Health insurers routinely overcharge enrollees for prescription drugs

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If you’ve ever paid a deductible or coinsurance for a brand name drug, chances are the amount you paid was inflated. 

That’s because health plans typically base the portion of costs they charge enrollees on the list prices of drugs, not the discounted prices insurers actually pay. 

Enrollee cost-sharing for drugs isn’t based on costs

The discounted, or after-rebate, prices are confidential, so it’s hard to know exactly how badly enrollees are being cheated. However, one major drug maker, Eli Lilly, recently revealed that it provided rebates last year to large customers like insurers and government programs that averaged more than 50%.

But most insurers calculate enrollee cost sharing payments for brand name drugs like Eli Lilly’s as if the list price were the insurer’s actual cost. So if the list price of a drug is $300 and you haven’t yet met your deductible, your insurer would charge you $300 even if its after-rebate cost is just $150. And if you’ve met your deductible and your coinsurance is 30%, your insurer would charge you 30% of the list price ($90) rather than 30% of its cost ($45).

Among the hardest hit are people with diabetes. The list price of insulin reportedly averages more than three times the average discounted price. Humalog, for example, had a list price last year of $594 and an average discounted price of $135. By tying their cost-sharing payments to the much higher list price health insurers are not only hurting diabetes patients financially; they’re also causing some to skimp on insulin with oftentimes disastrous, and even deadly, consequences for their health.

Health insurers can’t justify the practice

Insurers, including the one I served for 12 years as public policy director, defend the practice by claiming they use the pharmaceutical company rebates they collect to reduce premiums. But there’s no more reason to trust them on that than there is to believe they use any cost savings to lower premiums. (Their recent tax cuts, for example, appear to have gone to profits.) 

And even if they were using rebates to lower premiums the practice would still be wrong. It would be like telling enrollees that their coinsurance for doctor visits is 30% and then charging them 40% in order to lower premiums and sell more insurance. No matter where the rebate dollars are going, it’s utterly dishonest not to reflect them in the costs charged to enrollees, and it victimizes exactly the people that health insurance is supposed to help.

Indeed, the practice is so clearly indefensible that two of the country’s largest insurers recently abandoned it. UnitedHealthcare and Aetna both began this year to base cost-sharing payments for prescription drugs on the after-rebate prices they pay. 

We can make them stop it 

The drug cost crisis runs deeper than this one scam, but the quickest and easiest way to make drugs more affordable for patients would be to get the rest of the insurance industry to stop overcharging their enrollees. If United and Aetna can be motivated to do the right thing, so too can the others. 

Based on my experience in the industry, all I think it would take is public notice. Insurers are heavily regulated, and that makes them sensitive to their public image. This practice is a bad look and they know it. It persists only because the public doesn’t know about it. If that changes, it will end.