The Balanced Choice Pharmacy Benefit System
A Two-fer: A Medicare Pharmacy Proposal that Also Lowers Medication Costs for Everyone
© 2004 Copyright Ivan J. Miller
(This prepublication copy of this article may be photocopied or distributed electronically as long as it is noted that it is copyrighted, and that it is not published anywhere, even on a website, without permission of the author, Ivan J. Miller, IvanJM@aol.com.)
The Medicare pharmacy benefit plan passed by the 2003 Congress is a mess. Insurance companies will siphon off billions of dollars needed for medical care, the government will incur excessive and unnecessary debt, and Medicare recipients will not get the assistance they need. Moreover, this proposal does not include an effective way to deal with the rising costs of medications. Fortunately, there is a better answer, the Competitive Pricing Medicare Pharmacy Proposal. It is a two-fer. One plan solves two problems — the need for a Medicare pharmacy benefit and the need to restrain the rising cost of medications.
The Competitive Pricing Medicare Pharmacy Proposal gives more assistance to Medicare recipients than the current plan, costs less, gives choice to consumers and providers, lowers the cost of medications for everyone, and accomplishes all this without government interference in the price of pharmaceuticals. Because the current plan will not be in effect until 2006, there is time to create and implement a simpler and better plan, especially since there will be an election between now and then.
The plan is simple. First, it makes competitive pricing lists available in the doctor’s office where medication decisions are made. Second, it stimulates patients’ concerns about price because in Competitive Pricing, Medicare pays a base amount for each category of medicines, and patients pay the full gap between the base amount and the actual charge for a specific medication.
How is the Competitive Pricing Proposal able to accomplish so much? It simply addresses the core problem in the price escalation of medications — medications have not previously had real price competition. Doctors and patients have not had enough price information available in the doctor’s office where medications are prescribed. Furthermore, too often when the price is known, patients have not cared because after a copayment, insurance is paying the bill.
The health insurance industry has known about this problem and has made some ineffective attempts to simulate price competition. Many managed care companies created drug formularies — books that either rated the cost of medications in a manner similar to the star systems used by movie reviewers or created barriers to obtaining medications thought to be too expensive. Unfortunately, formularies function more like annoying bureaucracy than a market force. Other managed care companies wait until prescriptions are taken to the pharmacy and have pharmacist benefit managers phone doctors in an attempt to persuade them to change the prescription to a less expensive medication. The use of pharmacist benefit managers is time-consuming and highly abrasive to patients and providers. The current fad is to have three tiered systems with a different copayment for each tier. The low copayment tier is for generic drugs; the middle copayment tier is for medications that are favored by the managed care company due to price, negotiated special deals, or rebates; and the high copayment tier is for drugs considered expensive. Tiers save money for managed care companies that may have negotiated a special deal or rebate for including a medication on the second tier, but they do not change the price of medication for the rest of Americans.
The above attempts to simulate price competition do not address the major cause of escalating prices in medication. Pharmaceutical companies raise the price of established medications frequently, sometimes even several times a year. These small price increases are not large enough to affect a medication’s star rating in a formulary or move it from one tier to another, but Families USA has found that in 2002 these price increases amounted to an annual rate of 8.1%. In Competitive Pricing Proposal, on the other hand, patients and providers would know the exact dollar difference between medications, and the market would react to even these small changes.
The Competitive Pricing Proposal creates price lists by first requiring that drug manufacturers publish the maximum price for their medications. The manufacturers can change the price or sell below this price at any time. The published price is then used by the Medicare system to create a cost comparison chart for the typical dose at a typical pharmacy. The list allows doctors and all patients to make price comparisons, and it also gives Medicare patients the amount of the anticipated gap payment they will need to make for each medication. Patients may achieve additional savings by shopping around for a discount pharmacy that lowers their gap payment.
Funding directly supports Medicare recipients by providing, directly to the pharmacy the patient has chosen, base payments that increase as the annual cost of medications increase. Most recipients would pay the gap between the base payment and the actual cost of medication at the pharmacy. The plan gives Medicare recipients the financial help they need because the base amount increases as annual medication expenses rise. Low-income recipients and those with huge costs would have all costs of medications paid by Medicare to assure that no Medicare patient would forego necessary medication for financial reasons.
The Medicare Patient and the Doctor
The following fictional script for Dr. Goodheart and Mrs. Beewell shows how the plan works:
Dr. Goodheart: Considering your history of heart problems and high blood pressure, I would like to start you on a Beta-Blocker.
