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You are here: Home / Anderson On Health Insurance / Multi-million dollar drugs and reinsurance problems

Multi-million dollar drugs and reinsurance problems

by David Anderson|  August 27, 20198:53 am| 26 Comments

This post is in: Anderson On Health Insurance

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The New York Time’s Reed Abelson and Katie Thomas have an incredible story earlier this week on one Ohio family’s four million dollar drug claim.  The family is insured through their union.  The union is a self-insured plan with sixteen thousand covered lives.  And despite having a fairly large risk pool, this one family has a notable impact on total claims. We will dig into reinsurance and then extend this logic to the ACA individual market.

The drug, Strensiq, treats a rare bone disease that afflicted her with excruciating pain and left her struggling to work or care for her family.

A year after she began taking the drug, Ms. Patterson, 49, credits it with nearly vanquishing her pain, enabling her to return to workpart time for a hospital….At one point in 2018, for every hour that one of the union’s 16,000 members worked, 35 cents of his or her pay went to Alexion to cover the Pattersons’ prescriptions….Because Strensiq needs to be taken indefinitely by patients who need it,

The union is self-insured.  That means they hire someone to handle the plan administration but the union or its welfare fund pays out all claims.  When the welfare fund has a good year, the union members benefit.  When the welfare fund has a bad year, the union members have to kick in more.  A family cluster of three people with multi-million dollar claims is a good case example of a bad year.  A family cluster of three with recurring multi-million dollar claims is an excellent case example of a very bad decade.

Most self-insured plans will buy commercial re-insurance.  Reinsurance in the private sphere has a different function than ACA reinsurance.  As we discussed last week, ACA reinsurance primarily serves as a way to partially segregate some high cost claims from general premiums:

an external source of state based money is added to the pool of money collected by premiums.  This new pot of money is then used to pay claims and since, on a static analysis, the claim expense does not change, the average premium can decrease because it is displaced by some external funding.  The theory of change can range from a political need to do something and this is something for high, non-subsidized premiums to a more technocratic justification that the ACA individual market is acting as a quasi-de facto high cost risk pool and it should be compensated as such by other entities.

Private reinsurance is funded through premiums and it serves to eat risk. Risk is a term of art for insurers. It means statistically possible but uncertain events. Certainty is the opposite of risk. Reinsurers will offer contracts to self-insured groups offering to take on some percentage of claims above a threshold. These reinsurance contracts tend to be renegotiated every few years. During negotiations, the re-insurer will look at the claims experience of the group and offer riders.  Those riders can be exclusions for certain conditions, drugs or diseases, or they can be modified limits where the contract under most circumstances starts transfers at a quarter million dollars but for the case of the specific indications where transfers start at two million dollars.  The union in this family’s case probably received some reinsurance payments for the first year as Strensiq was a statistical risk.  However if the reinsurance was renewed, Strensiq had become a certainty.  Reinsurers will not cover certainties. The same logic applies to insurers if the union attempted to convert their welfare fund to a fully insured plan; the insurers would use the claims experience to set premiums and the multi-million dollar drugs are part of the baseline.

The union has three basic choices.  It can not cover the drug, it can raise premiums to cover the expected spend, or it can find a way to send the Patterson family (and many others) to the ACA individual market via the new HRA arrangements.

The ACA market has two very different sets of responses depending on the market structure.

If the ACA individaul market is a monopoly or a de facto monopoly where the dominant carrier has 95% of the membership and even more of the revenue, the insurer will welcome new people with multi-million dollar claims.  Most of the line of business is subsidized so there is a huge cohort of folks who are mostly price insensitive or at least have a price ceiling on their premiums.  A bolus of very expensive claims raises the index rates which mechanically increases the premium spreads.  For subsidized individuals who are buying plans priced below the benchmark in a monopoly market, adding the Patterson family makes them incrementally better off.  Non-subsidized folks are worse off as premiums increase.

