The big picture problem of out-of-pocket costs
Prescription drugs aren’t affordable for every patient, and it’s harming their health
1 in 4 Americans struggle to afford their prescription drugs.1 Maybe you’re one of those 1 in 4, and if not, you almost certainly know someone who is — a family member, a neighbor, a coworker or a friend. Maybe that person looks like Annie, a Type 1 diabetic who can’t survive without insulin; sometimes she has to choose between paying the heating bill or affording her monthly prescription.
Or maybe they look more like Eugene, an elderly heart patient who is enrolled in Medicare Part D; the rising out-of-pocket costs of his heart medications mean he’s begun rationing pills, taking just half the recommended dose. Or they could even be like Jess, who has employer-sponsored insurance with a high deductible. Her coworkers don’t know she suffers from chronic pain, or that she frequently finds herself unable to afford her medications when her annual deductible resets; they only know that on bad pain days, she comes to work seeming tired and “off.”
Around 1 in 2 Americans take at least one prescription drug; elderly people or those with chronic conditions often take several.2 In 2019, total spending on prescription drugs in the United States was about $370 billion, increasing 5.7% from the previous year.3 About 14% of that cost came directly from patients’ pockets4, causing hardship.
The high out-of-pocket cost of prescription drugs is also impacting America’s health. One survey showed that 1 in 5 adults in the U.S. has failed to complete a prescribed course of medicine because it cost too much; only 1 in 10 patients said the same in Germany, Canada or Australia.5 In 2019, 9% of all U.S. prescriptions were abandoned6, likely in large part due to cost; only 5% of prescriptions with no out-of-pocket cost are abandoned, but 45% of those that cost more than $125 out-of-pocket are abandoned and 60% of those that cost more than $500 are abandoned.7
The relationship between out-of-pocket costs and prescription abandonment
The more a prescription drug costs a patient at the pharmacy counter, the less likely the patient is to take it. So high out-of-pocket costs have a real impact on patients’ health. This 2019 data from IQVIA defined a prescription as “abandoned” when it was not dispensed to a patient within 14 days of the initial fill.
Source: IQVIA LAAD Sample Claims Data, Dec. 2019
Because of how Medicare plans are designed, high out-of-pocket costs particularly impact Medicare enrollees, who represent around 1 in 6 Americans. These high out-of-pocket costs for Medicare Part D enrollees are a serious burden, because even a small rise in costs can have big impacts. A recent study found that when Medicare beneficiaries’ out-of-pocket costs rise by just $10 per prescription, it led to a 23% drop in overall drug consumption, and a tragic 33% increase in mortality.8
Percentage of U.S. population across different insurance types and growth of Medicare Part D
Around 1 out of 6 Americans are currently enrolled in Medicare. That number has risen over the past two decades as life expectancies increase and the Baby Boomer generation ages into Medicare. For instance, the number of Americans enrolled in Medicare Part D grew from 22 million in 2006 (when the program was created) to around 47 million today. These trends are expected to continue.
Source: KFF State Health Facts data, Health Insurance Coverage of the Total Population; KFF, An Overview of the Medicare Part D Prescription Drug Benefit, 2020.
Annual out-of-pocket costs for Medicare Part D beneficiaries
Medicare Part D enrollees have significantly higher annual out-of-pocket costs than other patients. Studies show that higher out-of-pocket costs make it less likely that a patient will take all their medicines as prescribed; for instance, the study noted above, which found that an increase of just $10 per prescription for Medicare beneficiaries led to a 23% drop in overall drug consumption.9 When patients fail to adhere to the treatments advised by their healthcare team, they have worse health outcomes and are more likely to become hospitalized or die.
Source: KFF Report, How Does Prescription Drug Spending and Use Compare Across Large Employer Plans, Medicare Part D, and Medicaid, 2019; CMS National Health Expenditure Data, 2019; US Census, National Population Totals and Components of Change: 2010-2019
Drug discount and rebate programs have historically been used for purposes other than reducing patient out-of-pocket costs
Policymakers have long been concerned about the price of drugs, but they’ve faced challenges into getting to the root of the issue. While drug rebates and drug discounts have regularly been used in the U.S. healthcare system, they’ve been applied to a variety of purposes other than ensuring that the drug is affordable for patients at the pharmacy counter.
One of those purposes has been to reduce insurance premiums. In Medicare Part D, different health plans compete for enrollees on the basis of premiums, benefit structures, specific drugs covered and pharmacy networks.10 Plans negotiate rebates from drug manufacturers who compete with other manufacturers for preferred formulary placement (the formulary is the list of drugs the plan will cover). The more restrictive a plan’s formulary is, the greater negotiating leverage the plan has in order to obtain larger rebates from manufacturers. The rebates collected by the plan are used to keep premiums lower for all enrollees, helping the plan compete for enrollees against other plans.
Unfortunately, because the rebates are used to keep premiums low instead of reducing the out-of-pocket costs for drugs, the result is a system where the sickest patients who need multiple drugs each month find themselves struggling to afford their medications, while their utilization generates rebates that allow healthier patients who take fewer drugs to benefit from lower premiums. In short, the rebates generated by sicker patients subsidize low premiums for healthy patients, not exactly how most people imagine health insurance should work.