Mrs. Beewell: Okay, but my finances are tight so I would like you to consider cost in choosing a medication.
Dr. Goodheart: Gladly, I know that cost matters. I have in my hand here this month’s Competitive Pricing Medicare Medication Chart. There are five Beta Blockers, but only three that I would consider prescribing for you. Now on this Chart, the lowest priced one would have a gap payment of $30 per month, but more patients report side effects with that one. The next lowest priced one would have a gap payment of $39 per month and fewer people report side effects.
Mrs. Beewell: Why don’t I try the $30 per month one for a couple of weeks, and if I get side effects, I will try another.
Dr. Goodheart: Good idea. We have a plan. I will see you in two weeks to see how well the medication is working.
(As it turned out, Mrs. Beewell found a discount pharmacy that lowered her gap payment to $21 per month and the less expensive medication proved to be just right for her. Overall, Mrs. Beewell found her annual gap payments were lower than her combined copayment and deductible costs on the health insurance she had before Medicare had the Competitive Pricing Program.)
Medication prices will decline for everyone
The second part of the two-fer solution is that price competition will cause the price of medications to fall for everyone. According to Families USA (Bitter Pill, 2002), Medicare recipients pay 42% of the cost of medications in America. There is tremendous power that will come from the cost-conscious senior and disabled Medicare recipients. In addition to Medicare patients, those who have no insurance or do not have a pharmacy benefit in their plan will also be interested in using the Competitive Pricing Medicare Medication Chart. The 44 million uninsured, and uncounted millions who have insurance but no pharmacy benefits will add their market power to Medicare recipients. Once millions of cost conscious consumers sensitize doctors to price, they will consider price differences even when insurance is paying the bill. The market will change from the current situation in which drug companies hardly ever face real price competition, to one where there is almost no place to hide from real price competition. The result should be a steady decline in the price of established medications.
This dramatic change can happen because a primary cause for price escalation in medications is periodic price increases for established medications, not the few medications that really have no competitors. Families USA (Bitter Pill, 2002) has identified the top 50 drugs used by the elderly, and according to the Physicians Desk Reference (2002), at least 47 of these have some competitor medication in their category. Families USA found that the brand name drugs on this list increased at three times the rate of inflation in 2002, while the generic drugs increased at less than the rate of inflation. Generic drugs compete on price at the pharmacy where the lowest cost generic is chosen. Brand name drugs, on the other hand, avoid price competition because they are selected by physicians who do not have the price information available.
It is true, that one medication cannot always be replaced by another in the same category, and therefore no two drugs are equal competitors. Two medications in the same category may be equally effective for only some patients. This is no different than most other parts of the free market system. Competitors are usually not offering identical products, and they still compete on price.
Patients are protected from putting too much emphasis on price in this proposal because the doctor still decides if it is appropriate to try a less expensive medication. The difference between the current situation and the Price Competition Proposal is that price can be one factor that the doctor-patient team uses in selecting medications.
If the Price Competition Proposal merely slows the rising cost of established medications, it would be a great accomplishment. Hopefully, Price Competition would take 10%, 20%, or more out of the bloated prices that have developed in the years without price competition.
When price competition begins to work, it will restrain medication costs without government cost controls that might stifle the invention of new drugs. After all, it is well established that price competition is merely a traditional component of free market systems that are known to stimulate innovation and new products. Pharmaceutical companies, just as other industries that cope with price competition, will be able to make healthy profits.
The Price Competition Proposal is better than the so-called “market-driven” proposals that ask consumers to pick between one or another giant HMO pharmacy benefit. These HMO pharmacy benefit packages are so complex that no one can understand how they will work in an individual case. From an economic perspective, HMO pharmacy benefits can be thought of as a huge bundle of services that must be accepted as a whole. The Price Competition Proposal unbundles the delivery of medications so that the doctor-patient team can make each medication decision independently.
The Price Competition Proposal saves money because it eliminates most of the administrative costs that occur in both giant HMOs and government bureaucracies. The Price Competition Proposal requires only a small administration to distribute price lists and make the base payments directly to pharmacies, thus cutting huge costs from the administration of the Medicare pharmacy benefit plan approved by Congress in 2003.
