Robbing Peter to keep Paul's premiums from going up


Dear Senator Hassan:

During the second round of questions, toward the end of Wednesday’s hearing, you stated: 

“You’ve also blamed insurance plan design for high drug prices but it’s really the list price set by manufacturers that is driving the increase of what consumers are paying because requiring lower cost sharing for drugs would just lead to increased premiums, again all at the expense of consumers.” 

There is growing awareness that insurance plan “cost-sharing” is a misnomer—that some patients with chronic medical conditions are in fact paying more than their insurers do for drugs. Your statement overlooks this reality, which has long been known to industry insiders. It thus de facto endorses the practice of discriminatory pricing against people with diabetes and other chronic conditions. Discriminatory pricing practices are effectively forcing people who use heavily rebated brand name drugs to make additional, hidden premium payments (similar to hotel drip pricing, except here the add-on payments remain hidden from consumers). For people with type 1 diabetes, using “heavily rebated brand name” insulin, and thus paying whatever cost sharing insurers demand, is the only way they can stay alive. To paraphrase Senator Kaine’s comment during the hearing: insured individuals are also being held hostage by their own insurers. 

High list prices, set by manufacturers, harm both insured and uninsured individuals. But, as accurately stated by Mr. Azar, inflated cost sharing amounts, set by insurers, also cause harm. On behalf of your constituents with type 1 and other insulin dependent diabetes, we ask you to reconsider your position on this matter and to publicly oppose insurance discrimination, in any form, against people with diabetes.

When Mr. Azar has publicly stated, as he did at the Manhattan Institute on November 3, 2016, that “a significant number of people who already paid premiums for their health insurance then end up paying more than their insurer does for a medicine,” you should be asking him how this is possible. Repeating, instead, the misleading and discriminatory position of the insurance lobby (lower drug cost-sharing automatically causes higher premiums) works against your constituents with diabetes and other chronic medical conditions.  

We draw your attention to this specific issue because CMS’s proposed rule that rebates must be passed through to seniors under Medicare Part D—and, to a lesser extent, T1DF’s pricing lawsuits—are likely to bring reimbursement contracting under higher public scrutiny. Drug channel actors and others who wish to preserve anti-competitive opaque contracts—so that they can continue to profit from the difference between a high public list price and a secret net price—will use statements like yours to channel public support. Already, The Washington Post’s Carolyn Johnson has advanced the argument that cost sharing based on net cost (which T1DF believes is already legally required) would cause an increase in premiums. In her November 24 piece, “The Trump administration is taking on drug prices—but not drug companies,” Ms. Johnson dismissed the idea of passing rebates through to Medicare Part D beneficiaries as “radical” and raised the specter of higher premiums as an argument against cost-sharing based on rebated (net) cost to plan. She, like you, failed to acknowledge that under the current system some insured are paying more than their insurers do for drugs. This argument, in a nutshell: we must continue robbing Peter, or Paul’s premiums will go up.

Mr. Azar has flaws as a potential head of HHS, a number of which we outlined in the letter we sent you on November 19, 2017. He is, however, an experienced industry insider who knows exactly how the U.S. dual pricing reimbursement system works for the benefit of corporate actors. The pricing system he described on November 3, 2016, is in fact quite accurate. Manufacturers, PBMs and also insurers profit from high list prices. But they do not all profit in the same way: 

