Why Drug Companies’ Medication Coupons Are Bad for the Healthcare System

Have you had the experience where you need a medication, and the brand name actually is cheaper for you because your doctor gives you a coupon for it? It’s great for you, but it’s bad for the healthcare system, and here’s why.

I have written before about the principle that is relevant to this, but it bears repeating: The party making a purchase decision must be the one who also bears the price differential between those options.

To understand why, let’s pretend you have a medium risk of heart attack or stroke in the next 10 years, so your doctor recommends you start a moderate-intensity statin medication. They’re all pretty close to equal in terms of efficacy and side effects, so the best money-saving decision would be to choose the cheapest one, right? Well, if your doctor says, “I’m happy to prescribe any of these for you. Which would you like?” You are the party who now gets to make a purchase decision. So you look at the monthly prices below (these are real prices):

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But then your doctor hands you a pitavastatin $100 off coupon some drug rep from Kowa Pharmaceuticals (the manufacturer) dropped off. You, a rational person, opt for that one since it’s now the cheapest (free)!

Now the monthly cost to the healthcare system for you to be on a statin totals $0.00 (your copay) + $101.36 (what your insurer has to cover) = $101.36. That’s about 20 times more expensive than it should have been!

What just happened here? The party making the purchase decision (you) did not bear the price differential between the options. Your insurer originally set it up so that you would pay more if you chose a more expensive statin, but the coupon interfered with that.

This same situation plays out over and over every day in our healthcare system with medications and with every other health service. It’s why I keep saying that we need to make the party who makes the purchase decision the same party who bears at least some part of the price differential between the options, which leads to a value-sensitive decision. Reference pricing does it, high-deductible insurance plans do it (for services below the deductible, at least), multi-tier prescription programs do it (when they’re not being subverted by manufacturer coupons). But these, collectively, are not influencing nearly enough of the purchase decisions being made in our healthcare system! And we waste money. Even worse, the higher value options are not rewarded with market share, the lower-value options are allowed to persist as is, and the overall value delivered by our healthcare system remains much lower than it could be.

So that’s why medication coupons–and any other thing that interferes with purchasers bearing the price differential between options–are bad.

Why Insurers Are Finally Investing in Primary Care

Image source: eurekafirerescue.org

First off, I apologize for the long delay between blog posts. I’m still here, and I still am obsessed with health policy. I’ve been working on a publication that outlines some of what I’ve figured out lately, and I’d rather people first see it in a publication by me rather than by someone else who came across it on my random blog and ran with it.

Anyway, let’s talk about why insurers are starting to do things differently lately. They’ve started doing pilot projects to see if investing in primary care will save them money by preventing unnecessary tests and services (they predict it will in a big way). They’ve also started investing more in IT to keep track of patients’ health information, again hoping they can use it to find ways to prevent patients from needing preventable tests and services.

Of course this makes sense. If they, as a business, can invest $500,000 in primary care and then save $600,000 by preventing a whole bunch of things down the road that they otherwise would have had to pay for, it’s a great investment! But why haven’t they started trying out these investments in cost-saving prevention until now? Remember that a business is always trying to use the money they’re making and invest it in projects that improve their financial performance. But there are a lot more options of projects to invest in than they have the money to invest. So they are trying to find the projects that seem to offer the greatest reward for the lowest risk. This would lead us to assume that these kinds of projects haven’t had a great reward-risk ratio until now.

I haven’t figured out a great way to organize my thoughts about this, so here they are in a random order. (FYI, one of the items in the list below is going to change, and it explains why insurers are changing their ways, so you better figure out which.)

