CHAPTER 3

We Pay and Pay for Healthcare

This chapter provides a background of how healthcare insurance developed and was used until the Affordable Care Act (ACA) went into effect in order to understand why the changes brought about by the ACA affects consumers enough to alter their behavior. Prescription drug coverage, not previously required in health insurance and now required in all plans, is discussed because drugs can add substantially to out-of-pocket costs for people on regular long-term medication.

The Reality of Insurance

Unlike other Western countries such as the United Kingdom, Canada, Japan, Germany, and France, the United States does not offer free basic healthcare to its people. In those countries, the government pays for national healthcare for its citizens. If you are a visitor in a country that has national healthcare, and you become ill or injured, you may receive treatment at little or no cost to you.¹

The American system has quite a different model than these countries. Before the 2010 ACA, about 85 percent of Americans were insured and 15 percent were not. During this period, there was huge variation in breadth and depth of coverage among the insurance plans. The government covered private health insurance for 31 percent of the population in 2012: 16 percent through Medicare for individuals 65 years and older; 18 percent through Medicaid for eligible low-income individuals paid by federal and state government and administered through the states; and the remaining public funding through the Veterans Administration, Indian Health Service, and Tricare.

The American healthcare system is called an employer-based system because 54 percent of people are privately insured, either through employers or through a family member who gets insurance through an employer, known as group insurance. About five percent of the population purchases their own private insurance, called individual insurance. Large employers (200 + employees) are much more likely (98 percent) to offer health insurance than small employers of 10 or less (50 percent).

What has caused the U.S. health insurance to become mostly employer based? To answer this question requires going back into American history.

1. Before World War II, the Great Depression decreased the utilization of hospitals and physician services. Blue Cross plans offered hospital insurance through employers charging the same premiums to all insured patients whether they were sick or healthy, old or young. Physician services, guided by principles of the American Medical Association (AMA) that included patients’ freedom to choose any physician, no third party should come between physician and patients, and the medical profession should control medical practice, were offered as Blue Shield plans beginning in 1939 in California.

2. During the war, labor was in short supply because of millions of men fighting overseas. Workers wanted higher salaries and employers wanted to pay them, but the Stabilization Act required that wages and prices be stabilized at a September 15, 1942, level. The important point is that the executive order issued by President Roosevelt excluded insurance and pension benefits from the freeze. Insurance could be provided by employers as a benefit to attract employees.

3. After World War II, employers were bound to wages and insurance plans in negotiations and could not cancel health insurance even if there was no severe labor shortage, according to a ruling by the War Labor Board.

4. The National Labor Relations Board ruled in 1949 that unions could negotiate for fringe benefits like health insurance as part of their wage negotiations. This encouraged unions to demand employer-sponsored health insurance.

5. The IRS issued a tax exclusion in 1954 for health insurance paid by employers. This meant that the dollar value of the health insurance employers paid would not be included as part of the employee’s taxable income.

The Problem with Health Insurance

The purpose of insurance is to protect people against large unforeseeable financial loss. A premium is paid over the course of a year for this protection. In the case of car insurance, if the car’s insured is in an accident, the insurance company will pay for car repair and personal injuries. The covered individual may get a rate hike for the following years because of the accident since auto insurance premiums take into account prior claims.

Insurance is based on pooling risk—there are enough members covered who do not file claims and their premiums cover the cost of all claims in any given year. In other words, the pool of insured must have more premiums dollars paid than the dollar amount of claims. The risk is spread out over the pool. The larger the pool or group means the risk is spread out over more people, and is more predictable with low variance in total cost from year to year.

A healthcare system that is insurance based faces the same business risk as other types of insurance. The challenge to health plans participating in the exchanges is attracting enough healthy individuals to purchase insurance. Young people are generally healthier than older ones. The health status of a specific individual is not random: Employed people are also likely to be healthier than the unemployed, and healthier people use fewer services than the not-as-healthy. Those with chronic illnesses are high consumers of healthcare services.

Spending for healthcare services is concentrated among a small percentage of people. One percent (three million people) of the population was responsible for more than 20 percent⁴ of all personal healthcare spending in 2009. The highest five percent of all healthcare spenders accounted for 50 percent⁵ ($623 billion) of total healthcare expenditures. In contrast, 15 percent of the population spent nothing and half of the population with the lowest spending was responsible for just three percent of the total spending.

Insurers participating in the Healthcare.gov and other state market exchanges are continuously monitoring the exchange enrollees for low usage, high usage, or no usage. They are looking at the newly insured members to determine whether they are losing or making money on the previously uninsured population. In the first year of Obamacare (ACA), 2014, insurance companies showed profits of $362 million total, with California’s three largest insurers, Blue Shield of California, Kaiser, and Anthem Blue Cross, accounting for half of the profits. Across the nation, most insurers recorded losses for a total of $2.87 billion. California, which runs its own exchange called Covered California, is cited as an example where the exchange runs smoothly and insurers can make money. Insurance companies are refining their plans and premiums as they collect more data on exchange enrollees to make the exchange market profitable.