Still, there is another bonus that comes from the Price Competition Proposal. Critics have blamed expensive direct-to-consumer advertising for pushing up the cost of medications. The pharmaceutical industry defends itself by saying it is only educating consumers about the possibility of improving their health care. If the Price Competition Proposal is implemented, when Mrs. Beewell sees Dr. Goodheart and inquires about the medication she heard about on TV, he might say, “Yes, you have that condition, and because I know you care about cost, let’s see how much each of the different medications for that condition cost.” When advertising expenses push up the cost of the medication, the advertiser would lose the sale in the doctor’s office where price competition comes into play.
To cure the American health care systems we need new ideas that serve the interests of patients, employers, and providers of health care services, not the interests of bureaucracies, public and private, that control health care services. The Competitive Pricing Proposal is one such idea. It makes sense. Price competition has been proven to work in other parts of the free market system. Competitive Pricing serves the interests of Medicare recipients. By controlling the price escalation of medications, it relieves the health care cost burden on all patients and employers. This step can be the beginning of reshaping the health care system so that it better serves all Americans.
The following Pharmacy Benefit article is an earlier and more detailed version of the proposal described in the "Two-fer" article above and some of the terms are different. Instead of referring to a "base payment" and "gap," the following article refers to "first" and "last" dollars. Also, instead of calling the proposal a Competitive Pricing Medicare Pharmacy Proposal, it calls the proposal the Balanced Choice Pharmacy Benefit System.
The Balanced Choice Pharmacy Benefit System1
©2003, Ivan J. Miller
The Balanced Choice Pharmacy Benefit System is included as a separate topic in order to offer a detailed example of how Balanced Choice can create a system that both provides necessary medical assistance and uses free market forces to lower prices. An additional reason for looking at the pharmacy benefit separately is that while most of Balanced Choice requires a full transition to a government based system to create savings, the pharmacy benefit portion can be implemented alone, as a part of Medicare, without the full Balanced Choice System.
Balanced Choice has promoted its Pharmacy Benefit System for several years, and recently similar proposals have received some publicity in Health Affairs as “reference pricing2.” While this article refers to some similar programs, none of these are as comprehensive or as easy to use as the Balanced Choice Pharmacy Benefit System.
The United States’ health care systems must find a way to control escalating medication costs and help pay for medications for its citizens, particularly those without pharmaceutical benefits in their insurance plans or without any insurance at all. In the current health care systems, rapidly increasing medication costs place a tremendous financial burden on many people and prevents others from obtaining needed medications. Escalating costs also interfere with plans to develop government assistance for patients. Previously proposed solutions have been unsatisfactory because some fuel the cost increases, some create a bureaucracy that limits patient and provider choices, and some result in price controls that might stifle research and development of new medications. The proposed Balanced Choice Pharmacy Benefit System overcomes the problems in those previous proposals, and offers choice, provider independence, cost controls, and an affordable funding system.
Balanced Choice uses two innovations to restore market forces that control the price of pharmaceuticals: (1) having Balanced Choice pay the first dollars instead of the last dollars, and (2) creating a price list suitable for comparison shopping. In addition to restoring these market forces, the proposal describes a scenario for combining these innovations with a safety net for patients with financial hardships.
Balanced Choice is easy for both patients and providers to use and has many advantages over current pharmacy benefit programs. Consumers, on the average, would pay less than they spend now. Pharmacy benefit managers would not second-guess physicians. Insurance bureaucracies would not limit which medications are available. Patients could participate in their own decisions about which medication is best and could obtain even greater savings by shopping around. Financial assistance would increase when pharmaceutical expenses grow and provide full payment in cases of financial hardship.
All of these benefits occur while the system lowers the price of medications without taking away incentives for the research and development of new pharmaceuticals. This proposal allows the pharmaceutical industry to obtain the reasonable profits that a free market should offer. After all, the pharmaceutical industry makes life-saving products. The industry deserves a reasonable profit for such a valuable health care service. Free market forces in Balanced Choice give the industry the ability to earn reasonable profits, particularly for new and more effective medications.
How can Balanced Choice offer all of these benefits? The answer begins with an understanding of the cost escalation caused by traditional insurance. Armed with this understanding, one can see how Balanced Choice restores market forces that function to finance pharmacy benefits without causing price escalation as traditional insurance has done. After these price-lowering features are explained, they are placed in a proposed system that is affordable and easy to use.
The Balanced Choice Restores Market Forces to Lower Prices
A major cause of rising medication prices has been the undesirable economic impact of traditional health insurance payments3. In traditional insurance plans, patients pay the first dollar costs of medications in the form of a deductible and a flat copayment per prescription. Insurance has traditionally protected patients from overwhelming costs by paying the last dollars. Because consumers do not pay for price increases or the last dollars, they often ignore the price because insurance takes care of it. In other words, to consumers with insurance, all medications cost the same, the copayment. Because consumers have not been concerned with cost, prices have risen unreasonably.
