The Insurance Companies' Latest Target: Specialty Drugs

04/25/2016 01:13 pm ET Updated Apr 26, 2017

Read the headlines these days and you'd think the health insurance companies are going broke. It's true most insurers offering Obamacare are losing money on it. UnitedHealth Group, the nation's largest insurer, announced it will all but exit Obamacare next year because of those loses. But insurance companies have not fallen on hard times. Anything but.

Obamacare may be a bust, but the overall portfolios for most insurers, all those products offered outside the Obamacare exchanges, have earned staggering profits under Obamacare. Look at insurers' stock prices. On March 23, 2010, the day President Obama signed the Affordable Care Act, UnitedHealth traded at $30.40 a share. Today, it's $133. UnitedHealth is not alone. In January, the Center for Public Integrity noted: "Health Net's share price has increased 224 percent [under Obamacare].... Anthem's is up 238 percent.... Aetna's 290 percent. Cigna's 305 percent. And Humana's 309 percent." How have insurers done it? By increasing deductibles, hiking premiums, and slashing coverage for medical services and drugs, especially specialty drugs.

In this rapidly changing business, one area of concern among some industry observers is drug reimbursement. To fathom the reimbursement system you have to understand how fees are determined. First, a drug must be placed on a formulary, a list of prescription medicines covered by insurance companies. Formularies may vary from one health plan to another, but if a drug is not on a formulary the consumer must pay for it out-of-pocket, often at 100 percent of the cost. Being profit driven, insurers want to maximize the number of drugs excluded from formularies. For those drugs that do make it, the formulary establishes the amount that is paid in reimbursement.

The creation of these formularies is a mysterious process, so much so Harvard Business Review put it this way: "The drug formulary is a giant black box." In recent years, insurers have begun using so-called third-party watchdog groups to evaluate individual drugs to determine their inclusion. One of the more visible groups is the Institute for Clinical and Economic Review (ICER), a Boston-based not-for-profit that describes itself as "a trustworthy, independent source to help assess how valuable a new drug really is."

But some critics question just how independent the organization really is. Its seed money was a $430,000 grant from the Blue Shield of California Foundation, which is funded by Blue Shield of California, a member of the Blue Cross Blue Shield federation of insurance companies. The BS funding continued; indeed, in 2013, the BS foundation accounted for two thirds of ICER's budget. In addition, one of ICER's affiliated organizations, California Technology Assessment Forum, was a part of the BS foundation before it merged with ICER, and a seat on ICER's corporate board is held by an officer from Blue Cross Blue Shield.

ICER also receives funding from other insurers, including Blue Cross Blue Shield of Massachusetts, Harvard Pilgrim Health Care, Kaiser Permanente, Partners Healthcare, Aetna, Anthem, and UnitedHealth. ICER president Steven Pearson has his own connection to the insurance industry, having once served as a research fellow at America's Health Insurance Plans (AHIP), the trade association representing insurance companies.

Another major supporter of ICER is John Arnold, a former Enron trader who became a billionaire as a hedge fund manager. Called a "right-wing ideologue" in The Wall Street Journal, Arnold wants to "significantly change patient care." He made a recent grant to Peter Bach at Memorial Sloan Kettering in New York to support a drug-pricing project. In an op-ed piece in The New York Times attacking a cancer drug, Bach admitted he was paid by the drug manufacturer's competitor, and in the contributors note for another article he disclosed he has been paid by AHIP and insurers like Anthem.

ICER may get support from other interests, but with so many ties to insurance companies, it should not be surprising that it often appears to favor insurers. As one think tank study pointed out: "[O]f the pharmaceuticals it has examined thus far, ICER has determined that most are too expensive" -- a boon for insurers. On Entresto, a treatment for chronic heart failure, ICER president Pearson said: "Just because it's a good long-term value doesn't mean you could afford it today without jacking up healthcare premiums a whole lot or doing other things to make money available." On Repatha and Praluent, treatments for high cholesterol: "Even if these drugs were used in just over 25 percent of eligible patients, then employers, insurers, and patients would need to spend on average more than $20 billion a year."

Indeed, a main focus of ICER is specialty drugs. As defined by Wellmark, specialty drugs are prescription medications "[requiring] special handing, administration or monitoring [that] are used to treat complex, chronic and often costly conditions, such as multiple sclerosis, rheumatoid arthritis, hepatitis C, and hemophilia." The drugs are expensive, but they are also highly effective in treating -- and curing -- complicated diseases. They represent a rapidly growing sector in the pharmaceutical industry -- the reason ICER has targeted them. Consider Sovaldi and Olysio, treatments for hepatitis C. With a high price tag -- $84,000 for a course of treatment of Sovaldi, $66,000 for Olysio -- they have an equally high cure rate -- 80 to 90 percent. Even so, Pearson announced this about Sovaldi: "It could be the right thing to do clinically, but at this price, can we afford it?"

In the broader picture, ICER embraces a value-assessment approach to evaluating drugs, not unlike the National Institute for Health and Care Excellence in the United Kingdom, which limits a drug's use based on cost. An arbitrary price is determined for a drug beyond which it is considered too expensive to be used. At present, Obamacare forbids price setting "as a threshold to establish what type of health care is most effective or recommended," but ICER advances the use of it anyway.

In short, the final goal of organizations like ICER is price controls. While that can cap prices in the short term, in the long term price controls produce drug shortages and decreased incentive for pharmaceutical companies to invest in future research. It will also lead to even larger profits for insurance companies, although they seem to be doing quite well already, despite the losses they are suffering from Obamacare.