High-deductible plans require the insured individual to pay a high deductible amount before the insurance company pays. These plans keep premiums low because they are really catastrophic insurance. The exchanges offer high-deductible plans, which employers are increasingly offering. Employers find them attractive because they keep costs down by having the employee pay more of the medical bill. The high deductibles vary, but the IRS minimum in 2016 is $1,300 for an individual and $2,600 for a family. The limit for annual out-of-pocket expenses is $6,550 for an individual or $13,100 per family. While this is thought to be conducive to prudent use of healthcare services, it is also a deterrent for people who need services but are unwilling to pay the costs up to the deductible amount.

Another issue with voluntary health insurance is self-selection. People who are already sick with chronic diseases such as diabetes or heart failure, and those who tend to be overly concerned about becoming ill, use more healthcare services and are more likely to purchase insurance. At the other end of the spectrum are people who are healthy and don’t believe they will become ill. This group is not a high user of medical services since their focus is more likely on fitness and prevention; they are not prone to purchasing health insurance. For insurance companies, self-selection means that the pool of people to spread the risk becomes heavier with high users. High use causes the cost of insurance to go up so insurance companies can cover their costs, which in turn keep low users from buying insurance because the premiums are high. Insurance companies need to balance the high and low users of health services in their risk pool in order to stay in business.

Many people believed that if they were healthy, did not make large insurance claims, and paid their premiums, the insurance company would not hold an unplanned large claim against them. They were wrong. Before HITECH’s implementation and requirements for health plans to provide minimum coverage, elimination of exclusions, and maximum life payments, insurance companies could drop an insured member if she had an illness that was expensive in a given year without any reason. Some people found that their insurance company would not renew their coverage or their premiums took huge leaps if they became ill, developed a chronic disease, or were diagnosed with cancer. Expensive treatments caused some individuals to file for personal bankruptcy. Figure 3.1 shows that the uninsured had the most difficulty paying medical bills, while the newly insured and those who had insurance prior to ACA had approximately the same percentages.

The uninsured often face unaffordable medical bills when they do seek care. In 2014, nearly 36 percent of low- and middle-income uninsured adults⁶ said they had problems paying medical bills. These bills can quickly translate into medical debt since most of the uninsured have low or moderate incomes and have little, if any, savings. It is a tragedy that anyone has to choose between her life and going bankrupt. Forcing an individual to make those decisions at a time when she is extremely stressed about recovering and paying bills is unethical. But this was the way that insurance companies forced a balance in their risk pool. The only other way to keep the risk pool balanced is to make it mandatory for everyone—healthy and not healthy—to have health insurance. That’s what the ACA did.

Figure 3.1  Problems paying medical bills among low- and middle-income nonelderly adults, by insurance coverage in fall 2014

Source: 2014 Kaiser Survey of Low-Income Americans and the ACA.

Note: Includes adults ages 19 to 64. “Previously Insured” includes people who were insured as of interview date and have been insured since before January 2014. “Newly Insured” includes people who were insured as of interview date and gained coverage since January 2014. “Uninsured” includes people who lacked coverage as of the interview date.

*Significantly different from Newly Insured at the p < 0.05 level.

Paying for the Uninsured

There is a belief among some people that no one should be forced to buy health insurance because it violates their rights. The truth is that the cost of taking care of an uninsured patient doesn’t just go away—someone ultimately pays.

Here’s how the care for an uninsured⁷ patient is paid: When an uninsured person seeks treatment at a hospital, even though she cannot pay for it, the hospital still has expenses for the doctor, nurses, staff, tests, medicine, the bed, and other services provided to the patient. The hospital spreads out the cost of the uninsureds’ care across the bills of patients who are insured. The higher hospital bills result in higher insurance premiums for those who have health insurance. The hospital also receives some money from a federal program to help pay for care provided to the uninsured. The bottom line is care for the taxpayers and people with healthcare insurance pay for the 50 million uninsured consumers.

The Insurance Requirement

Universal health coverage was a major objective of ACA—in other words, getting the 15 percent of the uninsured insured. One group that became immediately insured was young adults who became eligible to stay on their parents’ insurance plan until they turned 26 years old. This allowed more than three million young adults to become insured virtually overnight.

The 12 million uninsured undocumented immigrants in the United States are excluded from the ACA. That leaves 38 million that the federal government is trying to entice to enroll in Medicaid or buy insurance in the health insurance exchanges, also known as the marketplaces. So far, the uninsured nonelderly has decreased to 10.7 percent in the first quarter of 2015 from 16.2 percent in the last quarter of 2013, the lowest uninsured in decades, according to a report¹³ by the Kaiser Family Foundation.