Even when consumers are cost conscious, doctors do not have ready access to accurate price information4. Managed care manuals, called formularies, place medications in categories from inexpensive to very expensive, but these do not give the price in terms of dollars and cents. Formularies may favor medications that have been discounted for that managed care company. Hidden rebates may influence the medications that a managed care entity endorses. Different formularies may rank medications differently. Because doctors often work for six or more managed care companies5, the multiple formularies are more confusing than a straightforward price list. While doctors often hear when a medication is extremely expensive, they do not have information about less dramatic price differences. Without price information in the doctor’s office where decisions are made, even motivated patients and providers have not been able to exert market forces that could contain the cost of medications.
Changing who pays first dollars and last dollars
In the Balanced Choice restoration of market forces, the payers would be reversed from the situation in traditional insurance. Balanced Choice would pay most of the first dollars and patients would pay all of the last dollars. The last dollar payment, called the gap, is the difference between the Balanced Choice payment and the retail price. The proposed system would pay enough of the first dollars so that the last dollar expenses, or gap payments, are not overly burdensome to patients. The following example and table demonstrates how the gap payments would work in practice:
A patient takes a medication from a category that has three choices of comparable or competitive medications, which cost $45, $60, and $65 per month. In this category of medication, Balanced Choice pays for the first $40 of expense. The patient’s cost changes depending on which medication is chosen. After the first $40 expense is paid by Balanced Choice, the consumer owes a “gap” payment of $5 per month if the first medication ($45 – $40 = $5), $20 per month if the second ($60 – $40 = $20), or $25 per month if the third ($65 - $40 = $25) medication is prescribed.
Simplified example of Expected Retail Price List
|Medication||Expected retail price||Balanced Choice first dollar payment||Patient’s gap payment|
Consumers pay the last dollars in Balanced Choice so it matters to them how much a medication costs. Patients and their advisors, doctors, would be motivated to select lower priced medications or pay more out-of-pocket for a more desired medication.
Creating a comparative price list
The second step in restoring market forces is making price information available by creating a comparison-shopping list of Expected Retail Prices. Through a legislative requirement, all pharmaceutical companies would periodically determine their maximum wholesale prices to pharmacies. This determination is merely the same practice most companies use in declaring the suggested retail price for their products. Pharmaceutical companies could freely change prices when new price lists are periodically published. Once the wholesale prices are available, Balanced Choice could easily adjust these for reasonable pharmacy markups, and it could then create an Expected Retail Price List for the typical dose. This list would explicitly state the “Expected Gap Payment” that patients pay out-of-pocket. These prices are not controlled but are just like a suggested retail price; they can vary according to the retailer. Even though the actual gap payment may vary according to which pharmacy is chosen, the list allows a market comparison of the Expected Gap Payments while the patient and doctor are together in the office.
These lists can easily be made user friendly. All competitor medications can be listed on one page that is easy to read. It is no more complicated than any other purchase in which consumers decide which product to buy based on cost, quality and personal need considerations. Because the decisions are made in the doctor’s office, the doctor can provide any specialized or technical information needed. The doctor would decide what medications were appropriate, could advise the patients of the potential benefits and side effects of each, and the patient could consider price in making a choice from the appropriate medications. The doctor might say that one medication costs less but has a higher incidence of a troublesome side effect. Or, in another situation, the doctor might say that all of the medications in the category seem to work about the same so the patient might as well choose the one with the lowest price.
If this list were available to all doctors, price comparison would become more of an issue in choice of medication. Although this is a major innovation, in principle, it is nothing more than a method for having drug companies offer the same kind of information that is available on the comparison pricing labels displayed in most grocery stores. In grocery stores, comparison prices show cost per pound or per quart; on the medication price list, cost per typical dose could be compared.
Market force price controls are likely to be effective
Currently, prescription drugs are the fastest growing component of health care spending6, and the industry is operating contrary to free market predictions. In free markets, when there are competitors, prices are supposed to decline. The opposite is happening with pharmaceuticals. The cost of medications that have been on the market for years, often medications that have competitors, are rising 80% more than the rate of inflation7. Price increases have contributed 4.8%/yr. to the increase in dollars spent on pharmaceuticals in the United States in the years from 1987 to 1999. There is no escaping the conclusion that current attempts at price controls are just not sensitive to the incremental price increases that exist throughout the system. Yet, in other areas of the economy where there are price conscious consumers and price information available, the free market has been found to be a reliable way to contain costs, even when the products are believed to be essential.
