Editorial Board

An Easy Way to Cut Drug Costs

California is weighing a small but valuable change to its rules for pharmaceutical companies.

Those coupons come at a high price.

Photograph: MCT/MCT via Getty Images

In the absence of national action to control the high price of prescription drugs, California is considering a small state rule that could make a big difference. It targets a game that pharmaceutical companies play to keep people spending more than they need to on medicines.

The rule, contained in legislation now on the governor's desk, would bar the use of coupons to help consumers cover the cost of co-payments for any brand-name drugs for which there is a generic alternative that works as well.

At first sight, this policy looks like a loss for patients, because the coupons it would outlaw enable them to pay less for brand-name drugs than for generic ones. But when coupons are used, insurers still pay full freight, typically more than five times what they spend on generics. By encouraging patients and doctors to choose branded drugs, coupons raise spending, on average, by $6 million to $24 million per drug per year, according to a recent study.

Insurance companies then fold this expense into premiums, raising costs for everyone. The U.S. health-care system spends well over $300 billion a year on prescription drugs, and almost three-fourths of that goes to brand-name drugs, even though they make up less than one in eight prescriptions.

Most branded drugs have generic competitors, thanks in large part to a 1984 law that made it easier for generics to be approved by the Food and Drug Administration. And most private insurers charge their customers significantly lower co-pays for generic medicines -- to steer them toward the thriftier option.

But co-pay coupons for branded drugs are easy to find -- online and in doctors' offices. Patients can use them without insurers knowing, which makes it difficult for insurance companies to bar their use. Medicare, Medicaid and other government insurance programs prohibit co-pay coupons for branded drugs, but the rule is not perfectly enforced. The use of co-pay coupons has risen in recent years to account for more than half of retail spending on branded drugs.

The California rule could bring real savings in health care spending without compromising patients' health. Massachusetts already has a similar regulation, and other states should follow suit. But first Governor Jerry Brown should sign California's legislation into law.

    --Editors: Mary Duenwald, Clive Crook.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

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