commentary

(Providence Journal)

April 19, 2008

A Better Way to Pay for Prescriptions

by Dana P. Goldman

The pricing plans most people choose for their cell phones are simple: Pay one price and talk as much as you want. What if paying for your prescription drugs were as easy and appealing?

It's not as outlandish as it may appear. Paying for drugs the same way we pay for cell phones would encourage people to use as much as they need, not just what they can afford. That could result in better medical care, help avoid hospitalizations and cut medical expenses.

Such a plan is feasible for a broad array of drugs taken for long periods to treat chronic conditions, such as asthma, diabetes and high cholesterol. Our research shows that paying a flat annual fee for these medications could increase patients' drug use without altering their out-of-pocket spending, health-plan costs or drug-company profits.

While unique to health care, this type of “two-part pricing” plan is used across our economy. Buffet restaurants, cable and satellite television, and country-club memberships are services commonly sold at one price for all the service you need. The best example may be computer software. Instead of paying every time you boot up your computer, for example, you pay a one-time fee to buy a license for Microsoft's Windows operating system. This way you use your computer whenever you need, without concern for the software cost.

We examined how such a system might work for statin medications — the drug-of-choice for people with high cholesterol levels.

A typical American with employer-provided health insurance pays $25 for a month's supply of Lipitor, Zocor or another name-brand statin. While these drugs are meant to be taken every day, research shows that the typical statin patient takes his or her medication for just 7.8 months out of the year — a number that has declined as drug co-payment costs have risen. So considering these numbers, the typical statin patient pays about $195 a year for his drugs.

We suggest setting $195 as the price a consumer would pay for an annual statin “license,” which would give him or her access to a year's worth of the medication. A consumer's health-insurance provider would pay another $374 for the license — the same amount health plans now pay toward the drugs used by a typical statin user. This means the health plan and patients pay the same amount as they do now, but some basic psychology and economic behavior kicks in.

Having prepaid for his medications, the patient is more likely to make sure not to skip a dose. After all, he has already paid for it. A useful analogue is to think of how people eat at the Sunday buffet. (Unlike the buffet though, the pharmacist would ensure that patients aren't over consuming their drugs.)

There also are some salubrious side effects. Drug manufacturers would no longer have an incentive to push doctors to oversubscribe medications to existing patients — a serious issue, especially in light of the recent uproar over the use of anemia drugs in Medicare. Under a licensing model, manufactures get paid the same amount regardless of how much drug the patient needs, so they have less incentive to push over consumption.

Some patients may balk at the higher up-front cost. We could address that by offering payment programs — just as we make payments for our high-speed Internet service after we sign up for a year or two to get the best deal. But the patient (and health plan) would pay regardless of how much got used. Or we could lower the license fee in return for modest co-payments — something like $5 per prescription. Rebates would also be given to patients whose doctors switch them to another medication for clinical reasons.

Most of us choose a cell-phone plan that encourages us to call whenever we want, without keeping track of our minutes. The same incentives should encourage patients to take their medicines more often. Examining research about the impact of rising co-payments on patient compliance, we estimate that patients' use of statins would climb from 7.8 months to 9.8 months under such a drug-payment plan.

The big promise of our proposal is better care at no extra cost. If people with high cholesterol take their medication as prescribed — not just when they can afford it — they should be less likely to develop heart disease. That means fewer heart attacks, strokes and a lower rate of heart failure. That should lower health costs and improve quality of life. It's not a big enough change to declare the health system cured, but it's enough to make a difference.

New approaches in health care often have a hard time catching on because too often someone will lose, be it patients, providers, manufacturers, or insurers. But in this case, everyone can win.


Dana P. Goldman is director of health economics at the RAND Corporation, a nonprofit research organization.

This commentary originally appeared in Providence Journal on April 19, 2008. Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.