  • If an insurer wants to invest in prevention, but then the patient switches insurance before the insurer gets to reap the savings, that was basically wasted money. Yeah the patient is healthier as a result, so that’s a small consolation prize, but the analyst who forgot to compare the expected payback period with the average length a patients stay on their insurance will probably still be fired.
  • Trying to pay a primary care physician to do better at keeping patients healthy isn’t an across-the-board money saver. Actually, it probably only saves money for a small portion of patients. But the thing that makes it worth it is that those patients are probably the highest-cost patients, so a ton of money still stands to be saved.
  • Paying a physician more to establish a medical home or hire a care manager or something like that probably involves the insurer paying the whole cost for the physician to do that, otherwise they won’t. And since the physician has the care manager, chances are he/she will use that care manager for all his/her patients who need the service, including patients that are covered by other insurers. So the insurer is now stuck paying for a competitor’s patients to get healthier, saving the competitor money even though the competitor didn’t invest a thing.
  • An insurer won’t be very popular if they add services to only a select group of patients on the exact same coverage plan. Other people will say that’s unfair and demand to receive the same service. This would be annoying, and they’d have to find a way around it so they don’t end up spending all this prevention money on people who won’t end up saving them much in return.
  • People, when buying insurance plans, aren’t really able to compare the coverage offered by different plans. There are so many complexities, all they can really do is look at the price and look at some of the basic coverage provisions, but that’s it. There may be all sorts of limitations that they don’t even know about. Because of this, insurers can get away with offering a high-priced plan with not great coverage and still (through great marketing) convince a lot of people to buy it, so where is the reward in finding ways to lower price by doing cost-saving prevention when you can just add a few exclusions to save money instead and nobody will ever notice when they’re choosing their insurance plan?

I hope you figured out that the last one is changing. With new tools coming out that help people more easily compare the quality of coverage offered by different health plans, including insurance exchanges’ standardized levels of coverage, people will be able to spot the insurance plan with equivalent coverage but a way lower price. And when that happens, people will flock to that insurance plan. This is a significantly larger incentive to try out risky investments in cost-saving prevention, which also means it’s quite a risk not to try anything out for fear that you’ll lose all your customers. Finally, cost-saving prevention projects that actually decrease overall health spending and keep patients healthier will top every analyst’s list!

And in case you’re wondering what role increasing health costs have played in this whole thing, the answer is . . . probably nothing. Health costs have always risen, and insurers have always raised premiums to maintain pretty constant profit margins. Sometimes spending increases slower and they make a bundle, sometimes costs rise faster than predicted and they increase premiums even more the next year. But none of this changes the risk-reward evaluation done by analysts to decide if they should finally start to invest in cost-saving measures, although it might in an indirect way because people are clamoring louder (as costs rise) to get cheaper health insurance, but unless those people were finally able to compare the value of different plans, all their clamoring wouldn’t have much of an effect on insurers’ investment strategies.

How to Keep Insurance Companies from Stealing Healthcare Cost Savings

In February 2011, I posted on what healthcare delivery reform proposals are getting wrong. Here’s the brief rundown on what I explained:

  • Most reform proposals will make care less expensive for patients (due to more integrated care plans, a better focus on preventive care, fewer complications, etc.)
  • Providers are the ones charged with making these delivery changes
  • Patients saving money = providers getting paid less
  • Why would providers make the changes only to lose money? They somehow need to financially benefit from their efforts and improvements
Are there solutions to this? Of course! Here are my favorite two:

 

First, integrated delivery. If the organization charged with making changes to how care is delivered is the same that will benefit financially, it works. An example might help. I live in Utah, where Intermountain Health Care (IHC) dominates. IHC is really good about doing research and finding ways to improve quality. So let’s pretend they do a lot of heart valve replacements, and that they’re usually paid $20,000. But, if they have a complication, they have to do all sorts of extra work, and they end up getting paid $30,000. (I’m making the numbers up, but I’m not lying about the fact that providers often get paid more for procedures when there were complications.) So, IHC finds that they can tilt the bed at a 20-degree angle and that magically reduces complications by 25%. But that means they’re getting paid $10,000 less every time they avoid that complication! The patient whose complication was averted with the tilting of the bed maybe ends up paying $2,000 less in co-pays than he would have, and the insurance company saves the other $8,000.

