Wednesday, January 16, 2019

Is the Drug Industry an Existential Threat to the Private Health Insurance Business?

At a time when many Democrats are calling for a single-payer health insurance system, are the drug companies inadvertently driving the system on a course to that end?

Consider this.

The longtime political firewall against a single-payer system has been the satisfaction consumers have had with their employer-sponsored health insurance. Most voters have had no interest in giving up their affordable and attractive employer health benefits for the uncertainty of a one-size-fits-all government-run plan.

Employer-sponsored health insurance covers 140 million people—by far the largest part of the under-age-65 health insurance system. Most of these people are in the politically all-important middle class.

But in recent years, the employer share of premiums and out-of-pocket costs has been exploding (Willis Towers Watson, November 2018):

  • The unemployment rate is 3.7%—the lowest since 2000.
  • But, corrected for inflation, wages are up only 2% since January 2015—about one-half of one percent annually.
  • For the bottom 60% of workers by income, wage gains have been completely wiped out by contributions for employer-provided health insurance.
  • For the bottom 50% of workers, employers’ health insurance contributions averaged 30% to 35% of the total compensation package.
  • From 1999 to 2015, worker premiums for a family plan more than doubled in inflation adjusted dollars, from $2,000 annually to $5,000.
In 2008, the average annual share of health insurance costs for employees was $3,354 but by 2018 that was up to $5,547:

Driving these costs has been pharmacy.

I recently polled a number of my clients on their historic and current drug spend.
  • Twenty years ago, drug spend as a percentage of overall medical costs for a health insurer regularly ranged from 5% to 7%.
  • Today, all drug costs, including specialty drugs and infusion drugs, range from 30% to 35% of all costs.
  • Today, employer plan health care cost trend is regularly reported by health plans to be in the 5% to 7% range. 
  • When their drug cost trend is subtracted from overall trend, non-drug trend is about 2%—essentially the level of current overall inflation.
To me there is an inescapable set of conclusions here:
  • Because of the impact health insurance costs are having on take home income, we are at risk that the historical attractiveness employees and their families have had for employer-based health insurance will be lost.
  • If the health insurance industry loses the support of employer-plan participants it will have lost the firewall that has made voters reluctant to support government-run health care.
  • The health plan industry is providing health insurance to consumers for physician, hospital, and related costs at an annual level of increase that is close to overall inflation.
  • With drug costs exploding from 5% to 7% of total costs to now 30% to 35% of costs, the primary villain in the multi-year erosion of the value of the employer-provided health benefit, and private insurance generally, has been drug costs.
Voters, Donald Trump, the Democrats, and the Republicans have all cited drug costs as a huge economic issue that has to be brought under control.

But for the private health insurance industry, it could be the one major factor that does them in if a solution isn’t found.

I can’t see a more important issue for the health insurance industry than the unfettered ability of drug companies to unilaterally dictate prices.
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