Health Insurance Carriers Are Prescription Drug Pushers

This video provides an in-depth exploration of the financial incentives driving health insurance carriers to favor expensive prescription drugs, specifically focusing on how pharmaceutical rebates to Pharmacy Benefit Managers (PBMs) can circumvent the Medical Loss Ratio (MLR) regulations. Dr. Eric Bricker, the speaker, begins by outlining the fundamental financial structure of a fully insured health plan, using a hypothetical group of 100 employees paying $1 million annually in premiums. He details how the MLR mandates that 85% of this premium must be spent on healthcare claims, while 15% can be retained by the carrier for administration and profit.

The presentation then meticulously breaks down the claims portion, estimating that approximately 25% of total healthcare spend is allocated to pharmacy, translating to about 21% of the total premium. The core revelation is that a significant portion of this pharmacy spend, estimated at 25% (or even 27% in one cited study), is returned to the insurance carrier or its PBM in the form of "rebates" from pharmaceutical companies. This 5% of the total premium, derived from these rebates, is then effectively added to the carrier's 15% administrative and profit margin, resulting in a minimum 20% retention of the total premium. Crucially, this 5% "escapes" the MLR calculation, directly boosting the carrier's bottom line without being counted as administrative overhead.

Dr. Bricker further addresses the common counter-argument that insurance carriers implement prior authorizations (PAs) to control drug costs. He explains that pharmaceutical companies strategically counter these PAs with sophisticated "Market Access Programs," citing Humira Complete as a prime example. These programs provide extensive support, including pre-templated medical necessity letters and appeal forms, to help both patients and physicians navigate and bypass the prior authorization process, ensuring that prescribed medications are approved. This dynamic illustrates the inherent conflict of interest for insurance carriers, who are simultaneously beholden to pharmaceutical companies for rebate payments and to employers for premium payments, leading to a "two masters" scenario that Dr. Bricker argues is unsustainable in the long run.

Key Takeaways:

• MLR Loopholes and Rebate Exclusion: The Medical Loss Ratio (MLR) rule, which mandates that 85% of health insurance premiums be spent on claims, does not fully account for pharmaceutical rebates. These rebates, paid by drug manufacturers to PBMs/carriers, are often not passed through to employers and effectively escape the MLR calculation, boosting carrier profits.
• Financial Incentives for Expensive Drugs: Health insurance carriers are financially incentivized to have plan members receive more and more expensive medications. Higher drug spend leads to larger rebate payments from pharmaceutical companies, which directly contributes to the carrier's profit margin beyond the MLR cap.
• PBMs as Intermediaries: Pharmacy Benefit Managers (PBMs), often owned by or closely affiliated with health insurance carriers, play a crucial role in negotiating and collecting these pharmaceutical rebates, which are then retained by the carrier.
• Magnitude of Rebate Payments: Approximately 25% of all prescription drug spend can come back to the health insurance carrier in the form of pharmaceutical company "rebates," which are essentially commissions. This translates to roughly 5% of the total health insurance premium.
• Impact on Carrier Profit Margins: The 5% of premium dollars collected as rebates is added to the 15% administrative and profit margin allowed under the MLR, meaning carriers can effectively retain at least 20% of the total premium, a substantial increase to their bottom line.
• Pharma's Market Access Programs: Pharmaceutical companies actively develop "Market Access Programs" (e.g., Humira Complete) to help patients and doctors navigate and bypass prior authorization requirements for expensive medications. These programs provide step-by-step guidance, pre-templated forms, and direct support to streamline the approval process.
• Conflict of Interest for Carriers: The business model of health insurance carriers creates a fundamental conflict of interest, as they serve "two masters": pharmaceutical companies (who pay them rebates) and employers (who pay them premiums). This inherent conflict undermines their ability to genuinely control drug costs for employers.
• Regulatory Ambiguity: While CMS rules (42 CFR 438.8(e)(2)(ii)(B)) dictate that "Prescription drug rebates received and accrued" must be deducted from incurred claims, it remains unclear if other pharmaceutical payments to PBMs, such as administrative fees, formulary placement fees, and market share bonuses, are considered "rebates" under this regulation.
• Importance for Employers: Employers need to be acutely aware of the complex financial flows within their health plans, particularly regarding PBM contracts and the retention of rebates, to understand the true cost of prescription drugs and advocate for better cost containment.
• Unsustainable Business Model: Dr. Bricker posits that the underlying business model of health insurance carriers, characterized by serving conflicting masters, is ultimately unsustainable and will likely fail in the long term.

Tools/Resources Mentioned:

• 42 CFR 438.8(e)(2)(ii)(B): A specific CMS rule regarding prescription drug rebates and their deduction from incurred claims.
• Law.cornell.edu/cfr/text/42/438.8: Link to the Cornell Law School's Legal Information Institute for the Code of Federal Regulations.
• Civhc.org/2021/08/13/prescription-drug-rebates/: A source discussing prescription drug rebates.
• Humirapro.com/patient-support: Website for Humira Complete, a market access program for the drug Humira.
• AHealthcareZ PBM Money Flow Video: Another video by the same channel explaining PBM financial flows.

Key Concepts:

• Medical Loss Ratio (MLR): A provision of the Affordable Care Act (ACA) that requires health insurance companies to spend a minimum percentage (typically 80% or 85%) of premium revenue on medical care and quality improvement activities, rather than administrative costs or profits.
• Pharmacy Benefit Managers (PBMs): Third-party administrators of prescription drug programs for health insurance companies, Medicare Part D plans, large employers, and other payers. They negotiate drug prices, process claims, and manage formularies.
• Pharmaceutical Rebates: Payments made by pharmaceutical manufacturers to PBMs or health plans in exchange for favorable formulary placement or market share for their drugs.
• Prior Authorization (PA): A process used by health insurance companies to determine if they will cover a prescribed medication, procedure, or service based on medical necessity criteria.
• Market Access Programs: Strategies and support systems developed by pharmaceutical companies to help patients and healthcare providers overcome barriers (like prior authorizations) to accessing their prescribed medications.

Examples/Case Studies:

• Hypothetical Fully-Insured Group: A group of 100 employees paying $10,000 per employee per year, totaling $1 million in annual premiums, used to illustrate the MLR and rebate calculations.
• Colorado Employer Study: A reference to a study of employers in Colorado that found 27% of their total pharmacy spend was returned to the insurance carrier/PBM in rebate payments.
• Humira Complete: Presented as a specific example of a pharmaceutical company's market access program designed to assist patients and doctors in navigating and bypassing prior authorization processes.