In the last days of the Trump administration, the Department of Health and Human Services issued a final rule that would require plans to forgo traditional rebates and instead use their negotiating power to negotiate lower drug prices on behalf of patients, with the discount applied at the pharmacy counter.11 While this rule would help reduce out-of-pocket costs for patients who need multiple drugs, the loss of rebate dollars would cause the plans to increase premiums or require that federal taxpayers contribute billions more towards reducing premiums.
Drug discount programs have also been used as a revenue source. The 340B Drug Pricing Program is a federal program that allows certain safety-net healthcare providers, called “covered entities,” to purchase drugs from drug manufacturers at significant discounts. The covered entities then sell the drug to the patient at cost, or provide the drug to the patient for free if the patient cannot afford it. However, if the patient has insurance, the healthcare provider’s ability to purchase drugs at a low price and then be reimbursed at a much higher price by the patient’s insurance offers the healthcare provider a much-needed revenue stream. Covered entities then use this additional revenue stream to help fund their safety-net mission.
While it is entirely possible that covered entities could always pass the discount on to patients, many covered entities, specifically Federally Qualified Health Centers (“FQHC”), would see millions of dollars of critical revenue disappear. This would cause nearly every FQHC to reduce services to some of the neediest patients in our communities, or even cause the FQHC to shut down entirely, unless state and federal governments decide to make up the loss in revenue with additional grant dollars — something most lawmakers are reluctant to do.
While there is nothing wrong with using drug discounts and rebate programs for purposes other than reducing patient out-of-pocket costs, these additional uses of discounts and rebates makes it challenging for policymakers to implement changes to improve drug affordability.
The growth of rebates and discounts across programs
Rebates and discounts have risen steeply since 2014. The 340B Drug Pricing Program has seen particularly dramatic growth.
Source: MACPAC, Medicaid Drug Spending Trends, 2019; CMS, Medicare Trustees Report, 2020; CMS, Medical Loss Ratio summary data, 2020; Drug Channels, New HRSA Data: 340B Program Reached $29.9 Billion in 2019, 2020
Annual average out-of-pocket spending per capita in the U.S., for large employer-sponsored healthcare plans, and for Medicare Part D
Though rebates and discounts have risen steeply, out-of-pocket costs haven’t declined in response. For most patients, out-of-pocket costs are about the same. Even Medicare Part D, while seeing a slight decline, remains high. The remarkable growth in rebate and discount programs isn’t helping patients at the pharmacy counter.
Source: KFF Report, How Does Prescription Drug Spending and Use Compare Across Large Employer Plans, Medicare Part D, and Medicaid, 2019; CMS National Health Expenditure Data, 2019; US Census, National Population Totals and Components of Change: 2010-2019
List price and net price aren’t following the same trajectory
List price is the published price set by the manufacturer. List prices have risen steeply since 2015, and that gets a lot of attention in the news. Conversely, net prices are the price the manufacturer actually receives after discounts, rebates and other price concessions. For the past five years, net prices have mostly remained flat, and in some cases even failed to keep pace with inflation. This widening discrepancy is driven by the steeply growing cost of discounts and rebates, which reached an unprecedented $187 billion in 2020.12
Source: Drug Channels report, Five Top Drugmakers Reveal List vs. Net Price Gaps, 2020; U.S. Bureau of Labor Statistics, CPI for All Urban Consumers (CPI-U).
Insulin provides one clear example of a growing gap between list and net prices
The high out-of-pocket cost of insulin is hugely concerning for many. A recent report published by the bipartisan leaders of the Senate Finance Committee outlined how list prices have risen for insulin, along with commercial rebates. The report describes how the three major pharmaceutical companies that manufacture insulin in the U.S. “blamed [pharmacy benefit managers] PBMs for their demand for ever-higher rebates which has caused them to raise list prices to maintain profitability and patient access.”13 This chart shows how list prices have risen for Humalog, a type of insulin, while net prices declined and out-of-pocket costs also rose. (In this chart, average out-of-pocket cost for insulin is computed based on nine different insulins, including the top five products in terms of Part D spending.)
Source: American Diabetes Association, Impact of Higher Insulin Prices on Out-of-Pocket Costs in Medicare Part D, 2020: Eli Lilly and Company: Integrated Summary Report, 2018, 2019
Misapplied discounts drive up the cost of drugs
Drugmakers participate in a complex, overlapping network of drug rebates and drug discount programs, both those mandated by laws and those created via private contracts.
This system includes discounts paid to providers, like the federally administered 340B Drug Pricing Program, as well as discounts privately negotiated by group purchasing organizations (GPOs). It includes discounts given to state payers, as in the Medicaid Drug Rebate Program. It includes rebates and other fees paid to pharmacy benefit managers (PBMs) and other payers. It also covers direct patient discounts through co-pay coupon programs. Altogether, these rebates and discounts added up to $187 billion in 2020.14
Our research shows that misapplied discounts and rebates are rampant. And as the system becomes more complicated, they’re a growing problem.
These misapplied discounts — what the industry calls “noncompliant discounts” — are causing conflicts between payers, providers and drug manufacturers. With the world focused on overcoming the COVID-19 crisis, these conflicts are causing a lack of trust at a time when we most need our healthcare system to focus on improving the health of patients.