  • PBMs are now entering into pass-through contracts with insurers (who may separately or additionally receive rebates directly from manufacturers). These PBM pass-through contracts index the PBM’s fee on the size of the rebates they negotiate for, and pass through to, the insurer. The larger the rebate, the larger the PBM’s fee. 
  • Manufacturers derive benefits in the domestic as well as international markets. First, a manufacturer competes to give PBMs the largest possible rebate and thus to secure better placement on the insurer's or PBM's formulary (thereby increasing its sales). Second, because PBMs and insurers derive profits from the rebates, the reimbursement contracting system decreases pressure to compete on net price, thus allowing manufacturers to negotiate supra-competitive net prices, roughly twice what they can obtain in European single-payer markets. Manufacturers thus derive profit from an artificially high net price. Third, manufacturers derive unconscionable profits from the drugs sold directly to uninsured individuals, either via pharmacies or so-called Patient Assistance Programs (PAP). Finally, manufacturers use these reimbursement contracts (high public list price, low secret net price) to prevent price arbitrage and prevent competition on net price within a given marketplace as well as between marketplaces and, as increasingly in Europe, between single-payer markets. 
  • For insurers, leading the public to believe that they actually pay skyrocketing list prices allows them to blame people with chronic medical conditions, especially diabetes, for above-inflation premium increases. Insurers may use inflated list prices, instead of the much lower net prices they actually pay, to report plan costs, thus allowing them to take a larger profit than otherwise allowable. Under the dual pricing system, insurers classify rebates paid by manufacturers for drugs dispensed under ACA plans as general revenues while keeping the unrebated list prices of the drug as a cost to plan. Accounting manipulation may thus enable insurers to overstate their members’ cost-sharing liabilities and to inflate the subsidies they receive. Finally, payers inflate cost sharing payments by using list prices as cost to plan instead of the much lower net cost. They also deceive consumers into believing that insurers shoulder a much larger share of the cost that they actually do. A $50 copay for a drug when the insurer reports its cost to plan as list price of $300 sounds like a deal; a $50 copay for a drug if the insurer accurately reported actual cost to plan as net price $60 would obviously be less impressive. (And, as Sen. Collins pointed out during the hearing, in some cases insurers are exacting “co-pays” that are higher than the drug’s cash price without insurance.)

The fact that insurers/payers also take advantage of high list price does not excuse the enabling role of the manufacturers and PBMs. But insurers could, and in our opinion already should, base cost sharing on this much lower net cost to plan and disclose to plan members accurate net cost information. Instead, insurers base patient cost-sharing on a full list price insurers do not pay, and keep the net price they actually pay secret.

Your comment on Wednesday encourages your constituents and the American people to tolerate the existing exploitation of patients with chronic conditions by repeating the unsubstantiated insurer position that delivering net drug pricing to consumers would increase premiums. On the contrary, it is common knowledge, especially in regard to diabetes, that low drug prices foster therapeutic adherence to drug treatment, resulting in improved medical outcomes and decreased overall costs. Meanwhile, the system you defended on Wednesday results in inflated cost-sharing amounts that decrease therapeutic adherence and thus increase medical complications, causing higher costs to insurance plans and ultimately to taxpayers. 

Where is your indictment of insurers’ exploitation of Americans with chronic medical conditions such as diabetes? Missing from your comments on Wednesday was an acknowledgment of the harmful effect of the current overcharging on the financial but also medical welfare of your constituents with chronic medical conditions. Insurers have been misleadingly messaging to the public that premium increases are caused by the skyrocketing list prices of diabetes drugs—while in fact these commercial insurers pay only a fraction of the list price, sometimes as low as 25% in the case of analog insulin. That this overcharging may, as T1DF’s lawsuits allege, be fraudulent, makes the oversight even more troubling. There is no evidence that rebates received by manufacturers, and accounted as general revenues, are actually used by insurers to lower premiums instead of increasing profits. In fact, enforcing cost transparency, and thus accountability—across the entire channel, from manufacturers to insurers—would likely reduce costs across all plans. Your unqualified statement that reduced cost-sharing would drive up premiums condones payers’ current discriminatory practices. These payers turn your constituents with diabetes into scapegoats.

T1DF hopes that you will reconsider your position on this subject. It is your responsibility to tell payers that discrimination, shaming and scapegoating must stop. You must protect your constituents who are now being directly exploited—a group that includes lower-income people on ACA plans with high deductibles; small business owners; and workers on employer-provided plans, which are also increasingly designed to force overpayments from consumers who use heavily rebated brand name prescription drugs. In the future, we would hope to see you publicly recognize that “cost-sharing” is, in many cases, a euphemism for direct overcharging. At a minimum, we hope you will refrain from scare tactics designed to discourage public support for reduced cost-sharing in insurance plan design.

Thank you for taking the time to consider these concerns.


About T1DF

The Type 1 Diabetes Defense Foundation is a nonpartisan Oregon-based 501(c)(3) nonprofit dedicated to advancing equal rights and opportunities for Americans with type 1 and other forms of insulin dependent diabetes. T1DF accepts no funding from the pharmaceutical, medical device, pharmacy benefit management, or insurance industries or from any organization they fund. We support regulatory frameworks in which manufacturers compete directly on innovation and price to consumers and where drug channel actors can engage in open and efficient price arbitraging, without price discrimination and asymmetries of information.