Radical Prescription

A recent Rand study of 25 large firms found that raising the co-pay for pharmaceutical claims by just $5 reduced yearly drug costs per worker by $163.*

An interesting piece in the WSJ (“A Radical Prescription,” May 20, 04, R3) suggests that this logic does not always hold. Higher co-pays can cause consumers to cut back on prophylactic and maintenance medicines. Pitney Bowes, for example, found that high-prices caused their diabetic and asthmatic workers to take their medicines irregularly resulting in sudden and expensive attacks. So Pitney Bowes took a counter-intuitive strategy – to save money they would pay for more of their workers prescriptions.

On the new plan workers began to switch to more expensive but more convenient and thus easier to maintain drugs and within a year the company was saving money.

the company was paying more for maintenance medications… [but] it was spending significantly less on rescue medicines…

[S]ignficant saving has come from fewer emergency room visits, which dropped 35% among diabetes patients and 20% among asthma patients…there were also fewer hospital admissions and doctor’s office visits.

The strategy won’t work for all drugs but it shows how much care must be taken in devising optimal insurance plans.

* Originally, I had said this implies a cost to benefit ratio in excess of 30 (163/5). Robert Ayers pointed out, however, that the co-pay is per drug while the savings are per year. Thus the cost-benefit ratio must be lower than 30. The original source doesn’t provide the data to calculate it exactly, however. Thanks Robert!