 

Poor IHC, right? They spent thousands of dollars on the research that produced the bed-tilting idea, and now the patients’ and insurance companies’ wallets are benefitting. Except, IHC has a secret. The insurance that patient was on is Select Health, which is IHC-owned! So, really, IHC just saved its patient $2,000 and saved itself $8,000. Not bad! This scenario, when the provider and insurer are the same entity, is called “integrated delivery,” and it creates excellent incentives to improve quality. The only time this breaks down is when IHC averts all sorts of complications for patients on different insurance companies. [Update: There are downsides to integrated delivery organizations, including ACOs, that relate to their limiting of the options available to patients and, thus, interfere with value-sensitive decisions. I won’t explain it here, but I’ve learned more since writing this post.]

 

This brings me to the second solution, which can sometimes work when it’s not an integrated delivery situation. So when IHC goes to renegotiate their contract with, say, Altius, they will have their reduced-complication-rates data in hand, and they will say, “Hey, we have 25% fewer complications than before, so your average cost will go down from $22,500 to $21,000. But we want some of those savings since you didn’t do anything to warrant saving all that money, so we’ll raise your rates a little bit to make your average cost $22,000, which is still lower than it was before, and we’ll be getting some compensation for all this hard quality-improvement work we’ve been doing.” I guess this solution could be called “splitting the savings.” [Update: Since writing this, an amazing idea called “shared savings” became popular. It’s exactly what I describe above. But it has a pithier name.]

 

The providers will still be losing some of the savings to the patients and external insurance companies, but at least they’re improving quality and their reputation!

How Doctors Make Prices

I’m venturing out a little bit on this post because I don’t know if the pricing process I’m about to explain is used by all providers or not. That’s my disclaimer.

Now I’m going to pretend I’m a doctor with a brand new self-run clinic. I’ve just hired all my nurses and bought all my computers, etc. My next step is to decide on a fee schedule. How do I do it?

I start by checking prices of other doctors in the area. Or not, because I can’t find any of those. So then I ask some of my physician friends, who say they generally charge 100 to 120 percent of Medicare fees. “That’s quite a range,” I say. But then they say it doesn’t matter too much what I set my fees at because my future patients’ insurance companies will basically choose how much they are going to pay me anyway.

Insurance companies decide the price? I guess that makes sense because they have all the bargaining power over me, a lowly solo doctor running my own clinic. So I somehow find a way to take a look at compensation schedules for different insurance companies, including Medicare and Medicaid. Their prices are all over the board for every procedure! For a single billing code (maybe it’s the one for setting and casting a broken arm), Insurance Company X will pay $1,100, Insurance Company Y will pay $1,000, Medicare will pay $900, and Insurance Company Z will pay $1,200.

Now I start thinking strategically about this. If patients are never going to ask me how much I charge, since their insurance companies will handle all of that, I decide to set my price for setting and casting a broken arm at $1,200. Why? Because if I set it at $1,000, I’m only going to get $1,000 from Company X, who was willing to pay me $1,100, and $1,000 from Company Z, who was willing to pay me $1,200. Why would I set my price low and leave all that money on the table? So as long as I set my price at $1,200 or higher, I’ll get the full $1,200 from Company Z, the full $1,100 from Company X, the full $1,000 from Company Y, etc.

So how do the insurance companies decide on these fees? I hear stuff about this specialist-dominated group of physicians who, working as a committee (known as the RVS Update Committee, or RUC), get to update the Medicare fee schedule every year. And people keep telling me that’s why I, as a primary-care doc, don’t get paid as much as I should because those darn specialists in that committee overvalue work done by specialists and undervalue work done by primary-care physicians.

At this point, I give up worrying about prices and just trust that the money that comes in every month will be more than the money that goes out every month. And, after a few years, that seems to consistently be the case, so I just stop worrying about it.

. . . That is, until patients on high-deductible insurance plans start calling my receptionist and asking what our prices are for various procedures. We’re not sure we want her to admit that our price for setting and casting a broken arm is a whole $1,200, so we prepare a canned response to such inquiries: “We’re not allowed to quote prices over the phone. You’ll just have to come in so the doctor can take a look at you first.”

Why Doesn’t the Healthcare Industry Evolve Like Other Industries?

If you think about almost any industry and how it changes over time, you can see an obvious shift from high cost, low quality to lower cost, higher quality (and, thus, greater access to the product/service). Think about computers, or portable music players, or cars, or flat-screen TVs, or indoor plumbing, or airline flights. . . .