The ACA supports health insurance for low-income earners by subsidizing a portion of the premiums of plans on the insurance exchanges or providing tax credits. The federal government also provided for expansion of Medicaid by changing eligibility to include individuals with income up to 133 percent of the federal poverty level, but expansion was optional and left up to each state. In fact, 19 states declined¹⁴ to expand their Medicaid coverage, with the result that additional Medicaid-eligible recipients would not receive health insurance.

Why do people remain uninsured? The top reason given is because it is too expensive (48 percent), followed by unemployment/not offered/ not eligible at work. Seven percent gave immigration status as the reason. See Figure 3.2.

Exemptions from health insurance include individuals who cannot find a plan on the exchange that is 8 percent or less than their income, specific religious groups, and Native American Indians.

Health plans offered on the marketplace must provide benefits and services that meet defined minimum essential coverage. Some insurers, prior to ACA, had eliminated coverage of basic services such as maternity care. Many individuals who possessed some of these empty plans were not aware of the lack of coverage, but stuck with them because of their low premiums. Most plans also did not offer any free preventive care. However, today, all ACA plans now must provide free preventive care. The ACA-defined minimum essential coverage ensures that plans cannot offer skimpy coverage.

Figure 3.2  Reasons for being uninsured among uninsured adults, fall 2014

Source: 2014 Kaiser Survey of Low-Income Americans and the ACA.

Note: Includes uninsured adults ages 19 to 64.

Key Facts About Insurance Exchange Marketplace Plans

• Qualified health plan—must be accredited and have financial resources and contracts to provide care to patients.

• Must accept all people who select their plan on the exchange (no exclusions due to preexisting conditions).

• Guarantee renewal when selected.

• Free preventive services (no copay or deductible) for U.S. Preventive Services Task Force A and B recommendations—including immunizations, flu shots, mammograms, Pap smears, colonoscopies, and tests for high cholesterol and sexually transmitted diseases.

• No annual or lifetime dollar maximum on coverage (previously many plans had $1 million caps).

• Premiums can vary based on age and smoking status, but not preexisting conditions.

It is difficult to provide universal coverage in a system where insurance coverage is voluntary. Everyone needs to purchase insurance in order for the risk pool to be balanced by the law of large numbers, the bigger the pool of insured people, the more predictable the risk of illness and the cost of insuring the pool. That keeps the premium cost down per individual.

Healthy and mostly young people believe that they are paying higher premiums to support the sick population. The problem with this belief is that it partitions the entire insured population into sick and not sick, and does not take into account that some illness episodes are long term.

Without a family history of disease, no one can predict when he will be diagnosed with a chronic illness, cancer, or any sudden debilitating disease. A healthy person can move into the sick category in a matter of days. Should this sick person now pay more for insurance? That’s the way the pre-ACA health insurance plans worked. Once you were diagnosed with an illness or the insurance company had to pay large claims, your insurance premium either dramatically increased or was canceled. There was no requirement that an insurance company provide you with coverage. This is why the provision in the ACA guarantees coverage with a preexisting condition, and that someone with a preexisting condition does not pay a higher premium.

To prevent adverse selection—when sick people sign up and healthy people don’t—the ACA mandates that individuals purchase at least the minimum essential coverage on the exchange, which is the bronze tier. Of course, they can choose to pick any other tier. As the tiers increase from bronze to silver to gold to platinum, the premiums increase and deductibles decrease. The relative position of the marketplace tiers, Medicaid, employer-based plans for premiums and deductibles is shown in Figure 3.3. Catastrophic insurance requires the insured be under the age of 30 or qualify for a hardship exemption.

If individuals don’t have insurance, a penalty is assessed. In 2014, the penalty was $95 per individual, and rose in 2016 to a minimum of $695 per year or 2.5 percent of household income with a maximum of $2,085. Beyond 2016, it adjusts with the cost of living. The IRS reported that about 7.5 million Americans paid an average penalty of $200 for not having health insurance in 2014. The reason 48 percent of uninsured adults¹⁵ say they don’t have insurance is because the cost is too high even with ACA subsidies.

Figure 3.3  Health insurance type: premium versus deductible

The U.S. Census Bureau reported for 2014 that three types of insurance coverage increased from 2013 to 2014: private direct purchase increased by 3.2 percent to cover 14.6 percent of the population, Medicaid added 2.0 percent covering 19.5 percent, and Medicare inched up by 0.3 percent to 16 percent (due to an increase in the number of individuals 65 years or older). Private insurance includes direct purchase and employer-based, while Medicaid, Medicare, and the military are government insurance. Employer-based insurance covered 55.4 percent of the population and was unchanged between 2013 and 2014. Employers with 50 employees or more are required to offer insurance to their employees or pay a penalty, while those with less than 50 are exempt from the requirement. This was to deter employers from canceling employee health insurance when individual plans became available on the exchanges. The statistics support this for the first year of ACA mandatory insurance.