The market effect of specific, clear and current price information should not be underestimated. In the current system, information about price is often outdated and purchasers only have easy access to gross price differences. In this market obscurity, a few dollars increase in the price of a monthly prescription usually goes unnoticed and there is little incentive for a few dollars per month decrease in price, which would also likely be unnoticed. However, if patients and doctors could easily compare prices, a $3 per month difference may result in choosing a different comparable medication. As a result, price increases would decrease market share, and price decreases would increase market share. This is how the free market works when prices are not obscured.
Some of the increases in pharmacy costs, 7.8%/yr.8, are a result of new products or increased volume. However, even the impact of these price increases could be tamed by market competition among existing medications. If the prices of established medications had been decreasing as a result of free market competition, it could have greatly offset the increases coming from new products and increased volume.
The pharmaceutical companies are able to reduce prices significantly when a customer has power in the marketplace. The Department of Veterans Affairs (VA) and the Defense Department have the lowest prices in the land (58% of the cash/drugstore price)9. The U. S. Department of Health and Human Services estimated that in 1999, through insurance companies, patients were able to purchase medications for 14.6% less than patients who pay cash as an individual customer. This figure is an underestimate because it did not include covert rebates paid to the insurance companies10. Another report estimates that hospital pharmacies that are under a managed care arrangement can obtain a price reduction of 20% more than traditional hospitals11.
The potential price competition generated by a price list is considerable. In spite of many medications being patented, there are still competitors. For example, in the Physician’s Desk Reference12, there are 15 product categories for the treatment of high blood pressure. In some of the most preferred categories, there are numerous competitors: ACE Inhibitors — 10 competitors; Angiotensin II Receptor Agonists — 5 competitors; Beta Blockers — 12 competitors; and Calcium Channel Blockers — 15 competitors. If prices were available at the time medications were chosen, free market competition would surely drive down the price of most medications.
Further evidence of the impact of price competition on the cost of medications comes from the alternative medicine market, which is not covered by insurance. Personal observation indicates that the cost of vitamins and supplements has shown a steady decline in prices over the past few years.
Balanced Choice is a way to assist patients with medication costs while maintaining the benefits of a free market system. In free markets, prices are lowered by competition, while at the same time quality improves and products become more available. Quality is assured because research and improved medications bring pharmaceutical companies financial rewards. As in other parts of the free market, research and development would be well-funded because of their potential to increase profits.
Balanced Choice balances maintaining free market principles while providing the financial benefits and assistance that ensure universal health care coverage. This support and assistance has three features.
- Balanced Choice pays the first dollar costs.
- Balanced Choice pays more as personal annual medication expenses rise.
- Balanced Choice pays the full cost in cases of financial hardship.
Example of a Balanced Choice Pharmacy Benefit System
The following example demonstrates one scenario for how Balanced Choice combines market forces with a safety net for beneficiaries with financial hardship. The size of the benefit can be changed without altering the underlying principles.
Overview of the Example
There are no deductible expenses for the patients in Balanced Choice. From the first prescription, Balanced Choice pays the first dollar expenses.
For the first $1,000 of pharmacy expenses per year, Balanced Choice pays a set amount, which is 60% of the average Expected Retail Prices of the medications in the product category. If patients select a less expensive medication or find a discount pharmacy, they save money.
For pharmacy expenses between $1,000 and $3000, per patient, per year, Balanced Choice pays a set amount, which is 75% of the average Expected Retail Prices of the medications in the product category.
For pharmacy expenses over $3,000 per year, Balanced Choice pays a set amount, which is 90% of the average Expected Retail Prices of the medications in the product category.
In cases of financial hardship, patients could apply for additional assistance up to 100% of the cost of all medication. Although this is a deviation from the complete use of market forces, it is likely to involve a small enough number of people that the market forces will still lower medication prices, and that most doctor-patient partnerships will remain cost conscious.
The Balanced Choice Governing Board (BCGB) would be in charge of gathering the Maximum Wholesale Prices from pharmaceutical companies and preparing a periodic, Expected Retail Price List for Medications that is both doctor-friendly and patient-friendly.
Example of an Expected Retail Price List for Medications
Balanced Choice requires that BCGB gather information from pharmaceutical companies and prepare and distribute an Expected Retail Price List for comparison shopping. This price list (see Table 2) categorizes medications in groups of competitive medications, gives consumers and providers Expected Retail Price information, states the first dollar costs that are reimbursed by Balanced Choice for each category of medication, and estimates the gap expenses for patients.