If the ACA market is mostly competitive, then the insurers have a different strategic calculus.  They know that whomever gets the Pattersons will receive some catastrophic reinsurance money.  The Feds will pay out 60% of the tab per person from the nationwide ACA QHP premium funded catastrophic reinsurance pool once an individual claims hit $1 million. Net of federal reinsurance, the insurer who covers just the mother, Mrs. Patterson, could expect to need to pay out $1.6 million minus any state based reinsurance and any risk adjustment.  Many conditions with orphan drug treatments either don’t risk adjust at all  or poorly risk adjust.

If we assume that the combination of federal and state reinsurance payments plus risk adjustment payments plus premiums brings the Pattersons’ costs to close enough to revenue, insurers won’t behave differently.  If there is a massive gap between net revenue and net expenses, insurers will strategically run like hell.  There are a few forms of running; keeping high cost drugs off formulary, or adding significant administrative burden to getting these drugs are the softer forms of running while strategic exit from particular counties to dodge risk is a more explicit running strategy.  The business logic is clear:

a problem given the market design. Rates have to be high enough to cover this individual’s costs. In a competitive market where the subsidies are tied to the second least expensive Silver and there is one super-outlier who can not be re-insured against, every carrier lives in fear of being chosen by the one outlier. If they set their rates low enough to be attractive to healthy people, they lose money on the catastrophic expected claims. If they set the rates high enough to cover ….  no one buys their product.

As we see more and more treatments that are both recurring and extremely high cost, the insurance market design problem gets more difficult.

 

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Reader Interactions

26Comments

  1. 1.

    Mathguy

    August 27, 2019 at 10:10 am

    It’s insane that a drug costs$4,000,000 a year. Perhaps the overpaid drug company CEO can kick in from his bonus to cover it.

  2. 2.

    kindness

    August 27, 2019 at 10:18 am

    I understand I’m an entitled Boomer and all but the idealistic me thinks no drug should cost a million (or more) a year. It just shouldn’t.

  3. 3.

    Lee

    August 27, 2019 at 10:21 am

    Holy shit. That is insane.

    This drug was initially researched with government funds right?

  4. 4.

    jl

    August 27, 2019 at 10:29 am

    China may be greatly expanding its market to important generic drugs, probably main supplier will be India. India has been resisting US efforts to make it conform to the current US patent and IP system which is, by historical standards going back over 100 years in both the US and Europe, extremely, outrageously friendly to corporate profits.

    China Goes Generic!
    Written by Dean Baker
    Published: 27 August 2019
    http://cepr.net/blogs/beat-the-press/china-goes-generic

  5. 5.

    Jay C

    August 27, 2019 at 10:35 am

    It’s an interesting subject to raise: the effect of multi-million-dollar drug regimes on (relatively) small-scale health insurance plans, but IMO, misses (entirely) the main question: WHY are there even “multi-million-dollar drug regimes”?
    $4,000,000 a year? For one family (one patient, apparently)? Why is (what one presumes is) that much of the development cost of this Strensiq drug being charged back to this single user – and how many people in total are using this medication – and for how much? And who is making [back?] all that money?

    It seems like a classic case of the basic American healthcare model – where the unlucky patient gets the choice of;
    1) Dying in horrible pain from some disease or condition
    2) Going bankrupt paying for treatment (and probably dying anyway)
    3) Rely on a healthcare plan that MAY spread the risk of bankruptcy around a bit (but with no guarantees against case 1)

  6. 6.

    Victor Matheson

    August 27, 2019 at 10:36 am

    Yeah, go to the ACA. Here’s what the union tells that family:

    We will buy you whatever single person ACA plan you want that is available in your area and put $8,150 in an HSA for you (in order to cover the 2020 out of pocket maximum for 2020). That will cost the union about $15,000 in order to save $4,000,000.

    Obviously, this just shifts the burden to someone else, but quite honestly, that it not the union’s problem. And if they go to the ACA, since lots of those plans will be subsidized with federal dollars, the cost of the spouse’s coverage will in part be spread over the entire country.

  7. 7.

    MattF

    August 27, 2019 at 10:36 am

    It’s interesting that the existence of extremely expensive drugs for extremely rare diseases is the result of deliberate policy. We had the Orphan Drug Act– and, presumably, good intentions– but did anyone predict that the magic of the marketplace would produce these results?

  8. 8.