Who Are the Newly Insured Consumers?

The newly insured from 2013 to 2014 had particularly large increases among poor and low-income individuals and people of color, groups that had high uninsured rates prior to 2014. Among racial and ethnic groups, Hispanics and Blacks had the largest declines in uninsured rates, and all people of color generally had larger coverage gains than Whites. People who live in states that chose to expand Medicaid through ACA also joined the newly insured.

As of June 2015, there were 10 million new enrollees in state or federal marketplace plans and 14 million additional people enrolled in Medicaid.

Understanding Their Needs

The high ownership of smartphones among the population has created many opportunities for individuals to use telehealth, remote monitoring, and health and fitness apps. Mobile and online access for these new consumers is important. According to a 2014 report by the National Partnership for Women & Families,¹⁶ Hispanics, Black/African American, and Asian American patients were more likely to use a mobile or smartphone all or most of the time for electronic access to their medical information or doctor (33 percent Hispanic, 28 percent Asian American, 22 percent Black/African American) than non-Hispanic White patients (10 percent).

As the fastest-growing U.S. demographic, Hispanics are expected to double in size by 2050¹⁷ and will likely become a much larger segment of the insured market. They are also the fastest-growing segment of mobile health adopters, according to a 2015 PWC Health Research Institute report. They are three times more likely than non-Hispanics to use a mobile device for healthcare to schedule appointments or purchase care. The National Partnership for Women & Families study also found that Hispanic adults (78 percent) were significantly more likely than non-Hispanic White individuals (55 percent) to state that having online access increases their desire to do something about their health.

It is important to understand the needs and behavior of the new consumers because they will seek providers and products that satisfy them. This kind of information about consumers can be valuable for healthcare providers and insurers to understand how to serve a new type of customer.

Other reports about new Hispanic healthcare consumers include:

• More willing to use technology to monitor health such as glucose levels.

• Fifty-four percent used a retail clinic (e.g., clinics located within CVS, Walgreens, Walmart stores) in the last year compared to 33 percent of non-Hispanics independent of insurance status or income level.

• More likely to use nonphysicians such as pharmacists for advice and care.

• Cost is important. Knowing the price of health services is important prior to going to a doctor or having a procedure done (95 percent Hispanic, 82 percent non-Hispanics).

• For nonemergencies, they do not go to the doctor as often as non-Hispanics.

• Hispanics rank cost above quality when selecting medical providers.

What Hispanic consumers seek	Meeting the needs
Accessibility through mobile devices for care, appointments, advice	Mobile apps, telehealth, e-mail, text
Lower-cost primary care options	Nurses, physician assistants, pharmacists, and other nonphysicians who are mobile-friendly; retail clinics
Price of care or procedure in advance	Bundled pricing for procedures. List fees for each service—immunization, stitch removal, sport forms, lab tests, images
Care at convenient location, weekend and extended weekday hours	Retail clinics, telehealth
Ability to monitor health condition	Mobile apps that track, remote monitoring devices, providers who can accept and review the data for feedback

Cost Shifting to Consumer

In 2015, the average total annual premiums¹⁸ for employer-sponsored health insurance were $6,251 for single coverage and $17,545 for family coverage.¹⁹ Each rose four percent over the 2014 average premiums. During the same period, workers’ wages increased 1.9 percent and inflation declined by 0.2 percent. Wages are not keeping up with rising premium costs.

As the price of providing health insurance continues to rise, employers are pushing more of the cost of care onto their workers. According to the National Business Group on Health, in 2015, nearly 33 percent of large employers offered only high-deductible plans—at least $1,250 each year for an individual, double for family coverage, compared to 22 percent in 2014 and 10 percent in 2010.

Employers are looking for ways to reduce the costs of health benefits by shifting more costs to the employee, offering plans with narrower provider networks, and implementing defined contributions that give the employee a fixed dollar amount to purchase a healthcare plan.

The following are other techniques that reduce employer healthcare costs:

• Increasing the deductible amount the consumer pays before health insurance starts to pay.

• Moving from copays to coinsurance, which requires the consumer to pay a percentage of costs for medical care instead of a flat-fee copay.

• Eliminating coverage of a spouse when the spouse has health insurance from his or her own employer.

At the same time, the number of enrollees with high deductible health plans grew from four percent of the employer-based health insurance population in 2006 to 20 percent in 2014. The number of employees required to pay coinsurance (a percentage of the costs of healthcare services incurred, rather than a fixed copay) for a hospital admission has increased to 61 percent in 2014 from 37 percent in 2008, according to an AHA report.

