Why do people buy health insurance? The most often cited reason is to transfer the risk of illness to a third party by paying a premium. University of Minnesota economist John Nyman has studied this for many years. He argues that people buy health insurance as an income transfer in the event they become sick. People who are ill often lose their income and health insurance pays a benefit that patients would use their income on. A commenter on the NCPA Health Blog a few years ago said he believed that people buy health insurance for the negotiated discounts. That makes a lot of sense.
My Obamacare policy costs around $8,000 a year and comes with nearly a $9,000 deductible. That means I have to spend about $17,000 a year before my health coverage provides any benefits. One thing that worries me about “going bare,” however, is that although I can afford to pay cash for a $17,000 health problem, my cost for that $17,000 health problem would be closer to $50,000. Much of it would likely be for services that I could not shop for. So to a significant degree a major benefit insurance companies provide enrollees is the negotiated discounts that are roughly one-third of hospital list prices. A more sinister view is that sky-high list prices and much lower negotiated prices are a conspiracy by health care providers and insurers to boost (insured) patients.
About half of people with employee health coverage are in self-insured plans. Blue Cross, Aetna, Humana and Cigna may have their name on your ID card, but they merely administer the plan rather than underwrite it. In self-insured plans employers are on the hook for employee medical costs. Here is the problem: Insurers’ negotiated prices are considered proprietary. Employers don’t really know how much insurers are paying for the care their workers receive. When an employer is asked to reimburse a workers’ medical care it may be more than the insurance company paid the hospital for that care.
An exclusive report in the Wall Street Journal claims employers and enrollees are paying far too much for generic drugs sold to them by their health plan.
The cancer drug Gleevec went generic in 2016 and can be bought today for as little as $55 a month. But many patients’ insurance plans are paying more than 100 times that.
Across a selection of these so-called specialty generic drugs, Cigna and CVS’s prices were at least 24 times higher on average than roughly what the medicines’ manufacturers charge, the Journal found.
How did this happen? It’s called vertical integration. In some industries dominant firms may buy their own suppliers to get supplies cheaper. This would give them a competitive advantage. Health care is not a competitive market, however. The three largest Pharmacy Benefit Managers (PBMs) control 85% of the market for drugs. They are also owned by large insurance companies. Thus, if the insurance company is being reimbursed for drugs by an employer, the theory goes, why not mark the drugs up to boost profits?
“Someone in the middle of that transaction is making a lot of money, and they’re doing it at the detriment of the consumers,” said Stacie Dusetzina, a health policy professor at Vanderbilt University School of Medicine who studies drug costs.
The reason, health researchers and industry officials say, is the very companies that are supposed to keep a lid on drug spending can maximize their profits by marking up the prices. Other companies in the drug-supply chain won’t stop them, because consolidation has swept many of the businesses under the same parent.
A recent entrant into the field of cheap generic drugs is Mark Cuban’s CostPlus Drug Company. The WSJ compared average prices for Cuban’s drugs with prices reported by the three big insurers to Medicare. Cuban charges a 15% markup, plus a $10 dispensing and shipping fee.
Across a selection of 20 generic drugs carried by the Cuban pharmacy, Cigna’s prices were 27.4 times higher than Cuban’s on average for the 19 drugs for which data was available.
CVS’s prices were 24.2 times higher on average for 17 drugs for which data was available. UnitedHealth’s prices were 3.5 times higher than Cuban’s on average for the 19 drugs with available data.
Cigna can charge roughly $6,610 a month for Gleevec, the Journal’s analysis found. CVS Health can charge more than $7,000 a month. United Health can charge $218.
Insurers are supposed to negotiate great deals on drugs and medical services for their clients (employer plans) and their enrollees. In years past many health plans would provide generic drugs for a cheap $5 copay to steer patients to cheaper, generic alternatives to name brand drugs. Recently, however, patients are often better off saying they don’t have insurance and paying cash for generics rather than pulling out their health plan card and paying their copay that is often higher than the cash price.
The entire article is worth reading WSJ: Generic Drugs Should Be Cheap, but Insurers Are Charging Thousands of Dollars for Them (gated).
Talk about fingernails on a blackboard. When you added the deductible and the premium together I just rolled my eyes. Only goofy PHD people do that Devon. YOU and Brian Blase.
You are wrong Devon, figures. You wrote people buy life insurance for the pre-negociated rates. That’s not true. We trained agents to ask, “If you had a crystal ball and knew you would never have a medical problem over $5,000, would you even BOTHER buying health insurance? Prospects say 99% of the TIME – Hell NO! Then the agent says, “So, you have insurance for tha catastrophic claim, is that correct? 99% of the TIME they will say yes.
They used to sell just the Network Discounts for about 20% of the cost of insurance and these guys didn’t need a license so there were tall stories! The National Association of Insurance Commissioners called them SCAMMERS and shut them down! BOOM!
Orlando newspapers reported Florida hospitals charged uninsured people 10 TIMES more! Network discounts are important.
Devon, I am not sure you are correct about the way that insurers can take advantage of self-funded plans.
Not that insurers are angels or even nice guys…but in the self-funded plans that I have seen, (which is not that many), the employer had full access to claims data. The insurer could not mark up and collect extra payments over the top in the way that you describe.
I wonder if it has to do with the size of the TPA vs. the size of the employer. I’ve had quite a few small, self-insured employers’ HR people tell me they had a hard time verifying what they were paying for.