The Marketplace Pulse series provides expert insights on timely policy topics related to the health insurance marketplaces. The series, authored by RWJF Senior Policy Adviser Katherine Hempstead, analyzes changes in the individual market; shifting carrier trends; nationwide insurance data; and more to help states, researchers, and policymakers better understand the pulse of the marketplace.
People shopping for health insurance in the individual market this year will generally find more choices of insurers and plans. But one thing that has not changed much is the prescription drug benefit. Enrollees in the individual market will continue to be exposed to high levels of out-of-pocket costs for drugs, particularly in the higher formulary tiers. And with the recent CMS approval of insurer co-pay accumulators, manufacturers' coupon programs are less likely to be helpful.
There are major differences between ACA plans and large group employer coverage when it comes to drug benefits. Individual and small group plans both have more formulary tiers than large group plans. Nearly all (95%) of individual market and 93 percent of small group plans have four or more tiers compared with 54 percent of traditional employer plans and 36 percent of high deductible employer plans. More tiers translates into higher out of pocket costs, since patient cost-sharing is higher for brand and specialty drugs.
Patients usually pay either co-insurance or co-payments for prescription drugs. Since co-insurance is often based roughly on the drug’s list price, it can become quite costly at higher tiers. Compared to large employer plans, individual market plans are much more likely to have co-insurance rather than co-payments, and to have a higher co-insurance rate (50%) as compared with roughly 30 percent in large and small group plans. And while nearly half of large and small group plans have co-insurance caps that limit spending on specialty drugs, this is true for only 9 percent of plans in the individual market.
The most important difference is that individual market plans are much less likely to provide first dollar coverage for expensive prescription drugs, meaning that most enrollees must satisfy their deductible before they are able to pay co-insurance or co-payments. This is most likely for the costlier drugs in the higher formulary tiers. More than three quarters of individual market plans require that the deductible be met before enrollees are eligible for any cost-sharing for preferred specialty drugs. This is true for a little less than half of large and small group plans. And deductibles in the individual market are significantly higher than in the large group market.
To give an example, an individual market enrollee with a specialty drug that costs $3,000 per month would reach their deductible (about $4,000) in the first two months, before paying co-insurance (median 50%) until reaching their maximum out of pocket, usually $8,500. For the small group market, the situation is quite different, and looks more like large employer plans. More than half of small group plans permit co-pays or co-insurance before the deductible is met for drugs in the preferred specialty tier, and the median copay is $300, versus $650 in the individual market.
The individual market is extreme, but rising out-of-pocket costs for brand and specialty drugs are a general trend in commercial insurance, with deductibles and co-insurance representing a growing share of spending. Consumer costs have risen as the use of branded and specialty drugs has grown. Spending on specialty drugs in particular has grown sharply in recent years, and accounted for nearly 40 percent of retail and mail-order prescription drug spending net of rebates in 2016-2017. For privately insured patients with an initial cost exposure above $50, the average obligation has climbed in recent years, from $122 in 2013 to $188 in 2018, according to data from IQVIA. This trend has led to the proliferation of manufacturers' co-pay assistance programs, which circumvent the benefit design by providing financial assistance that allows patients to reach their deductibles. Co-pay coupons offset an estimated $13 billion of commercial costs in 2018, and have become particularly important in the individual market, due to the austere benefit design and approximately 30% of enrollees have a prescription for at least one specialty medication.
Yet co-pay coupons have been criticized for encouraging substitution of brand name drugs for generic medications, and for increasing overall drug spending. Plans have responded in recent years with “co-pay accumulator” policies, which essentially bar manufacturers’ co-pay programs from allowing enrollees to meet their deductibles. Accumulator programs began to proliferate in ACA plans in 2017, and were inserted in plan descriptions in ways that were not easy for consumers to notice. The AIDS Institute and other disease groups have criticized plans for a lack of transparency and opposed accumulator programs more generally. Yet in the 2021 Payment Rule, CMS approved their use, provided that they were applied in a “uniform manner” and plans were transparent about their existence. It is not clear to what extent co-pay accumulators are prevalent in 2021 plans, or how transparently they are being labelled. A handful of states have since passed laws or are considering laws to prohibit co-pay accumulators. Yet other states have passed laws limiting the use of co-pay assistance programs to cases where generics are not available.
While the successful effort to create a COVID-19 vaccine may have temporarily diverted attention from prescription drug costs, the issue is a high priority to consumers and will doubtlessly return. Reflecting the level of consumer dissatisfaction, state legislative activity in the area of drug affordability has increased significantly in recent years. In addition to actions banning co-pay accumulators, a large number of states recently proposed or passed laws directly limiting out of pocket costs for drugs, particularly insulin. The recent favorable Supreme Court decision regarding the Arkansas law that sought to regulate prices that PBMs pay pharmacies may serve to further increase state legislative activity in this area.
Co-pay coupons, co-pay accumulators, and state cost sharing policies are all imperfect responses to affordability problems, because they operate on cost-sharing, well downstream of prescription drug prices, and force unhappy tradeoffs between higher premiums for all versus much higher cost-sharing for a few. These challenges will only increase as the use of costly specialty drugs grows, and policy approaches that are designed to reduce drug prices will continue to have strong bipartisan support.
The Implications of Eliminating Essential Health Benefits
Eliminating or permitting states to waive an ACA provision that requires participating health insurance companies to cover 10 essential health benefits could contribute to thousands of dollars in new out-of-pocket expenses for patients.