    Victor Matheson

    August 27, 2019 at 10:49 am

    @Mathguy: This very well could be a fair price for this drug for multiple reasons.

    1. This disease affects 3000 in the US (and maybe a similar number in Europe). If the treatment cost $1 or 2 billion to develop, on the low side of most drug development costs, that is over $300,000 per patient just in the development.

    2. Here is the big one. This is an enzyme replacement therapy. Super, super tricky to make. This is not a simple chemical compound drug that once you know the formula, Walter White can make it in his basement. For a similar product my wife was using for her patients, Genzyme (the company producing the treatment) took 3 years trying to figure out why their multi-billion R&D investment and enzyme breeder couldn’t actually produce the enzyme they had invented. She had to ration the drug to her patients due to the fact the company couldn’t figure out how to actually make the product in bulk that they themselves had spent $billions inventing.

    3. This is clearly a special case. There is very likely something about this woman that causes her to need way more product than an average person for proper treatment. This is the same thing that happened with the Iowa hemophilia patient a few years ago. He developed a reaction/resistance that caused him to need 10x the clotting factor that a typical patient required.

  9. 9.

    Another Scott

    August 27, 2019 at 10:50 am

    @jl: Dean Baker and CEPR have been telling us for years that the Drug Patent system is broken and costing us more than just mone[y]. E.g:

    […]

    The paper, “Patent Monopolies and the Costs of Mismarketing Drugs,” examines the cases surrounding the prescription drugs Vioxx, Avandia, Bextra, OxyContin and Zyprexa. In each of these cases, there was either a court ruling against the company or a large settlement paid by the company, evidence that the maker of the drug misrepresented their research to preserve and/or expand the market for the drug in question.

    For example, the authors’ estimates indicate that excess cases of cardiovascular disease and premature death due to the use of Vioxx resulted in lifetime costs of $96 billion. For OxyContin, a drug both aggressively promoted and misbranded as “mildly habit forming,” the costs for premature death and abuse-related costs came to $102 billion. In the case of the antipsychotic Zyprexa, drug-maker Eli Lilly downplayed the known side effects of diabetes and obesity while marketing it to children and the elderly—patient groups that were not approved by the FDA. This resulted in 42,600 excess cases of diabetes at a cost of almost $4 billion. Cumulatively, all five cases examined in the paper were estimated to cost $382 billion from 1994 to 2008, or roughly $27 billion a year. This is roughly the same amount the pharmaceutical industry spent on research at the time.

    These costs represent a small fraction of the total costs of mismarketing drugs. However, the cases cited in the report suggest that the damage done by mismarketing is quite significant compared to the amount of research induced by patents. This is an indication that there are likely more efficient alternatives to patent-monopoly-supported drug research. An avenue such as publicly financed research could reduce the incentives for harmful rent-seeking behaviors and the consequent social and financial costs.

    It’s directly and indirectly killing people. :-(

    We need to Do Something.

    Cheers,
    Scott.

  10. 10.

    Jay C

    August 27, 2019 at 10:50 am

    @MattF:

    but did anyone predict that the magic of the marketplace would produce these results?

    Probably. But I’m sure their cavils were dismissed – probably by specious arguments along the lines of “socialized medicine” utterly and completely disincentivizing any sort of medical research whatsoever. Cases like Strensiq seldom seem to get mentioned, since they tend to bring up a relatively unpalatable truth regarding this country’s entire health system. I.e., that it has come to be organized along classic American corporate-capitalist lines, where some company’s bottom line profit is always going to considered the fundamental goal/basic principle. Well, that: and the expenditure of large amounts of money on advertising and PR to convince ourselves that we have “the finest healthcare system in the world”….

  11. 11.

    Victor Matheson

    August 27, 2019 at 10:51 am

    @jl: As I noted previously, going generic is not likely to be a complete solution here. This enzyme therapy would probably still be horrifically expensive even with a generic supplier due to the difficulty of manufacturing these products.

  12. 12.

