Free market theory assumes all actors work with an enlightened self interest, meaning every one will do what benefits them most. When it comes to health care, I have long maintained we as patients lack the needed knowledge to act in our best interests. As I said in my last post, we have trouble picking our best source of medical care. Unfortunately, that problem only covers one part of our system’s failing. Let’s imagine four decision points where all of our actors behave as theory would have us believe, in their best interests.

Imagine for a second three stakeholders with a newly approved drug. The first is the drug company which has spent millions of dollars developing a new treatment which seems to meet an unfilled need of our second actor, the patient. The pharmaceutical company knows the need of the patient and has invested heavily over a period measured in years to bring this new drug to the patient, and they want to maximize return on their investment. Since many of these investment fail to bear fruit, the costs to the pharmaceutical is huge, and they have to pass the costs along in order to stay in business and gain investors. The cost to the patient starts extremely high. Let’s call this Decision A when a patient goes to their insurance company as says “I need insurance to cover this.”

The patient has purchased insurance from our third actor the insurance company. The insurance company has thousands of patients who could benefit from this drug. As a result of this purchasing power, they have some bargaining power. However, the pharmaceutical company knows patients’ desire for the drug is strong enough to push patients to pick the insurance company which will cover their treatments. The result is our third actor does not have the needed bargaining power to force the pharmaceutical company to lower costs overly much.

So what does the insurance company do faced with a choice of losing customers or losing money due to high costs of the new medications? They do one of the only things they can do. They attempt to influence the patients to pick cheaper medications by making patients pay more. In effect, they lessen the amount covered for these “specialty drugs.” The logic is if patients have more of a financial stake, their decisions will differ. So the insurance company raises the patient copays. Let us call this Decision B.
Our first stakeholder sees this happening too. What can they do to make sure patients can afford their drug? The smart companies identify the patients most likely to be sensitive to price and tailors programs to keep them buying the product. I suspect this is the beginning of the “copay assistance plans” many pharmaceutical companies have for their expensive drugs. Think of this as a sale for which patients must apply, and the pharmaceutical company generates good will for giving away their product at a “discount.” Let us call this Decision C to offer copay assistance.

If our story ended here, maybe it would be sustainable, but it does not. The nature of insurance in the U.S. is to have a maximum amount patients are forced to pay. After all, that is why we have health insurance, to keep health events or conditions from wiping us out. What happens when the pharmaceutical costs are so high the maximum out of pocket is reached? Suddenly, the insurance companies’ tool to contain costs disappears completely. Now the pharmaceutical company can raise rates again because the copay assistance no longer lowers their profit as all costs are being born by the insurance company again. Once the pharmaceutical company realizes there is a maximum they will have to help pay, they can make sure the cost of paying the insurance copays is included the price they charge. In effect, the insurance company is paying its own copays. Let us call this Decision D when pharmaceutical companies add the copays back into the cost of the drug.

At each of these four decisions A-D, our actors made decisions in their best interests. At decision point A, the pharmaceuticals brought a drug to market and began by pricing their drug at what the market would bare. The patients who wanted the drug could not afford it, but they had insurance which covered it. As more patients with insurance wanted the drug, the insurance company had to change things or loose too much money. The copay rise is decision B. The pharmaceutical companies realized the insurance companies would drive customers away from their product unless something was done to keep the costs from adversely impacting patients . This brings us to decision C, the copay assistance. When the pharmaceutical company realized there was no longer a constraint because patients were no longer paying the copay, the pharmaceutical companies realize they can make back their copay assistance from decision C. At this point, there is no longer a downward pressure on price which leads us back to decision point B except prices are higher this go round, and copays are no longer an effective tool to contain costs.

Wall Street Journal: Health Insurers Discriminate Against Patients Who Need Specialty Drugs

While many may read the article in the Wall Street Journal as a terrible injustice insurance companies are inflicting upon us in the land of sickville, I look at it as a predictable decision point. The article describes decision point B. I have benefited from decision point C, and I know many other patients have as well. At some point in the near future, I predict we will complete the cycle. I know the drug I take for MS still costs 70-90K a year, and the price has not dropped significantly in the 8 years I have taken it. I attribute some of this to decision point D, but I have to admit I have not looked too closely at the marginal costs of the drug maker to make another dose for me or the time frame they need to recoup their investment costs. It has never been in my interest as a patient to care overly much when I pay so little. As more patients, pharmaceutical companies, and insurance companies continue to act in their own interests, how long can our free market continue to function without collapse?