News and Commentary

Medication Payment Proposal Lets Consumers Pay Annually

Consumers pay a set fee for Internet service, cable and satellite television, health club memberships, and even all-you-can-eat buffets. Why should prescription drugs be any different? Researchers at Rand Corp. suggest a similar payment structure for prescription medication — with an annual license fee that would entitle consumers to a year’s worth of medication for each prescription they take to manage chronic diseases, with a very small or nonexistent copayment for each monthly supply.

This new payment structure could increase drug compliance without altering patients’ out-of-pocket spending, health plan costs, or drug company profits, according to the study, “Drug Licenses: A New Model for Pharmaceutical Pricing,” published in the January/February issue of Health Affairs.

“We propose a fundamentally new way for consumers to pay for medicines that are taken for long periods of time to treat chronic health conditions,” says Dana Goldman, a health economist at Rand.

Pharmaceutical manufacturers would charge insurers a license fee for each patient receiving unfettered access to their products, up to a predetermined level (e.g., 12 monthly payments per year).

In return, pharmaceutical companies would sell their drugs to the plan at very low cost, rather than at the typical mark-ups associated with patent-protected, brand-name medications.

To prevent resale, the number of units dispensed to the insurer would be bounded by the number of licenses sold multiplied by the maximum number of prescriptions allowed per license. The health plan would then pass this cost structure on to its beneficiaries in the form of a separate but similar drug license with low or nonexistent copayments.

This model would apply to any chronic diseases for which repeated medication is required and in which treatment costs depend on the level of use.

Consumers are already familiar with this “two-part pricing model,” according to the researchers. The authors cite examples in the nonmedical world, pointing to the use of software as the closest example: Instead of charging a fee every time a person starts her computer, Microsoft charges a one-time fee for the use of Windows.

The very low costs of production and low number of effective substitutes available make pharmaceuticals similar to software — and distinguish them from other health services.

Because usage fees are lower than they would be if charged per unit (the manufacturers make up this cost with the license fee), patients purchasing the product end up using more of it than they would if marginal prices were higher. According to the researchers, in the case of pharmaceuticals, license fees combined with zero or low copayments would increase drug use, in the same way that a consumer with an unlimited-minutes calling plan feels no constraint on the number or length of calls, and in the way that people at a buffet can be expected to eat a greater amount than people who pay per dish.

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Edited by Jill Condello, PhD, ICON Access, Commercialisation & Communications