaceutical industry, based on the Omnibus Reconciliation Act of 1990.   The amount of these rebates will increase under the Affordable Care Act (health care reform of 2010). Further, Medicaid has a “most favored nation” clause under which any pharmaceutical company which sells a drug for less than the net Medicaid price must send a rebate to every state Medicaid program to ensure it got the lowest price around.

Unfortunately, game theory shows is that most favored nation clauses actually RAISE prices. They make the supplier realize that the cost of discounting is very high, and thus they reinforce supplier price discipline.  Pharmaceutical companies that used to give Kaiser a huge discount, for instance, would suddenly have to give that same discount to 50+ Medicaid programs, which together represent almost a quarter of all pharmaceutical purchases.  Kaiser –say goodbye to your discount.

This works in the hotel business too.  Marriott (and others) promise that you get the cheapest price on their own website.  This forces them to avoid selling their surplus rooms at a very low rate, because they might then have to give a refund to people who purchased at the full rate.  Hence, an apparent discount leads to higher prices.

Here’s a link to a wonky Rand article showing that the Medicaid most favored nation clause raised the overall price of drugs by about 4%.   Harvard Link  NonHarvard Link 

2) Novartis Covers Copayments for Gilenya, a new oral multiple sclerosis drug.

Novartis just announced that it will charge $48,000 per year for its new MS medication.   Gilenya is reported to work as well as a number of other biopharmaceuticals, but requires no injection.  The drugs it replaces are among the most expensive around– they tend to cost between $20 and $30,000 annually. 

Novartis will give the medicine away to those with income less than 500% of the federal poverty level, and will cover many or even most copayments or coinsurance for others. 

Who could argue with that deal?

In fact, the fixed costs of drug manufacture are large, and variable costs are low.  Novartis will maximize its profit by offering the medicine without allowing patient price sensitivity to reduce demand.   Most of those who will take the medicine will switch from the less expensive medications. Hence, the total amount paid for effective MS medications will rise because Novartis is offering the drug for reduced prices.

3) Medicis, the maker of Solodyn, an extended release minocycline for acne, offers a card that guarantees a $10 per month copayment for this medicine, which otherwise costs over $400 per month. 

This might seem like a good deal, but generic minocycline (taken twice a day) costs 75 cents a pill!   Here’s a pharmacist’s rant on the topic (a bit obscene –don’t click unless you’re ready for some expletives)  

The discount card is a great idea for the pharmaceutical company, which has taken a generic drug that can be purchased wholesale for pennies and converted it into a very expensive brand name medicine.  For consumers and the overall health care budget, this is a bum deal indeed.

4) The pharmaceutical industry has volunteered to give Medicare beneficiaries 50% off the price of brand name drugs when they are in the “donut hole” between spending $2840 and $4550 each year.

Again, how can we go wrong with 50% off?

Brand names remain substantially more than twice as expensive then generics within the same class.  For instance, generic simvastatin to lower cholesterol costs about a dollar a day retain (drugstore.com, 20mg), while brand name Lipitor costs over $3 per day (drugstore.com, 10mg).  So, Medicare beneficiaries who have no generic choice will do well with the discount. However, Medicare beneficiaries who are convinced to take the discount instead of moving to a generic will continue to pay more than they should.

We have to look at the total cost of care – not just the prices or the discount for a particular product or service.  The great discounted prices sometimes camouflage unnecessarily high costs.