Clearly, high deductible plans and the need to pay for coinsurance will drive more consumers to shop for services. Price transparency will be key to consumers who are interested in getting the best value. New healthcare players that offer care through retail sites kiosks and telehealth have seized the opportunity, and list their prices up front. Customers know the price before they buy—they don’t have to guess.

With the shifts in coinsurance and deductibles, consumers will be much more price-conscious when they seek care. With new delivery channels such as clinics in retail locations, telehealth visits, concierge care, and kiosks, the healthcare consumer’s choices are becoming similar to retail stores with low, medium, and high levels of service. Higher-end services offer extra features whereas lower cost will have just the necessities, but quality is expected at each level. Consumers are incentivized to shop around for low-cost providers because they will have to pay out-of-pocket before the health insurance company pays. If prices are higher than the consumer can afford, he may delay or forgo care.

Employers are utilizing private health insurance exchanges that allow the employee instead of the employer to make the choice of provider network, cost-sharing (coinsurance, copay, deductible) coverage, and premiums. Private exchanges are used to support an employer’s defined contribution while giving employees a greater choice in plans. The public marketplace exchanges are only open to individuals and small businesses (Small Business Health Options Program, SHOP) with up to 100 employees.

The shift of costs to the consumer means insurance companies are now selling directly to the consumer, not the human resources department of employers. The healthcare consumer is now also the buyer.

The Insurance Quagmire—Deciphering How Much Consumers Pay

As consumers pay more of their healthcare bill, they want more information about cost and quality. Yet this can be quite difficult. In fact, finding out how much an elective procedure will cost from a hospital has been almost impossible. Why? One reason is that the hospital does not know its own costs. Most hospitals do not give price estimates before the consumer arrives. The national pricing report card from the Catalyst for Payment Reform-Healthcare Incentives Improvement Institute gave 45 of 50 states a failing grade for their transparent pricing laws.

If hospitals provide price estimates, they are highly variable even within a geographic region. The Government Accountability Office found that providers quoted prices²⁰ ranging from $33,000 to $101,000 for knee replacement surgery.

Add to this scenario the complicated bills sent by the insurance company, hospital, and providers, and it is extremely difficult to figure out what a patient owes.

How can a healthcare provider be so wrong about how much a service costs? Hospitals have never had to understand the detailed cost of their services,²¹ from surgeries to lab tests, because there has been no transparency required of them. Daniel’s is the kind of frustrating story that healthcare customers are experiencing every day when shopping for care.

Not knowing the cost of healthcare is a barrier to consumers trusting providers. The provider expects to be paid, no matter how far off they’ve estimated the cost. Hospitals are working on understanding and calculating their costs for common tests and procedures because they know that is what their customers need to know in order to make decisions about their care. One way hospitals can do this is to clean up the charge description master, a comprehensive listing of items billable to a hospital patient or a patient’s health insurance provider, for some high-volume elective procedures that have little variation in actual charges between patients. Using a database of historical charges for the hospital, they can tell patients what the average charge was for the procedure.

The rise of consumer-driven healthcare has the potential to hurt healthcare organizations’ revenue cycles because patients tend to be harder to collect from than payers. The better way to avoid having to pursue patients for unpaid bills is to accurately let them know the cost up front. Cost information up front allows the patient to plan for the expense or make financing arrangements.

Healthcare consumers expect that they have to contribute to their care, but they need to know how much. The ability to tell a customer what a test or procedure will cost is critical to their decision on when to have it done, where it is performed, and if postponement is an option. The choice to have a procedure of test depends on:

• How much the test/treatment costs

• If there is harm in waiting

• The available alternatives for the test/treatment

• The risks

The story herein illustrates the problems that one family encountered when the insurer abruptly switched their health plan from a noncompliant ACA plan to one that met the requirements in the first year that individual insurance was mandated by the ACA. It also shows how difficult it is for consumers to understand how much they need to pay with their specific insurance plan. A misunderstanding can result in much higher bills and a threat to ruin the consumer’s credit rating.

Sonya is a smart woman, an attorney, whose experience represents many other consumers when their health insurance company switched them to an ACA-approved plan. They did not receive a notice from the insurer, were put into a plan that did not have the same network of providers, and were unable to find out if their providers were in the network for a specific plan. In addition, there is misunderstanding on her part of how UCR rates²² are used and what the insurance company pays.

Many health insurers offer price estimators for their patients. Some of the estimators reflect an aggregate range of possible costs; others are based on historic pricing, or claims data from varying sources. The calculators are also limited in the number of procedures that are included. The estimators are at the insurer’s portal requiring a login by the enrollee. Blue Cross Blue Shield offers a Procedure and Cost Estimator,²³ a tool that gives you information on the average cost of a procedure or service in your local area. The information provided to consumers by insurance companies varies widely and is not always accurate.

