Monday, June 23, 2014

Andrew Pollock's NY Times Article on Increasing Pressure on Drug Prices: Do Health Insurers Now Have Skin in the Game?

In this post I will speculate very briefly about an important new development reported by Andrew Pollock of The New York Times. The subject of Pollock's article is how health insurers at long last appear to be putting real pressure on drug prices. Though readers of this blog will not be surprised by the discussion of how drug companies price their drugs and avoid competing on price, the heart of Pollock's story is the recent efforts of pharmaceutical benefit managers (PBMs) to use their formularies to reduce insurers' prescription drug costs. There has always been some use of formularies to negotiate prices: but, according to Pollock, such efforts have now greatly increased. The article highlights how PBMs are restricting their formularies much more than in the past and drug companies are confronted with the choice of reducing their prices or finding themselves excluded from coverage for most of an insurer's patients.

The big question is. "What is responsible for the new attitude of PBMs?" Could it possibly be the case that some of the insurance reforms that are part of the Affordable Care Act/Obamacare (ACA) are actually working to either slow the rate of increase in the pharmaceutical component of health care costs or even to bring those costs down? This may indeed be the case. There are several components of the ACA that could be contributing to the new, tougher stance by PBMs. First, plans are increasingly standardized because the ACA has imposed a number of requirements for health insurance plans to meet and because the new health insurance exchanges created much more transparency in the health insurance marketplace. Second, the new ACA rules impose strict limits on the proportion of insurance company revenues that can be spent on administration rather than on medical care, a standard known as a company's Medical Loss Ratio. Taken together, this means that insurers are competing much more openly on price, and the share of premiums that can be taken by PBMs for their services is also under pressure. It seems plausible that the new, tougher attitude towards drug prices is the result of the significantly increased pressures on both the insurers and their PBMs under significant new constraints. In a future post, I will explore what this pressure on drug prices may mean for the direction of drug development.

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