Average yearly productivity growth of industries is estimated to be about 2.4%. But healthcare is different–it receives negative estimates year after year. So what’s the cause of this? Why doesn’t healthcare evolve toward higher productivity over time? If we can figure this out, then maybe we’ll know what we should work on changing with how the industry is structured. And then we’ll be able to permanently solve this crazy trend of healthcare spending, which has been increasing at a rate of 2 – 4% faster than the rest of our economy for a long, long time.

People often blame the lack of evolution (toward lower cost, at least) on healthcare providers not having an incentive to compete on price. Patients don’t price shop, so why would they compete on price? And patients don’t price shop because insurance just covers everything for them, even the small, routine things.  We’re all contributing to this because, no matter which doctor we choose, we still have a $15 co-pay, so why would we waste our time finding out which provider will send the cheapest bill to our insurer? It’s reasonable, this argument, which says that the insurance structure is the reason healthcare providers don’t have to compete on price, and that that is causing the industry not to evolve like it should.

Are there any solutions to this?

The most commonly proposed solution is high-deductible insurance plans. It makes sense. If nothing is covered until you surpass a $1,000 or $2,000 or $5,000 deductible, price starts to really matter unless you’ve already surpassed that deductible for the year (which would be unusual for healthy people). The hard part about this is actually being able to find out prices from providers, but we’ll ignore that with the assumption that if enough people start requesting prices, providers will start making them more readily available. So the result would be that providers finally have to compete on price, they now have an incentive to find ways to reduce prices, and problem solved!

Not so fast.

Did anyone ever consider that providers already do compete on price? No, they don’t compete on prices for patients, but they do compete on price to win insurance contracts. How do you think insurance companies choose which doctors will be in their network? By price! Yes, providers definitely compete on price already. They do it to win insurance contracts, which then guarantees them a steady flow of patients and revenue.

But why doesn’t price competition for insurer contracts provide enough of an incentive for providers to find ways to cut costs and help the healthcare industry to evolve like almost every other industry?

I don’t know. But here’s my guess:

Management is in charge of negotiations to win insurance contracts, so they feel the pressure to find ways to lower costs, but that pressure isn’t conveyed strongly down to the people who have the knowledge required to actually recommend cost-cutting changes: doctors and nurses. If management isn’t working with the current business model’s routines and processes day in and day out, they aren’t going to see the inefficiencies in how things run. Doctors and nurses need to do that, so maybe most healthcare organizations aren’t giving doctors and nurses enough/any incentives to do that.

But, management’s specialty is figuring out completely new processes, routines, and business models that can achieve the same job for the patient but at a way lower cost. So why aren’t healthcare management people figuring out and experimenting with those in an effort to secure more insurance contracts (and, thus, market share and higher profitability)? You’d think the price competition for insurance contracts would at least motivate those kinds of experiments.

The answer may lie in the fact that healthcare provider organizations are known as some of the most complex organizations conceived by man. Possibly this complexity deters innovations like that. They’d be so hard to predict financial outcomes and market response! And with fewer ideas being tested, the evolution of healthcare will necessarily be slower than most industries. I’d love to see some research comparing the complexity of organizations with their speed of productivity growth. And I’m also interested to see the results of all sorts of government-funded “pilot programs” that allow providers to test new ideas out.

So, those are my conjectures, that price competition for insurance contracts isn’t enough because doctors and nurses aren’t given enough incentives to root out inefficiencies and because healthcare organizations are so complex that they deter business model innovations. Maybe I’m way off. Ideas?

UPDATE: I’m wrong. Providers don’t compete on price to convince insurers to add them to their networks. I’ve since learned that prices between insurers and providers are pretty much decided by Medicare prices as an anchor and adjusted up or down depending on bargaining power. This means prices will stay the same even if providers find lower-cost ways to deliver care. So, the question remains: Why aren’t providers finding all sorts of ways to lower costs if any cost reduction would not be followed by price reductions and, therefore, go straight to their bottom line? I still haven’t figured this one out, but Clay Christensen seems to think providers need to encompass the whole value chain to be successful at it, so maybe that has something to do with it.