On the Tragedy of the Commons: the Toxic Effects of Drug Co-Pay Coupons

Last week I was driving through Phoenix when I saw this sign at an intersection:

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It struck me that this was a perfect example of what happens when clever business folks figure out a way to short circuit the normal laws of consumer behavior.    How’s it work?  Bring your car in and the glass shop bills your insurance company directly and either rewards you with cash, or at least pays your deductible.  Presumably folks who have insurance that will pay a lot get the $100 and folks with lower-end insurance only get $50… It’s a perverse incentive which disrupts the usual laws of consumer economics.

Driving, I was immediately reminded of a similar situation in healthcare:  pharmaceutical copay coupons.  A couple of weeks ago HBS professor Leemore S. Dafny and colleagues published a compelling perspective piece in the New England Journal discussing the corrosive effect of “copayment coupons” offered by manufacturers directly to consumers.

Like the auto glass example , these pharmacy coupons given to patients and are used at the point of sale to offset the patient copays.  For example, using a copay coupon, a patient can purchase a $1000 drug at less out-of-pocket cost (to him) than a comparable $20 generic which might have a $5 copay.  The net effect: aggregate pharmacy costs past on the the insurer are far higher because there is no patient incentive to use less expensive but comparable generics.

savings-card-newpageMy favorite example of this is the contemptible drug Nexium, which for all purposes interchangeable with the generic Prilosec (Omeprazole).  (In fact, before it was non-generic, Prilosec was the “purple pill” [™ I’m sure] and Nexium inherited the title once omeprazole was generic at pennies a pill).

According to GoodRx, today 30 tablets of Nexium cost $300 cash price at most national pharmacies, whereas 30 tablets of generic Prilosec cost just $24.  For the user using the Nexium Savings Card, Nexium costs $15 as compared to a generic co-pay that might be $20.

The problem with the coupons is that they dramatically undermine the insurance company’s/ PBM’s abilities to “tier” medication, which is the primary leverage they have over pharmaceutical manufacturers. Dafny writes:

By severing the link between cost sharing and the value generated by a drug, copayment coupons can undo the beneficial effects of tiering. With such coupons, consumers’ cost sharing may actually be lower for higher-tier brand-name drugs than for lower-tier therapeutic substitutes or generic bioequivalents. Since insurers typically cover about 80% of the total price of a prescription, however, the combined amount that the insurer and the consumer spend for higher-tier drugs remains substantially greater.

According to the authors, over half of all non-generics now have coupons available.  It’s come at a terrible cost to the system:

We estimate that coupons increase the percentage of prescriptions filled with brand-name formulations by more than 60%. Back-of-the-envelope calculations suggest that, on average, each copayment coupon increased national spending on all drugs by $30 million to $120 million over the 5-year period following generic entry. In our sample, consisting of 85 drugs facing generic competition for the first time between 2007 and 2010, we estimate that spending on the 23 drugs with coupons was $700 million to $2.7 billion higher than it would have been if the coupons had not been issued or had been banned.

At the end of the day, this Jiu-Jitsu at the point of sale only drives up the aggregate cost of medication, which is then necessarily passed onto consumers in the form of higher premiums.  As an old colleague was fond of saying, and which I repeat often, healthcare is a balloon: squeeze one area and another bulges.  This spigot of money flowing to the drug companies needs to be offset by reduced spending elsewhere, or by higher annual premiums.  It’s a perfect example of the tragedy of the commons, where individual users acting independently according to their own self-interest behave contrary to the common good of all users by depleting resources through their collective actions.


If you think that these increased premiums don’t matter, consider Ms. Rosa Ines Rivera, a cafeteria worker at Harvard’s School of Public Health who, with colleagues, is on strike, primarily to protest proposed increases in health insurance costs that Harvard wants to pass to employees.  I was struck by an opinion piece she submitted to the New York Times yesterday:

Why is the administration asking dining hall workers to pay even more for our health care even though some of us pay as much as $4,000 a year in premiums alone? I serve the people who created Obamacare, people who treat epidemics and devise ways to make the world healthier and more humane. But I can’t afford the health care plan Harvard wants us to accept……the cost of premiums alone could eat up almost 10 percent of my income.

It’s the same conversation that many employers and employees are having, as they realize that drug company revenue “optimization” has come at a steep cost to the average American.