ACA and the Insurers

The ACA mandate for health insurance translates into more customers for health insurers. But the actual customer will change. Pre-ACA and still the dominant form is health insurance that is sold to employers—employer’s benefits departments, not the end consumer. This will change as more individuals purchase their own insurance on the exchanges, where they can easily compare plans. Employers will contribute to the shift by offering defined contributions to employees so they can research and buy plans that meet their family’s needs.

Employers who offer “Cadillac” plans—the most expensive kinds—will also pay a 40 percent levy on plans that exceed $10,200 for individuals and $27,500 for families. In December 2015, President Obama gave the tax a two-year reprieve to be implemented. The purpose of taxing the Cadillac plans was to incentivize employers to eliminate high-cost health plans that encourage excessive healthcare use and ultimately drive up premiums.

Insurance companies who offer plans on the marketplace exchanges are still figuring out how to make their ACA businesses profitable. Special enrollment, where individuals can enroll after the open enrollment period due to loss of coverage or other qualified life-changing events such as moving, getting married, or having a child, has been cited as a cause for some of the high costs of ACA individuals. The rules for special enrollment are being examined to prevent enrollment right when healthcare services are needed. Health insurance markets require healthy customers to pay premiums, which offset the expenses incurred by the sick customers. By its very nature, insurance cannot be an on-demand service or the industry would not survive.

Insurers are developing strategies to cut their expenses and evaluate their pricing. One way is to offer plans with more limited choices of healthcare providers such as Highmark Health or eliminate selling individual consumers preferred-provider-organization (PPO) plans, which pay for providers outside the network, as Blue Cross and Blue Shield of Texas did. A narrow network of providers can be designed to limit consumers’ access to higher-cost healthcare providers, or out-of-network hospitals and doctors. While consumers accept this when purchasing a plan, they are shocked and angry when billed for an out-of-network physician when they are not told in advance. For example, a patient having an elective procedure chooses a hospital that is in-network, but the assistant surgeon is out-of-network and did not accept the fee from the insurance company. In this case, the patient is billed for the assistant surgeon’s fee in full.

The move toward person-centered care means that young healthy individuals are not the only profitable patients of the future. There is a shift toward improving the care and efficiency of the chronically ill with interventions that are less expensive than hospitalization or emergency room care. Chronically ill patients—and others who are the biggest users of healthcare—provide the best opportunity for insurers to reduce costs.

Prescription Drugs Have No Limits

The United States pays much higher costs for prescription drugs than any other country in the world.

Qualified health plans, as defined by the ACA, must contain 10 categories of service in order to meet minimum essential coverage. One such category is prescription drugs.

This is a huge area of cost: An analysis by the Kaiser Family Foundation of data from the Centers for Medicare and Medicaid Services and Truven Analytics found that employer health insurance plans spend 19 percent of their total health expenses on prescription drugs. “Specialty drugs” or high-cost medications, including biologic agents, that treat chronic conditions such as cancer, multiple sclerosis, rheumatoid arthritis, and hypertension can cost more than $100,000 per patient per year. Often, one drug manufacturer makes the drug with no competition, so monopoly pricing takes hold. Specialty drugs account for 24 percent of all drug costs.

The high cost of prescription drugs has been a hot issue due to several attention-getting headlines. One recent example is the announcement of a new medicine for people who cannot tolerate statins, a drug taken by those with a high risk of heart disease and that are usually taken for life. The drug, in a new class called biotech medication, lowers a person’s cholesterol at a price of $14,600 per year versus $36 per year for generic statins. This has raised many eyebrows and questions about the morality²⁴ of the pharmaceutical industry.

Drugs for treatment of Hepatitis C are contributing to the rising cost. A drug to treat Hepatitis C from Gilead has a list price of $84,000 per course of treatment or $1,000 per pill. For those on Medicare, the Hepatitis C patient still has to pay $8,000 out of pocket after Medicare shells out.

These high prices are sometimes the difference between life and death. The Centers for Medicare and Medicaid (CMS) took notice that some states were limiting treatment for Hepatitis C by imposing restrictions on who was eligible. Some states allowed only patients with severe liver disease and those who could prove they abstained from alcohol and drug abuse to receive Hepatitis C drugs. CMS warned Medicaid directors that the restrictions may be contrary to a federal law that requires Medicaid programs to pay for all medically necessary treatments, defined as any use approved by the Food and Drug Administration or by certain medical guidelines known as compendia.

Another major factor in drug prices is that federal law does not allow Medicare to negotiate the price of drugs. Instead, multiple companies that administer Part D—prescription coverage for elderly and other Medicare beneficiaries—negotiate with drug companies. This dilutes the negotiating clout of the companies because the volume of drugs for the total Medicare population is broken up across the companies.