Example of an Expected Retail Price List for a Hypothetical Medication Category
|List of medications that are in this category of competitor medications||Expected Retail Price for typical prescription for one patient||Paid by patient* for a typical prescription for first $1,000 of medication expenses per year13||Paid by patient* for a typical prescription for medication expenses between $1,000 and $3,000 per year14||Paid by patient* for a typical prescription for medication expenses over $3,000 per year15|
Explanation of How to Use the Expected Retail Price List
The price list gives doctors and patients information about the average Expected Retail Price for each medication; the amount each patient can expect to pay out-of-pocket is listed in the right-hand three columns. The patient payment decreases as the annual expense of medication rises above $1000 and again above $3000. As a result, all patients are protected from high medical expenses, but at the same time, all patients pay the last dollar amounts and are therefore sensitive to the price differences between medications.
Once the Expected Retail Price List is available, doctors can consider price information in prescription decisions. The way the price list is used would be different with different patients. If a doctor is certain that one medication is the best choice for a patient, the doctor may simply prescribe that one. If a doctor believes that several medication choices are equivalent, the doctor can select the least expensive. When the choice of medication involves a subjective comparison of cost, potential benefits, and possible side effects, the doctor can give the patient the information needed to make an informed decision, and the patient can decide.
Patients do not need any special knowledge about medication. Although some sophisticated consumers may know their illnesses well, and consequently, may be active in choosing medications, consumers would ordinarily rely upon the advice and guidance of their doctors. The system would operate much like the retail purchasing of a technical piece of equipment. In these purchases, consumers rely on the sales person to narrow the choices to several products that may be appropriate, explain the features and problems of each, and give the price. Based upon this expert advice, consumers make their choices.
*Patients may obtain additional savings by shopping at a discount pharmacy.
BCGB has several responsibilities in creating the price lists.
- BCGB is required periodically to gather from pharmaceutical companies their maximum wholesale prices for medications.
- BCGB is required to convert the pharmaceutical manufacturer’s maximum wholesale price to a suggested retail price for the typical patient. BCGB can do this by developing a formula for adding reasonable pharmacy markups to the wholesale price. These reasonable markups are not binding on pharmacies, but merely tools for generating an Expected Retail Price List.
- BCGB is required to determine what medications belong in each category. In most cases, the Physician’s Desk Reference’s (PDR) Index by Product Category17 can be used to create categories of comparable medications. This reference has proven its usefulness to physicians. Nevertheless, there are some categories that BCGB would probably arrange differently. For example, the PDR lists 10 competitors in the “Miscellaneous Anti-psychotic Agents” category. Four of these, often referred to as the atypical anti-psychotics, are newer, more expensive, and considered vastly superior to older anti-psychotic medication. It is likely that in order to serve the needs of consumers and physicians in situations like this one, BCGB would create a separate category for the newer and superior generation of medications.
- BCGB is required to establish a standard dosage that can be used for comparative pricing. A reasonable method for this would be to use pharmacy records to determine the average dosage per month. This method uses actual prescribing patterns to determine the standard for comparison. Other methods could be devised.
- BCGB is required to use this information to periodically publish and distribute an Expected Retail Price List for Medications that is both doctor-friendly and patient-friendly.
BCGB needs authority to solve problems within the spirit of Balanced Choice.
A central feature of Balanced Choice is that it is a system that responds to problems by correcting itself. In other words, it is a system that heals itself. If patient or provider choices indicate that part of the system is not operating effectively, the system needs to make adjustments. In this way, it is different than traditional bureaucratic systems. Therefore, Balanced Choice needs flexibility.
Regulations can result in market distortions by creating financial incentives to circumvent the regulations. To respond to these market distortions, BCGB needs authority to use its own judgment and adjust to market distortions as they arise. Two examples of potential problems and possible solutions are discussed below in order to demonstrate that the system could respond to price distortions while staying within Balanced Choice principles and philosophy.
- Possible distortion of maximum wholesale price for less common size tablets
If the comparative price list is based on the typical dose, it is possible that pharmaceutical companies may raise the price of less common size tablets because these tablets would be outside of the scope of the price list. For example, if the average dosage of a medication was two-100mg tablets per day, a pharmaceutical company could list a low maximum wholesale price for 100mg Tablets, but double the price for 50mg or 25mg tablets. Therefore, when unusual dose were chosen, the consumer would pay much more than anticipated based on the Expected Retail Price List.