    Wesley

    August 27, 2019 at 10:58 am

    @Victor Matheson, the problem with this drug’s pricing is that the woman’s case is NOT an unusual dosing for an adult. Alexion priced the drug for an infant, and when it was approved for adults, they just upped the dosing (clinically appropriate to be sure) but kept the price the same. They can still put out press releases saying the drug is $400k a year because they are conveniently forgetting to mention that if an adult needs this, it is $2-$3 million a year, into perpetuity, and that’s assuming they are not overweight. Unlike other $1 million + drugs, this doesn’t cure the condition, just treats the symptoms (effectively, sure, but at what point do we as a society say that $60 million over the life of a patent is beyond what we should be paying for a single person?). Alexion’s margins aren’t hurting. This is rent-seeking pure and simple, on top of all the massive tax benefits they’ve reaped through the Orphan Drug Act. Alexion bought the drug for $1 billion dollars and their development costs beyond that weren’t enormous

  13. 13.

    Cermet

    August 27, 2019 at 11:00 am

    @Victor Matheson: NO drug costs anywhere near a few hundred million – ever – to develop. As for a billion or more – LOLOLOLOL. Bullshit. As for exceeding 10 million to develop (many high end drugs) , a few do and rarely more but that includes marketing cost (often 50% or even more (then a 100 million occurs but that is paper cost, not real) for the total development cost – doctors need free trips to be induced to use it since it is often of little to marginal benefit for many new drugs.)

  14. 14.

    Victor Matheson

    August 27, 2019 at 11:02 am

    @MattF: Well, without the Orphan Drug Act, the most likely outcome is that the mother in Ohio has no treatment and continues to suffer horribly. The majority of the costs of this drug are not going away if you socialize the treatment.

    There are only two real questions here.

    1. Should we as a society bother spending billions of dollars on drugs to help only a small number of people?

    2. If the answer is yes, then who should pay for these treatments – the family, the union, the country as a whole, or the world as a whole?

    My answers would be “generally yes” to 1 (but not always), and the “US/Europe/Japan as a whole” for 2, at least for now.

  15. 15.

    Another Scott

    August 27, 2019 at 11:04 am

    @Jay C: Over the last few weeks I’ve been hearing a short ad on my local NPR station (WAMU – don’t know if it’s national). Something like, “With support from Apple Pie and Kittens Drug Industry Lobbyists – Let’s support affordable medication, but not at the cost of innovation.”

    Titanic, Inc – Let’s support life rafts, but not at the cost of sleek lines and packing density!

    Grr…

    Cheers,
    Scott.

  16. 16.

    Victor Matheson

    August 27, 2019 at 11:05 am

    @Cermet: From 2014 – “A new report published by the Tufts Center for the Study of Drug Development (CSDD) pegs the cost of developing a prescription drug that gains market approval at $2.6 billion.” Unless, you have a better source, I am sticking with what I have got.

  17. 17.

    Ohio Mom

    August 27, 2019 at 11:07 am

    I remember my introduction to this topic. In my twenties I worked for a local office of a small national nonprofit.

    Several years we were all sent letters saying something along the lines of, A member is undergoing expensive cancer treatment/had a very premature baby/etc. (obviously this was before HIPAA) so everyone’s rates are going up.

    Since I was responsible for raising most of the money for my little program, I was always conflicted. Should I feel sorry for this poor sap in a faraway city, or irritated that there went a portion of my next year’s raise.

    I knew nothing much about health insurance back then but even in my youthful ignorance it was obvious this wasn’t a workable system.

  18. 18.

    Victor Matheson

    August 27, 2019 at 11:10 am

    @Wesley: Interesting that you should bring up weight. Definitely a big issue with enzyme replacement. I know a story of a on enzyme replacement who was morbidly obese which ended up requiring an extra $200,000 per year in product paid for through the patient’s insurer, which was the taxpayer in this case. Interesting ethical dilemma about who should pay that extra amount.

  19. 19.

    Another Scott

    August 27, 2019 at 11:25 am

    @Victor Matheson: A rebuttal at FTFNYT.

    […]

    When the last study was published, a number of other organizations did their own analyses as well. One was by Public Citizen, the advocacy group founded by Ralph Nader, which basically took the amount that pharmaceutical companies reported in research and development over a period of time, and then divided it by the number of drugs that obtained F.D.A. approval. The group came up with $161 million.

