The Delicate Balance Between Drug Costs and Health Insurance Premiums

On December 12, 2014, President and Chief Executive Officer of America’s Health Insurance Plans (“AHIP”), Karen Ignani, called for greater transparency of drug development costs.  Ignanai’s push for transparency comes amidst an increase in the cost of specialty drugs which have added a new layer of pressure on health insurance premiums.  “Soaring costs for specialty drugs are putting price pressure on health insurance premiums and aren’t sustainable”, said Iganani at the FDA/CMS Summit for Payers.

[i]  Although these specialty drugs are only for a small number of people with rare illnesses, the increase in their costs have been making it harder for health insurance companies to sustain prices for premiums.  A perfect example is Solvaldi and Harvoni, two speciality drugs prescribed for Hepatitis C, developed by is Gilead Sciences. A single pill of Sovaldi costs $1,000 and a 12 week treatment is about $84,000.[ii]  Harvoni’s cost is even greater with a 12 week treatment equaling up to $95,000.[iii]

The high cost of specialty drugs has created an intense pressure between health insurance and pharmaceutical industries. Additionally, this issue shines light on the delicate balance between drug costs and health insurance premiums.  The pharmaceutical industry is far from oblivious to the rising cost of specialty drugs, but claim that high prices are due to development costs.  As the health care market continues to advance, innovation and development are needed to best meet the demands of patients.  Pharmaceuticals will claim that higher drug prices are warranted by ultimately producing drugs that offer better treatment for patients.  A drug such as Sovaldi, for example, has surpassed other Hepatitis C treatments by having a shorter durations of therapy, less side effects, and in some instances perhaps even a cure.[iv]  Thus, the high costs are warranted by development and innovation that result in better drugs.

Although health insurance industry officials understand the need for innovation and development, they believe it must be balanced by greater transparency.  “In terms of the high cost of specialty drugs, we have a challenge because no longer are people willing to basically sustain the high prices with the promise of innovation without transparency,” said Iganani.[v]  Ignanai’s concerns partially stem from the long patent-protections pharmaceuticals have for the production of drugs.  With these long patent-protections, the majority of the drug development process is confined to drug companies who make their own individual medical assessments, especially in regards to the allocation of money within the drug development process. [vi]  This may have not been an issue in the past, but as drug prices increase, it is becoming more burdensome for AHIP’s insurance premiums to sustain prices and is the reason that a call for greater transparency is needed.  “How do we know what is being spent on? How do we know that we are subsidizing R&D versus marketing, advertising and other kinds of costs?,” asked Iganani.[vii]  A greater transparency in drug development costs will assure that drug companies are spending efficiently.

Drug companies, however, oppose greater transparency in drug development costs for two main reasons.  First, drug companies argue that their individual medical assessments should not need to be verified or checked by officials within the health insurance industry.  Second, a greater transparency would reduce the incentives that drug companies have to produce drugs that provide more efficient treatment for patients.

This difference of opinion between the health insurance and the pharmaceutical industries is one that illustrates the delicate balance between drug cost and health insurance premiums.  Our health care industry is absolutely in need of development and innovation in drugs for a rapid growing health care market that demands better care for more patients.  This development, however, needs to be met with an increased transparency to assure drug companies are making a proper cost-benefit analysis in order to sustain drug prices.  Transparency will not only benefit consumers who are the last on the supply chain of pharmaceutical drugs, but also wholesalers, retail pharmacies, and nonretail providers.  Since these entities use bargaining power to negotiate the prices they pay for drugs, increasing drug prices only make it harder for them to reach a reasonable price.

[viii]Currently, specialty drugs account for about 25% of total drug spending but are continuing to consume more of the United States drug bill.[ix]  As specialty drugs are increasingly being approved by the Food and Drug Administration, it is incumbent upon health insurance and pharmaceutical industries to work together and find methods to stabilize specialty drug prices.  Failure to do so will not only exacerbate the health care spending problem in the U.S., but will reduce the likelihood of patients with rare illnesses being able to afford their medications.  At this rate, what good is innovation and making a difference in the lives of others through specialty drugs if the very patients they are for cannot afford them?

Faizan A. Khan is a first year law student at DePaul University College of Law. Mr. Khan graduated summa cum laude from DePaul University with a Bachelor of Arts in Political Science and minor in Economics. He is a member of DePaul's Health Law Institute and will complete his J.D. in 2017. 


References:

[i] Sara Hansard, Insurance Industry Leader Urges Increased Transparency About Drug Development Costs, Bloomberg BNA (Dec. 12, 2014), http://news.bna.com.ezproxy.depaul.edu/hcln/HCLNWB/split_display.adp?fedfid=60529742&vname=hcpnotallissues&jd=a0g0d5p6j7&split=0

[ii] Id.

[iii] Robert Galvin and Roger Longman, We Need More Transparency on the Cost of Specialty Drugs, Harvard Business Review (Nov. 4, 2014), https://hbr.org/2014/11/we-need-more-transparency-on-the-cost-of-specialty-drugs

[iv] Id.

[v] Hansard, supra.

[vi] Galvin and Longman, supra.

[vii] Hansard, supra.

[viii] Julie Somers & Anna Cook, Cong. Budget Office,  Prescription Drug Pricing in the Private Sector (2007).

[ix]  Felice J. Freyer, Specialty drugs transform lives-but at a cost, Bos. Globe (July 21, 2014), http://www.bostonglobe.com/lifestyle/health-wellness/2014/07/20/specialty-drugs-save-transform-lives-but-cost/MY2hxd8gD4mnfjwkmZ1ZcP/story.html