To solve this problem, BCGB could create guidelines for expected price variations for tablets that are a different size than the one used for price comparison. If a pharmaceutical company exceeded these guidelines, BCGB could include a notation that different size tablets would be more expensive than the list price would suggest. Because patients and doctors would likely frown on the practice of inflating prices for odd sized tablets, market pressure would discourage drug manufacturers from this practice unless there was a legitimate need.
- Inflation of maximum wholesale price for medications without competition
When a medication has no competitors, there is an incentive for the manufacturer to increase the maximum wholesale price, but in practice, sell the medication at a much lower price, perhaps even 30% or 40% below the listed price. If such deep discounts were practiced, and Balanced Choice were paying 60% of the maximum wholesale price, Balanced Choice may end up paying all of the actual retail price. This practice could result in less cost to the patient but an increase in costs to Balanced Choice, and it also undermines the patient’s cost consciousness. If this market distortion should occur, BCGB would need authority to find another reasonable method for determining a suggested retail price for medications without competitors. A possible method would be to base reimbursement on the actual retail price determined by a market survey.
Advantages of the Balanced Choice Pharmacy Benefit System
Balanced Choice respects the patient’s right to choose.
As health care is increasingly being managed, patients are rebelling about infringements on their rights to make their own personal health care decisions in consultation with the doctor of their choice. Balanced Choice respects patients’ rights to choice and provides financial support so that patients can either afford the medication they choose or obtain the necessary government assistance.
Balanced Choice creates powerful free market pressure to lower costs.
When the health care systems in the United States are converted to Balanced Choice, established doctor-patient partnerships would begin using the price list as one factor in the selection of medication, and the pharmaceutical companies should begin seeing the impact of price on market share. It is reasonable to predict that when price impacts market share, prices will begin to decline. As cited above, there is considerable evidence that pharmaceutical companies could sell medications for less if there were effective price competition.
In addition, market pressure is maximized in Balanced Choice in two ways. First, consumers can react to small as well as large differences in cost. Cost conscious consumers and providers would be more sensitive to price than pharmacy benefit plans that lump medications into tiers that represent only large differences in cost. Second, patients are 100% sensitized to price differences and increases because they pay all of the last dollar costs. These cost conscious consumers would create more market pressure than consumers in traditional insurance plans that pay 50% or 80% of the cost differences and increases.
Balanced Choice is easier for doctors than the alternatives.
In Balanced Choice, doctors consider the price list when making prescription decisions. This practice is common in almost all parts of business and retail purchasing. While it takes a little time, it is less difficult and less time consuming than the alternatives. Many of these alternatives involve appeal procedures, multiple formularies, consultation with pharmacists regarding switching medications, rigid restrictions on what medications can be prescribed, or multiple procedures for various pharmacy benefit managers.
Balanced Choice is simply a way to restore free market dynamics that have been absent from medication purchasing for years. It is reasonable to try a traditional free market approach rather than to have the nation embark on an experiment in which pharmacy benefit managers influence consumer choices and attempt to control medication costs.
The Unsolved Problems in the Balanced Choice System
Balanced Choice would not change some causes of medication price increases. The average senior filled 28.5 prescriptions in the year 2000, and it is projected that this will rise to 38.5 prescriptions in the year 2010. New and improved medications are constantly being developed. Medications that have no competitors and aA traditional free market is better than a pharmacy benefit management experiment.re superior to competitors will be expensive, at least until comparable competitors emerge. Increasingly, the sophisticated technology needed to develop medications results in greater product development costs. These costs may continue to rise under any system, but the price competition in the Balanced Choice System will keep overall prices lower than other systems without stifling research.
A Medicare Pharmacy Benefit Proposal as a transition to Balanced Choice
The Balanced Choice Pharmacy Benefit is one aspect of Balanced Choice that could be implemented separately from the entire Balanced Choice system if it were implemented as a Medicare Pharmacy Benefit proposal. Because seniors account for 42% of the total drug expenditures18, there would be considerable market pressure to lower prices if their medications were funded according to the Balanced Choice Pharmacy Benefit Proposal. In addition, those patients who had no insurance for medications would be interested in the Expected Retail Price List, and their medication decisions would provide additional market pressure for lower prices.