    In 2010, a systematic review of studies that looked at the cost of drug development was published in Health Policy. The review found 13 articles, with estimates ranging from $161 million to $1.8 billion (in 2009 dollars). Obviously, methodology matters.

    The best thing might be for pharmaceutical companies to open their books and allow researchers to verify these findings independently. That’s unlikely to occur. As long as others control the data and the methods used to analyze them, we will continue to disagree as to how much it costs to develop new drugs.

    FWIW.

    Cheers,
    Scott.

  20. 20.

    David Anderson

    August 27, 2019 at 11:40 am

    @Another Scott: The major problem with the Public Citizen methodology is that Big Pharma R&D budget is split between the bench scientists who get dedicated R&D funds that are counted AND the Mergers and Acquisitions department where Big Pharma buys out a start-up with a promising compound that is about to go into Phase 2 trials. The M&A does not count as R&D but it effectively serves as such in this instance.

  21. 21.

    PAM Dirac

    August 27, 2019 at 11:49 am

    @Another Scott: I find that the groups that come up with low numbers for the cost of drug development almost always have zero experience in actually finding drugs. If there were people that really knew how to find useful and safe drugs quickly and cheaply, why aren’t those people doing it? There is incredible diversity in the companies/academic groups/charities that are trying to find useful therapies, but somehow only the greedy ones actually bring drugs to market? Finding useful drugs is extraordinarily difficult. Only 10% of the entities that make it to clinical trials end up be approved and it is only 5% for cancer drugs. Any notion that all that has to be done is eliminate “bad guys” and then everything will be fast, cheap, and safe is completely delusional.

  22. 22.

    Sloane Ranger

    August 27, 2019 at 11:58 am

    Probably not the case here but I remember reading that, with the growth of drug resistant strains and gene therapy, drug companies aren’t sure how long a drug will be effective/the usual treatment for any particular condition, so they want to get their costs back and go into profit ASAP.

    Not a medical professional, have no connections in the field and a proud recipient of socialised medicine so may have misunderstood.

  23. 23.

    Seanly

    August 27, 2019 at 12:20 pm

    JFC, I avoid saying this Every. Single. Time that we get one of theses posts, but at some point we have to admit that the entire industry is just broken as hell. Wouldn’t it just be 10000 times easier to have a single-payer system? It’s such a big market and there are some many sick people that the greedy bastards who want to get rich will still find a way.

    I appreciate the hard work & dedication David puts into these posts, but the unspoken answer always seems to be that we need to shitcan the current system & try again.

  24. 24.

    Hoodie

    August 27, 2019 at 12:32 pm

    @Another Scott: The purported connection between patents and the mismarketing described seems tenuous except to the extent that drug companies always want to expand their markets and higher margin (e.g., patented) drugs would mean even bigger profits. However, drugs like oxy might be even more mismarketed if they weren’t patented, as the margins would be lower and the drug company (e.g., a generic mfr) would have even more incentive to expand use to make it up in volume. Seems like the problem is the regulation of marketing and off-label use, not patents.

  25. 25.

    David Anderson

    August 27, 2019 at 12:59 pm

    @Seanly: Let’s assume that there is 218-51-1-5 for single payer tomorrow morning.

    There is still A) Transition time so this will be a problem for several more years

    b) The price finding system between the US government and the makers of orphan drugs that will still find some number that either works for both parties and allows for an effective drug to be made available to people who need it like the Pattersons at some price or increased pain as no number could be found that works.

    Going to single payer would reduce the union strategic decision making problem and a competitive ACA insurance market strategic dynamics problem, but it does not resolve problem B.

    As a side note, I was talking with a colleague of mine about this NY Times article and they noted that I tend not to think about what could be and mainly think about what is. And that criticism is 100% true. 97% of my public writing is within the paradigm of the current and the near future possible. That is a deliberate choice I make as I am really good at finding the edge cases within a current rules universe and then running those edge cases into the ground. I am at best mediocre thinking about a future rules universe.

  26. 26.

    TenguPhule

    August 27, 2019 at 2:02 pm

    @Cermet:

    NO drug costs anywhere near a few hundred million – ever – to develop.

    This tells me you know nothing about R&D.

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