Your Drugs Are About to Get More Expensive

The Washington Post recently ran an article by Marlene Cimons, a Medicare Part D drug plan enrollee. Her late father had been a pharmacist and he had owned a drugstore while she was growing up. She thought it would be nostalgic to patronize a neighborhood drugstore rather than a big chain pharmacy. She found a neighborhood drugstore in her preferred pharmacy network and had her prescription transfer there. She was stunned, however, when a 90-day prescription that should have required only a $3 co-pay turned out to be $58.

When she inquired the drugstore claimed it stood to lose money on her particular prescription. Who knows; maybe its profit margin wasn’t as high as the pharmacy thought it should be. In order to fill her prescription the drugstore basically required her to willingly pay an extra $55 more than its contractual agreement stipulated. Of course, that violated the contract the drugstore had signed with her Medicare Part D plan. The agreement the pharmacy had signed with her drug plan did not allow it to arbitrarily charge higher prices and Ms. Cimons left without her prescription.

Medicare drug plans are governed by federal law. But for the rest of us with a drug plan, the state in which we reside generally regulates drug plans and pharmacy benefits. When pharmacists descend on state capitols they often find a sympathetic edar in state legislators. In his classic book, The Logic of Collective Action, Mancur Olson argued that special interests are often able to organizeand promote public policies that benefit the group. Special interests face less opposition when the benefits are concentrated but the costs are diffused to a larger group, because the group paying the costs has less incentive to organize.

This phenomenon has played out time and time again in states’ drug plan regulations. Over the past few years state legislatures have pass laws regulating drug benefits in ways that benefit drugstores at the expense of consumers. For example, New York State (and others) have so-called “consumer protection laws” that prevent health plans from offering enrollees’ a better price on mail-order pharmacy drugs.  In other words, in New York my drug plan could not induce me to use its mail order pharmacy by offering me a lower price than walking into a local pharmacy.

One of the most egregious examples I’ve seen lately is legislation being debated in Oklahoma. Oklahoma already has a law that requires weekly updates to the maximum allowable cost (MAC) list of prices insurers and drug plans use to reimburse pharmacies. Existing law also allows pharmacies to contest the MAC price if it believes it to be unfair. The Oklahoma Senate is now considering a proposal that amends and greatly expands the existing law.  Senate Bill 1150 replaces the term “maximum allowable cost” (in the existing law) with the term “reimbursement amounts.” Reimbursement amounts is so broadly defined that it includes not just MAC prices, but also customer copays and brand-name drugs. In theory, this could allow drugstores to raise prices by some arbitrary amount and balance bill consumers for the difference between the reimbursement they agreed to and the higher price they wish to charge. Basically, the Oklahoma legislature is debating legally allowing drugstores to do exactly what the drugstore in the Washington Post article tried to do to a Medicare Part D enrollee. Of course, when a public policy that benefits a group is passed in one state, lobbyists in other states soon try to follow. This isn’t just a problem for health plans. Many consumers have high-deductible insurance that requires the first $1,000 to $5,000 in medical and drug spending to be paid out of pocket before benefits kick in.

Devon Herrick, PhD is a health economist and senior fellow at the National Center for Policy Analysis.

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