A Balanced Choice Pharmacy Benefit for Medicare would not only help contain the rising cost of medications, but it would also be administratively less expensive than the current proposals to have pharmacy benefits provided by competing insurance companies. In the Balanced Choice proposal, the administrative costs are minimal, and the majority of the funds go to provide medication assistance. If competing insurance companies handle pharmacy benefits, these companies must both divert funding to a profit and create additional administrative structure. The marketing and sales costs of these competing companies would be substantial, and on top of this, each would need to build a reimbursement structure that duplicated what was done in other companies. Such a system would be less efficient in providing value to the Medicare beneficiary than the Balanced Choice proposal, and it would not have the additional benefit of providing comparison shopping price information to those without pharmacy benefit insurance.
Conclusion of Balanced Choice Pharmacy Benefit System
Prescription drugs are the fastest growing component of health care spending19. Competition has not been working to contain costs. Amazingly, the system has functioned for years without patients and doctors having comparative price information in the doctor’s office. The Balanced Choice Pharmacy Benefit System offers a way to restore free market forces to the pharmaceutical industry while decreasing the amount of regulation. It can protect beneficiaries from unusual medical expenses by paying increasing amounts as medication costs rise. It also provides a safety net by offering additional assistance for beneficiaries with financial hardship.
When compared to the alternatives, the Balanced Choice System is even more desirable. It can be implemented separately from the entire Balanced Choice system as a Balanced Choice Medicare Pharmacy Benefit proposal. It promises to be less bureaucratic and more flexible than the alternatives. It is not only good economics; it is good for personal freedom and the integrity of the doctor-patient relationship. With such potential benefits, it would behoove the United States to design, evaluate, and implement a Balanced Choice System including a pharmacy benefit program.
1This section was originally prepared as part of the entry in the O’Connor Report, “Build an American Health Care System” contest.
2Kanavos, P. & Reinhardt, U., 2003, Reference pricing for drugs: Is it compatible with U. S. health care? Health Affairs, 22(3):16-30.
3E. R. Berndt, The U. S. pharmaceutical industry: Why major growth in the times of cost-containment. Health Affairs (March/April 2001): 100-114.
4E. Lane, Newsday, Study finds doctors unfamiliar with drug costs. 2/9/03. Boulder Daily Camera, 1B & 8B.
5N. Beaulieu, “Externalities in overlapping supply networks” (Unpublished paper, Harvard University, March 2000), cited in E. R. Berndt, The U. S. pharmaceutical industry: Why major growth in the times of cost-containment. Health Affairs (March/April 2001): 100-114.
6K. Levit et al., Health Spending in 1998: Signals of Change,” Health Affairs, (January/February 2000): pp. 124-147.
7Families USA, Still rising: Drug price increases for seniors 1999-2000, Publication 00-103, (Washington DC: Families USA, 2000).
8K. Levit et al., Health Spending in 1998: Signals of Change,” Health Affairs, (January/February 2000): pp. 124-147.
9R. G. Frank, Prescription drug prices: Why do some pay more than others do? Health Affairs, (March/April 2001): 115-128.
10U. S. Department of Health and Human Services, Report to the President: Prescription Drug Coverage, Spending, and Prices (Washington DHHS, April 2000).
11Boston Consulting Group, The Changing Environments for U. S. Pharmaceuticals, (Boston, BCG, April 1993) cited in R. G. Frank, Prescription drug prices: Why do some pay more than others do? Health Affairs, (March/April 2001): 115-128.
12Physician’s Desk Reference, (Montvale, NJ: Medical Economics Company, 2000).
13This figure represents the estimated gap payment after Balanced Choice pays 60% of the average expected retail price ($32.97 in this example). The $1,000 is calculated based on the actual retail price, which includes the Balanced Choice System payment and the gap.
14This figure represents the estimated gap payment after Balanced Choice pays 75% of the average expected retail price ($41.21 in this example). The $3,000 is calculated based on the actual retail price, which includes Balanced Choice payment and the gap.
15This figure represents the estimated gap payment after Balanced Choice pays 90% of the average expected retail price ($49.46 in this example). The $3,000 is calculated based on the actual retail price, which includes Balanced Choice payment and the gap.
16When Balanced Choice payment exceeds the cost of the medication, Balanced Choice only pays the cost.
17Physician’s Desk Reference, (Montvale, NJ: Medical Economics Company 2000).
18McCloskey, A. Cost Overdose: Growth in Drug Spending for the Elderly, 1992-2010, (Washington: Families USA, July 2000).
19K. Levit et al., Health Spending in 1998: Signals of Change,” Health Affairs, (January/February 2000): 124-147.