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Wait…What’s Wrong with this Math?

I would have expected Dean Baker to pick up on this pretty quickly, but the debate is tonight so I’ll take out the club (and the calculator).

Yesterday Kevin Drum pointed to David Schultz and an apparent pharmaceutical scam, coupons:

Insurers set high co-pays for brand-name drugs to steer their members to less-expensive generics. In response, companies such as Merck, AstraZeneca, Pfizer and many others issue coupons or discount cards that cover that co-pay.

A recent article in the Journal of the American Medical Association outlined the dramatic effect coupons can have on prices paid by consumers. Using cholesterol-lowering drugs as an example, researchers found that the popular statin Lipitor comes with an average co-pay of $30 a month, compared with a $10-a-month co-pay for simvastatin, a generic drug also used to treat high cholesterol. But with a coupon from Pfizer, the drug’s manufacturer, the co-pay for Lipitor goes down to $4 a month, making it less expensive for the consumer than simvastatin.

It’s a great deal for the patient, but not the insurer. According to the JAMA article, the insurer pays $18 a month for simvastatin and $137 a month for Lipitor.

The coupons are “designed to get patients to bang down their doctor’s door and say, ‘Give me the most expensive drug,’ ” said Mark Merritt, president of the Pharmaceutical Care Management Association. Merritt’s trade group represents companies that manage prescription benefit plans for private insurance companies and firms that participate in Part D, Medicare’s drug program.

Merritt said that, since insurers ultimately end up footing the bill for the more expensive brand-name drug, they may respond by increasing premiums on everyone.

Kevin Drum only quotes from the second and third paragraphs, which is where the math problem lies.  He basically rehashes the third paragraph in his own words, adding the poor and elderly as pharmaceutical company targets of opportunity.  But he misses the importance of the first and last paragraphs–insurance companies set the co-pays, and respond with the increased cost by jacking up premiums.  Drum and Schultz are wrong–Pfizer’s reactions to Lipitor co-pays aren’t a “moral hazard,” they are responding perfectly rationally to insurance companies that are inept at cost-shifting.  At least I hope it is simple ineptitude.

Either the insurance companies are the ones running a scam, or they are asinine.  I already suspect that this is related to a patent expiring for Lipitor, so I’ll start with a web search for “lipitor patent expiration.”  Yep–according to ABC News Lipitor went off patent last year.  ABC in the same piece refers to drug savings from generics, which start at a 30% reduction in price but then jump to an 80% reduction with the ramp-up of the generic’s production.  So let’s also make an assumption Pfizer made back its R&D during the life of the 20-year drug patent (yes, clinical trials may have cut that time on the market down by 50-55%, but Pfizer knew that when it filed for the patent).  So it’s fairly safe to say Lipitor and simvastatin have roughly similar cost to produce.  Lipitor on average sells for $167 while simvastatin sells for $28.  Simvastatin costs 83% less than Lipitor, which has an effective markup of 496%.  This tracks with ABC’s reports.

Pfizer has the wherewithal to discount the patient $26 on average, which is clearly less than the cost of producing the drug.  Which Pfizer sells at nearly a 500% markup.  With the discount, Lipitor is merely marked up by 403%.  Pretty good racket for Pfizer–except that the insurance companies are enabling all of this.  For the same drug, insurance on average pays 64% of the generic’s cost but 82% for the brand name.

This case seems to point to insurance companies having a serious case of tunnel vision.  Instead of correcting a pricing problem they initiated, the insurance industry complains loudly in JAMA and Kaiser Health News.  Nothing is preventing the insurance companies from setting the co-pay for simvastatin at a lower level.  Even paying 100% of the $28 cost would be far more economical for the insurance companies than remitting $137 to Pfizer for Lipitor prescriptions.  Raising the co-pay on brand-name drugs that move off patent would also send a powerful signal that patients should select the generic.  But what are the insurance companies actual intent?

I have to consider an alternate scenario.  What if insurance companies are permitting themselves to be undercut by pharmaceuticals as a ploy to raise premiums?  What would prevent them from changing the co-pays to redirect patients to generics after raising premiums?  Maybe this story needs some more digging…

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3 thoughts on “Wait…What’s Wrong with this Math?

  1. As you say, “the story needs more digging,” And I think you’re the one to do it Great blog, with a fascinating range of ideas. Keep writing, and I’ll keep reading!

  2. Pingback: It’s Not All Roses… (Or is it Something Else?) « In The Corner, Mumbling and Drooling

  3. Pingback: Aggregate Demand Dominance: HCE | In The Corner, Mumbling and Drooling

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