Many consumers²⁵ are upset about the unjustified sharp rise in the cost of older drugs by companies just because they can, which is generating hostility against pharmaceutical companies. Among the catalysts for public outrage is Turing Pharmaceuticals’ sky-high overnight price hike²⁶ from $13.50 to $750 per tablet for a 62-year old drug, daraprim, which is the standard of care for treating the life-threatening parasitic infection toxoplasmosis. A decades-old migraine medication produced by Valeant Pharmaceuticals went from $3,090 for 10 vials to $14,120 within 12 months.

Although some price increases are due to drug shortages, other increases are due to a business strategy of buying old drugs and turning them into “specialty” drugs so pharmaceutical companies can charge high prices. The price of cycloserine, used to treat multidrug-resistant tuberculosis, increased from $500 to $10,800 for 30 pills. Both of these price hikes came after another company acquired the drug.

About 20 brand-name prescription drugs at least quadrupled in cost between December 2014 and February 2016, while another 60 medications have seen their prices more than double. Inevitably, some or all of these price increases are passed on to patients.

Generic drugs, intended to make medications affordable, have not escaped the catapulting price increases. An investigation by Congress²⁷ uncovered increases for a decades-old antibiotic, doxycycline, which rose from $20 in October 2013 to $1,849 in April 2014. The price for a bottle of pravastatin, a drug to lower cholesterol, rose from $27 to $196 in that same time. The price of a pill of digoxin, a centuries-old medicine derived from digitalis, an extract of the foxglove plant that was first described in medical literature by a British doctor in the 1700s as an herbal remedy to treat congestive heart failure, rose from 11 cents in 2012 to $1.10 in 2014. The drug is irreplaceable for some cardiac patients and is considered such a standard heart medication that the World Health Organization includes it on its list of essential medicines.

The increased use of generic drugs has been one of the rare success stories in national efforts to curb the nation’s $2.8 trillion medical bill, since generics have historically been far cheaper than name-brand versions. More than 8 in 10 prescriptions are filled with generic drugs,²⁸ according to the Food and Drug Administration. In the 10-year period from the beginning of 2003 through 2012, generic drug use has generated more than $1.2 trillion in savings, according to the Generic Pharmaceutical Association.

The more drugs a patient takes, the sicker the patient, the more trouble she has paying for them, according to a study by the Kaiser Family Foundation. This results in sicker patients skipping doses, cutting pills in half, or not refilling their prescriptions—no doubt a major contributor to the major problem of medication noncompliance, when patients do not adhere to taking medications as prescribed. The average copayment a consumer makes for drugs by plan tier is shown in Figure 3.4.

Beginning this year, most people with plans through Covered California, the state insurance exchange, won’t have to pay more than $250 a month per prescription. The exchange is the first in the nation to set caps on copays. Governor Jerry Brown signed a law late last year with a similar effect for other privately insured residents who take expensive drugs for cancer, epilepsy, and other diseases. That law takes effect in 2017.

Figure 3.4  Average copayment for drugs per plan (includes plans with “copayment” or “both copayment and coinsurance”)

Source: Kaiser Family Foundation analysis of Marketplace plans in the 38 states with Federally Facilitated or Partnership exchanges in 2016 (including Hawaii, New Mexico, Oregon, and Nevada). Data are from Healthcare.gov

Recent polling by the Kaiser Family Foundation showed that 77 percent of Americans believe making medications affordable to people with chronic conditions is a top healthcare priority for politicians. Seventy-two percent said drug costs are unreasonable.

In November 2016, Californians will vote on a ballot proposition intended to help control the cost of prescription drugs—the latest attempt to limit soaring prices that have prompted public criticism nationwide. The proposition would require the state to drive a harder bargain with drug companies so it doesn’t pay more for medications than the U.S. Department of Veterans Affairs.

The initiative would affect about five million people whose healthcare is covered by the state, including retired state workers, inmates, and some low-income residents in the Medi-Cal insurance program.

Exorbitant prices have initiated state legislative proposals across the country as well as federal hearings and task forces. Dozens of bills have been proposed to address the high cost of specialty drugs, according to the National Conference of State Legislatures. Political leaders in Virginia and New Jersey have introduced legislation that would require manufacturers to report production costs of some high-priced drugs. A bill in New Mexico would create a task force on pharmaceutical pricing, while a proposed law in the state of Washington would cap consumers’ out-of-pocket spending on prescription medications.

In the meantime, some tips providers can offer to help consumers keep their prescription costs down are below.

References

Blumenthal, D. 2015. “What’s the Big Deal About Drug Prices?” The Commonwealth Fund. www.commonwealthfund.org/publications/blog/2015/oct/whats-the-big-deal-about-drug-prices

Emanuel, E. 2014. Reinventing American Healthcare. New York: Public Affairs.

