Category: Healthcare Costs

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:


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.

Specialists and Practice Guidelines: On the Cash Cow in the Room

Here’s a personal story about medical overuse and willful ignorance. Stay tuned for the punchline.

First, a little background: a couple of weeks ago I came across a great study on medical overuse, specifically adherence to national recommendations published in 2012 regarding the use of the PSA (prostate specific antigen) blood test to screen for prostate cancer. Continue reading

Squeezing the Balloon:  Thoughts on a High-risk, Low Margin Business

I recently ran into an old colleague who works as a consultant to one of the large national pharmacy chains.  We got to talking about the various clinical services that the pharmacy has explored over the years, beyond low acuity retail care.  It turns out that, after an auspicious start, the big national pharmacies are increasingly shying away from providing clinical care and are beginning to lease their in-pharmacy clinics to local healthcare systems to run.

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On the “Bay State Boondoggle”

5822024293_6059e9d1ff_zThe Boston Globe recently ran an article discussing layoffs at Baystate Health, a large health system in Western Massachusetts.  The system is planing to lay off 300 employees to try to close a $75M deficit.  According to the Globe, the deficits are mainly driven by declining Medicaid reimbursement, but, more interestingly, by a $23M hit to Medicare revenue driven by a mistake made by Partners Healthcare, a health system on the other side of the state.

Here’s the fascinating backstory.

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Cost is Ruining the Patient/ Healthsystem Social Contract

It’s Summer in Boston and the annual migration of Bostonians leaving town (replaced by carloads of tourists headed in) is underway.


I’ve been keenly observing the influx of out-of-state license plates because it brings a wider sample of cars  to support my theory that the number of people applying collegiate stickers to their car windows has fallen dramatically.  Today, based on poor sampling science (my counting cars at a downtown garage) fewer than 5% of cars proudly display a college sticker.  This number seemed far higher a decade ago.

It turns out that my anecdotal observation actually tracks with data in the academic literature.  “Advancement” offices recognize that engaged alumni (presumably those that would put a sticker on their car) are declining.

According to the Council for Aid to Education, in 1990, 18 percent of college and university alumni gave to their colleges.  By 2013, that number was less than 9 percent— a record low and a trend that has persisted for more than two decades.

What’s interesting is that a very small number of donors contribute the bulk of the dollars: The University of Waterloo analyzed their alumni donations and found that <1% of alumni gave 78% of the over $150M dollars raised.  Here is their breakdown:


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The data suggest that a handful of donors are stuffing the coffers while the bulk of alumni have tuned out.  The Waterloo authors noted:

[It’s] a classic example of the 80/20 rule, except in our case it’s more like an 80/1 rule.

What’s behind this disengagement?

In a 2014 article, author Dan Allenbee argues that the rising cost of college has alienated many alumni.

Back when the cost of [the college] experience was relatively low, alumni felt like they had gotten a deal and were more willing to give back after they graduated… In the last decade, the price index for U.S. college tuition rates grew by nearly 80 percent—almost twice as fast as growth in medical care and more than twice as fast as the overall consumer price index, according to U.S. Labor Department statistics. Although tuition increases have slowed recently, data from the College Board suggests that federal aid has not kept up with rising costs, resulting in students and families pay- ing more out-of-pocket expenses. 

How we expect alumni to give back when they haven’t fished paying the original bill?

A 2016 piece in The Yale News argues that changing social norms seem to be a cause:

Alumni participation rates in giving hit an all-time low of 33.7 percent this year after dropping 25.61 percent in the last decade — the biggest fall in the Ivy League. And this decrease has primarily been concentrated among the younger classes: In the past 10 years, there has been an 11 percent increase in the number of alumni solicited, but a 26 percent decrease in participation.

“There [used to be] a supposition that there were things that you did,” Acting AYA Executive Director Jenny Chavira ’89 said. “And you did them because you did them.”

At a minimum, this trend in higher education serves as a harbinger for healthcare.  With the colleges, what we’re witnessing is the breakdown of a long-standing social contract between organizations designed to serve the community, and the people that they serve.  There is a silent majority who used to proudly display their allegiance to organizations and who now feel less affiliated.

If we believe that the weakening of the bond between social mission organizations and individuals is due to citizen’s perceptions that they aren’t getting value for money, then healthcare has a brewing problem.

This won’t be an issue of declining philanthropy: A few massive donations from a handful of benefactors will make up the gap.  The bigger long term issue for healthcare systems is declining consumer loyalty.  The erosion of the organization/ patient social contract can only lead to a future with fewer brand-name consumers and more buyers shopping for deals while “interlining” between systems (a trend that I wrote about last year).  Cost (or the ability to save a couple of bucks in a high-deductible plan) drives point-of-care decisions, for sure.  More important (and more insidious ) is the way that high cost/low value care impacts how patients feel about the patient/healthsystem relationship.




Hospitals are Pigging Out on Commercial Reimbursement and Starving on Medicare. What’s Next?

The Spring 2016 Medpac report on Medicare payments is out.  This annual report to Congress (put together by the 17 members of the Medicare Payments Advisory Committee) provides an assessment of the way Medicare pays for care, and offers recommendations for how to modify payments going forward. It’s a fascinating snapshot:

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Express Scripts Undoes Turing Pharmaceuticals: Witness the Rise of the “Activist” PBM

Everyone knows the recent story of “rapscallion” Martin Shkreli: the ethically depleted CEO of Turing Pharmaceuticals who bought the rights to Daraprim, a generic anti-parasitic medicine and marked up the price of a tablet from $13.50 to $750 overnight.  Martin Shkreli

As disgusting as Shkreli’s story is–  the more important and interesting tale is how Turing was subsequently undone by Express Scripts, the large national pharmacy benefit manager.  The NYT wrote a great piece on the Express Scripts triumph this morning.

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