The Co-payment Conundrum

From the diaries by Kevin.

Part of the health care plan problem in the U.S. is that it does not use the free enterprise system as well as it could to contain costs. Some reasons for these problems are federal and state government mandates and regulations. Outside of government regulations however, there is one health care policy that underutilized the power of capitalism to contain costs. This is the co-payment system for purchasing drugs.

If you have a health care plan like I do (and as far as I understand the vast majority of plans work this way) then if you need a prescription drug you can go to any pharmacy and only have to pay one amount no matter what drug it is. Your health care plan covers the rest. For example, let’s say you have high cholesterol so your doctor prescribes Lipitor. Without drug coverage, you would pay about $100 for 30 tablets of 10mg each. With coverage you pay $10 and your health care plan picks up the rest. If you have mental health problems, your doctor might proscribe Trazodone. Without coverage 30 tablets of 50mg would range in cost from about $11 to almost $25. With coverage you would still only pay $10 no matter where you buy it.

As a consumer this sounds like a great bargain. No matter what health problem I might have, my doctor can proscribe something, and I only have to pay a set amount. There is no hunting around on price so I can just pick it up at the most convenient drug store closest to my home or on the way to work.

From a health care coverage plan, however, it sounds like a terrible way to do business. There is no incentive for the purchaser to control costs. There can be tremendous store-to-store variations in what stores charge. You can investigate some of them (in Michigan at least) through the state government website. I do not understand why health care plans can’t use a similar method to enlist their customers as a force to control drug costs. It is not that difficult to set up a website and have pharmacies report their prices to the health care company. It should not be difficult for customers to use such a website to compare drug prices. For those who are not web savvy, they could also have an automated phone system.

They could incentivize the co-payment with a fairly simple formula. The regular co-payment would apply to the average price reported for a drug. Anything cheaper would reduce the co-payment by a percentage. Anything more expensive would increase it. For example, for the Trazodone let’s say the average cost is $18 so your co-payment for it would be $10 at that price. If you can find a store selling it for $11, your co-payment would be $6. If you are lazy and buy it at a store charging $25 then your co-payment would be $14. Or for another example, take Geodon which costs from $386 to $475. At the average of $430, the co-payment is $10. At the cheapest price of $386 it is $9. At the most expensive it is $11. (Of course, the formula could be adjusted for greater incentive.)

This should be a win-win situation. You pay less and your customer pays less. This would also benefit even those without coverage because it would drive down drug prices for everyone. This is the way a free market should work. With a third-party-payer system like we have in the U.S., co-payment incentives like this should be appealing. If employees shy away from the small additional hassle of competitive pricing the employer should see a benefit from cost savings. It should be a triple-win – for the health care provider, the employer, and the employee.

Why isn’t this system of drug pricing being used? Is it available somewhere but I just haven’t heard about it? Are there federal or state regulations against it? (If there are they should be repealed.) Granted this issue is not the only problem with our health care system. It is probably not even in the top five. However it should be something easily implemented and shouldn’t need political pressure. It might even be a smart idea to implement in our current government systems of Medicare and Medicaid.