HealthCare.gov. n.d. “Exemptions from Requirement Include Undocumented Immigrants, Prisoners, and Indian Tribal Members.” www.healthcare.gov/health-coverage-exemptions/exemptions-from-the-fee/

Hoadley, J., J. Cubanski, and T. Neuman. 2015. “It Pays to Shop: Variation in Out-of-Pocket Costs for Medicare Part D Enrollees in 2016.” Kaiser Family Foundation.

Kaiser Family Foundation. 2015. “Employer Health Benefits Survey.” http://kff.org/health-costs/report/2015-employer-health-benefits-survey/

Kaiser Family Foundation. October 5, 2015a. “Key Facts About the Uninsured Population.” http://kff.org/uninsured/fact-sheet/key-facts-about-the-uninsured-population/

Krogstad, J.M. 2014. With Fewer New Arrivals, Census Lowers Hispanic Population Projections. FactTank, Pew Research Center: Washington DC.

National Partnership for Women & Families. December 2014. “Engaging Patients and Families: How Consumers Value and Use Health IT.” www.nationalpartnership.org/issues/health/HIT/patients-speak.html

Pollack, A. 2015. “Drug Goes from $13.50 a Tablet to $$750, Overnight.” The New York Times, September 20. www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html?_r=0

Radnofsky, L. 2011. “Want an Estimate of Medical Treatment Costs? Good Luck, GAO Says.” Health Blog, The Wall Street Journal, October 24.

Reinhardt, U.E. 2006. “The Pricing of U.S. Hospital Services: Chaos Behind a Veil of Secrecy.” Health Affairs 25, no. 1, pp. 57–69.

Smith, J.C., and C. Medalia. 2015. Health Insurance Coverage in the United States: 2014 Current Population Reports, 60–253. Washington, DC: U.S. Census Bureau, U.S. Government Printing Office.

The Concentration of Healthcare Spending. July 2012. “NIHCM Foundation Data Brief.” www.nihcm.org/pdf/DataBrief3%20Final.pdf

United States Senate Committee on Finance. 2015. “Wyden-Grassley Sovaldi Investigation Finds Revenue-Driven Pricing Strategy Behind $84,000 Hepatitis Drug.” Ranking Member News. www.finance.senate.gov/ranking-members-news/wyden-grassley-sovaldi-investigation-finds-revenue-driven-pricing-strategy-behind-84-000-hepatitis-drug

U.S. Food and Drug Administration. n.d. “Facts About Generic Drugs.” www.fda.gov/downloads/Drugs/ResourcesForYou/Consumers/BuyingUsingMedicineSafely/UnderstandingGenericDrugs/UCM305908.pdf

Walker, J. 2016. “Patients Struggle with High Drug Prices.” Wall Street Journal, January 10.

¹ Depends on the country and the care required, but the amounts are far less than U.S. ERs. Some countries will bill your health insurance.

² HealthCare.gov (n.d.).

³ Smith and Medalia (2015).

⁴ The Concentration of Healthcare Spending (2012).

⁵ The Concentration of Healthcare Spending (2012).

⁶ Kaiser Family Foundation (2015a).

⁷ Uninsured here refers to someone who does not have health insurance nor have the money to pay for care. Hospitals bill uninsured patients at higher costs because they don’t receive the discounts negotiated with insurance companies.

⁸ Emanuel (2014).

⁹ Emanuel (2014).

¹⁰ Emanuel (2014).

¹¹ Kaiser Family Foundation (2015a).

¹² Kaiser Family Foundation (2015a).

¹³ Kaiser Family Foundation (2015).

¹⁴ AL, FL, GA, ID, KS, ME, MO, MS, NE, NC, OK, SC, SD, TN, TX, UT, VA, WI, WY as of May 2016. www.statereforum.org/Medicaid-Expansion-Decisions-Map

¹⁵ Kaiser Family Foundation (2015a).

¹⁶ National Partnership for Women & Families (2014).

¹⁷ Krogstad (2014).

¹⁸ Kaiser Family Foundation (2015).

¹⁹ Kaiser Family Foundation (2015).

²⁰ Radnofsky (2011).

²¹ Reinhardt (2006).

²² A good explanation of health insurance terms and sample calculations is offered by Patient Advocate Foundation. www.patientadvocate.org/index.php?p=439

²³ http://www.bcbs.com/already-a-member/cost-estimator/procedure-service-cost-estimator.html

²⁴ Blumenthal (2015).

²⁵ Walker (2016).

²⁶ Pollack (2015).

²⁷ United States Senate Committee on Finance (2015).

²⁸ Facts About Generic Drugs (n.d.).

²⁹ Hoadley, Cubanski, and Neuman (2015).