Why Is Health Care So Expensive? The Washington Legislature Has 3 Answers

The Washington State Legislature is considering a number of health care reforms this session, all pursuing cost savings in some part of the health care value chain.

SB 6416, aimed primarily at three non-profit insurance companies — Regence BlueShield, Premera Blue Cross, and Kaiser Foundation Health Plan — compels the Washington State Insurance Commissioner to take into account the surplus reserves at those insurers when approving a rate increase for those insurers.

SB 5586 seeks to increase transparency in drug pricing in Washington state by requiring greater transparency in drug pricing for pharmaceutical manufacturers. The bill requires manufacturers of drugs sold in Washington state to enter their pricing data into a state database.

HB 2296 is a bill targeted at Pharmacy Benefit Managers (PBMs) that would limit the maximum amount consumers would pay for a medication at the point of sale and prohibit “gag orders” of pharmacists that currently prohibit them from discussing lower-priced options for certain medications with their customers.

These bills employ the Watergate axiom of “follow the money.” The three largest non-profit insurance companies in Washington state have a combined surplus of $3.5 billion.

While this sounds like a large amount, it is only about $480 for every man, woman, and child in Washington, the equivalent of about a month’s premium in the individual market in the state.

The three largest non-profit insurance companies in Washington state have a combined surplus of $3.5 billion.
Steve Moore, IVN Health Editor

The insurance companies feel they need the reserves for an unforeseen disaster – a volcano eruption, earthquake, or terrorist attack. The legislature and insurance commissioner would like to see insurance carriers return some of the surplus to ratepayers before asking for a 24% rate increase.

The other two bills focus on an area that is one of the fastest rising in the health care value chain. Prescription drug pricing has increased an average of 7.5% per annum between 2014 and 2016.

SB 5586 hits the drug manufacturers, while HB 2296 delves into an realm of drug companies that are less widely known than the manufacturers – PBMs.

While drug companies are very profitable, the Big Three PBMs combine for 80 percent of the market share, and are among the largest companies in the world.

Maylan Pharmaceuticals became the national outrage for increasing the price of its EpiPen product by some 600% in late 2016. EpiPen delivers medication that reverses the effects of a potentially fatal allergic reaction. For parents with allergic children, the EpiPen is not a luxury purchase.

The CEO of Maylan was chastised during a congressional hearing for not knowing the retail price of her product. Not apparent to legislators in the hearings: the little control manufacturers have over the retail price of their medication.

While drug companies are very profitable, the Big Three PBMs combine for 80 percent of the market share.
Steve Moore, IVN Health Editor

In the instance of EpiPen, Maylan CEO Heather Bresch pointed out that her company received about $274 of a $600 EpiPen purchase, about $100 of which was profit.

While a 17% profit on a $600 purchase shouldn’t make anyone cry for Maylan, the company’s profit is not the entire story. Where does the extra $326 go?

That brings us to SB 5586 and PBMs.

PBMs manage the pharmaceutical formulary for insurance carriers. They negotiate the price of medications with manufacturers and they negotiate the selling price of medications with pharmacies.

They take none of the risk in manufacturing the product, nor do they assume risk in selling the product. And they are not engaged in the actuarial risk of insurance carriers.

They make a lot of money by negotiating prices for another company’s medications to be sold to yet another company’s pharmacies, or their own pharmacies. Two of the three largest PBMs have a pharmacy component to them, eliminating the need to negotiate on the retail side of the equation.

In some cases, paying cash for a drug is less expensive than paying for it with insurance at PBM negotiated prices. But not many people end up paying cash.

PBMs are an oligarchy with the top three companies accounting for 80 percent of the market share, and have tremendous market power. They negotiate “gag orders” on pharmacists which makes it a breach of contract for the pharmacist to inform consumers of lower-priced options for their prescription drugs.

Despite this being against the pharmacist code of ethics, many pharmacists sign the gag order rather than not be able to sell the most frequently prescribed drugs.

Drug pricing and the health care value chain is complex and intentionally difficult to understand.

While in the case of EpiPen, the manufacturer received 46% of the revenues and the PBMs made 54% of the revenues, no database exists which shows the division or revenues for all drugs.

PBMs are not very highly regulated and few industry watchers think that gag orders on pharmacists are a fair business practice. Transparency in drug pricing is the first step in decreasing the dramatic rate of drug price inflation.

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