Summary and Investment Conclusion

On net, drug manufacturers are using co-pay cards to reduce the higher out-of-pocket (OOP) costs faced by beneficiaries on the health insurance exchanges (HIEs) as compared to those faced by beneficiaries covered by employer-sponsored insurance. This may signal to plan sponsors and formulary managers that if they raise ESI beneficiaries’ out-of-pocket costs to the higher levels common on the HIEs, that manufacturers will use their co-pay card programs to keep beneficiaries’ OOP costs at affordable levels. The co-pay card subsidies required to offset ‘HIE-level’ OOP costs, if these become more common in the far larger ESI market, would be large enough to meaningfully reduce, perhaps even temporarily eliminate, manufacturers’ US real pricing power

Details

US patients have little room for higher out-of-pocket (OOP) drug costs; fully one-fifth of US drug sales are to households whose OOP prescription spending is on par with their housing costs, and 70% of US drug sales are to households whose OOP Rx spending is on par with their grocery bill (Exhibit 1)

In the employer-sponsored health insurance (ESI) market it is uncommon for beneficiaries to have to satisfy deductibles before drug coverage begins, and patients’ out-of-pocket costs most often take the form of fixed dollar co-payments that vary by formulary tier (e.g. whether or not a drug is preferred), but not by drug price. Conversely on the health insurance exchanges (HIEs), patients are commonly required to meet a deductible before drug coverage begins (Exhibit 2), and patients’ out-of-pocket costs are more likely to take the form of co-insurance (which does vary with drug price) than in the ESI market (Exhibit 3). Not only is co-insurance more common on the HIEs than under ESI, the co-insurance rates on the HIEs are higher (Exhibit 4). Under ESI co-insurance is often capped at a maximum dollar amount, and we believe these caps are less common on HIE-based plans. Finally, even if HIE beneficiaries have fixed dollar co-pays instead of co-insurance, their co-pays are higher than for ESI beneficiaries (Exhibit 5). All in, HIE-based beneficiaries are more likely to face high OOP Rx costs, and especially co-insurance, than ESI beneficiaries

Manufacturers have the option of lowering beneficiaries’ OOP Rx costs by issuing co-pay cards. However because HIE beneficiaries face higher average OOP Rx costs than ESI beneficiaries, the costs of the co-pay card subsidies for HIE beneficiaries will be higher, making manufacturers’ net pricing potentially much lower to HIE than to ESI beneficiaries. Far more importantly, if manufacturers routinely offer larger co-pay card subsidies to HIE beneficiaries, and bring these beneficiaries’ effective OOP costs down to (or near) the ESI level, they will have demonstrated to plan sponsors and formulary managers that they would likely also provide these same large subsidies to ESI beneficiaries if these patients were subjected to co-insurance

Because HIE beneficiaries’ OOP Rx costs are so much higher than for ESI beneficiaries, the HIEs serve as a test case. If manufacturers keep HIE beneficiaries’ OOP Rx costs low with co-pay cards, plan sponsors and formulary managers are more likely to attempt to extend the less generous HIE Rx benefit designs to the ESI market. If this were to happen, the larger co-pay card subsidies required of manufacturers would dramatically reduce net pricing power

To see where things stand, we analyzed the 50 largest US brands’ co-pay card programs. Specifically, we sought to determine whether the brand offered a co-pay card, whether the card could be used by HIE beneficiaries, and whether the card’s subsidies were configured in such a way that HIE beneficiaries with larger co-insurance OOP obligations could receive correspondingly larger subsidies

Of the top 50 brands by US sales, 42 offer co-pay card programs, and 35 of these brands’ co-pay cards can be used by HIE beneficiaries[1]. Of those 35 cards that can be used on the HIEs, 19 extend larger subsidies to patients with co-insurance as compared to patients with fixed dollar co-pays (Exhibit 6). For each of these 19 brands, Exhibit 7 shows the impact of the co-pay card subsidy on net price received by the manufacturer under either of two assumptions: 1) the patient’s OOP obligation is a fixed $100 co-payment; or 2) the patient’s OOP obligation is a 50% (un-capped) co-insurance payment. Using Enbrel as an example, a patient with a $100 co-pay reduces the net price received by Amgen by 4% if the patient uses an Enbrel co-pay card. Or, an Enbrel patient facing 50% co-insurance would reduce the net price received by Amgen by 27% if the patient used an Enbrel co-pay card. For the 19 brands whose cards offer larger subsidies to patients with higher OOP costs (e.g. co-insurance), the average reduction in net price to the manufacturer for $100 co-pay patients using the cards is 12%, and the average reduction in net price to the manufacturer for 50% co-insurance patients using the cards is 25%