How Does Prescription Drug Insurance Work?
Every insurance plan has preferred drugs, brand name drugs and drugs that are either not covered or have a high co-insurance cost. These are often arranged into Tiers.
Tier 1 – Generic Drugs
- Once a drug has been on the market for 20 years (25 in some circumstances), the patent held by the company which created the drug expires. This allows other companies to create the exact same drug (chemically and in delivery) for a tiny fraction of the price.
- Lowest copay amount
Tier 2 – Non-Preferred Generic Drugs
- Same as above just more complex or expensive ingredients. Could also be generics purchased by new companies trying to drive profits.
- Slightly higher copay amount
Tier 3 – Preferred Brand Name Drugs
- These drugs are less expensive than the Non-Preferred list, but are still under patents and therefore significantly more expensive than a generic.
- Often have a higher copay than a generic drug
Tier 4 – Non-Preferred Brand Name Drugs
- These are expensive drugs which are still under patent. They are often the brand name drugs for the generics in Tier 1. Considered an unnecessary insurance expense.
- These drugs are often susceptible to a copay and having to pay the cost difference between the Brand Name and the Generic version.
Tier 5 – Specialty Drugs
- These drugs are expensive, new and used to combat complex diseases.
- They are often not covered at all or require heavy co-insurance payments and restrictions on access.
So…how do tiers become tiers? Why is a drug covered under one insurance plan and not another? Who controls this system?
Pharmacy Benefit Managers
Insurance Companies and Employers contract PBMs (Pharmacy Benefit Managers) to organize and negotiate plans with pharmacies and drug companies. These folks are super important to understanding the cost of pharmacological medicine.
BCBS uses Prime Therapeutics from Irving, TX, as their PBM for many of their plans. According to Prime Therapeutics’ website:
“Prime Therapeutics’ NetResults is one of the most aggressive formularies in the industry. And it works. Our clients are seeing an estimated savings of more than $10 per member per month.
So being aggressive pays off — we get people the medicine they need without the use of high-cost drugs.
Go bold or go home.”
So wait. You do this formulary thing and we avoid high-cost drugs and everyone wins? Cool.
What’s a formulary?
A formulary is a tiered list of drugs covered by a prescription plan. The “NetResults” formulary can be accessed here. It uses a “p” for Tier 1, “np” for Tier 2, “P” for Tier 3 and “NP” for Tier 4. The copay assigned to each of those tiers depends on how much your insurance company/business wants to pay for prescription coverage.
The average copay for a three-tier system (usually combines tiers 1 and 2 from above and excludes all drugs from tier 5) are $11 for Tier 1, $31 for Tier 2 and $53 for Tier 3.
Average Wholesale Price
The Average Wholesale Price is the price a pharmacy buys the drug for in bulk.
It is considered the industry’s average price paid by a pharmacy to a drug manufacturer per 30/day or traditional supply. You can find the federal government’s ACA payment AWP list here.
Let’s use Meloxicam 15mg as an example. Target offers it for $4 without insurance. The FDA says its AWP is about 1 cent a pill. That’s a wholesale cost of 33 cents per 30 day supply. With my insurance it is $4.18/30 day supply at Walgreens (as mine is a percent, not a copay). The average cash price for the same amount is $13.78. Priority Health will charge you $7 after you meet their $75 deductible.
NOTE: The pricing isn’t even this simple as it is what the manufacturer reports to the government. It doesn’t include all of the standard rebates and coupons given as incentives to PBMs and Pharmacies in the form of checks after our collective purchases.
Has it ever occurred to you that pharmaceuticals are like a grocery store without price tags? Everyone pays a different amount and no one knows exactly why. But more importantly, does Walgreens keep all of the 1,250% markup on my Meloxicam?
A PBM clawback occurs when an insurance company assigns expensive copays to a drug, a price that may be significantly higher than the actual value and acquisition cost of the drug.
Clawbacks occur when your pharmacy submits a claim for a prescription drug, and you’re directed to collect a specific dollar amount for the copay. The amount will likely be excessive and unrelated to the acquisition cost of the drug. – pbahealth.com
So for example, if you paid that $7 co-pay for 30 days of Meloxicam and Walgreens paid 33 cents, the PBM would clawback over $6 of that copay YOU PAID after paying your deductible and monthly premiums. The amount of clawback to these PBMs has skyrocketed the cost of medication.
- The PBM negotiates with drug companies to decide which drugs will be part of their formulary and on which tier.
- The PBM establishes a rebate program for themselves based on purchases made by member of their formulary.
- The PBM then sets the copay amount (often far above the actual price of the drug).
- When the copay is more than the pharmacy charges, the PBM claws back all of the copay paid beyond the cost of the drug.
On top of this, you could have gotten the prescription cheaper by paying cash and not using your insurance. But, if you’re a pharmacy, telling a customer not to use their insurance is asking for big-time PBMs to make your pharmacy a persona non grata under all plans they administer. That would be a huge loss.
What Did We Learn?
There is a lot about pharmaceuticals that needs overhaul and transparency. When the pharmaceutical rep shows up in a short skirt to your doctor’s office talking about the next big drug, she’s bringing with her a list of PBMs who have tiered that very medication. The whole system revolves around a few key players who negotiate the prices, set the premiums, set the copays, choose the drugs, tell the doctors what scripts to write, tell the pharmacies what to charge and then collect back huge sums of cash from your family’s bank account. We need transparency so that we can reform this broken system. The only thing that can fight darkness is the light of day.
Micah Crittenden is a Senior Writer for American Research and is on Twitter at @thatgingerish