Economic Communication in Healthcare

This months article is a bit different from my normal articles. I have been involved in the health care industry for over 15 years and have many opinions on how our health care system can be improved. This article is about a small change that I feel will help control the cost of prescription drugs. The essence of the article is how to improve communication which has been a central theme in most of my articles.

A partial solution to providing Prescription Drug coverage

Prescription drugs come in 2 varieties: Generic and non-generic. The generic drugs are much cheaper. When a drug is first introduced, the manufacturing company has an exclusive patent. This allows it to recover the research and development costs, which are usually very substantial. When the patent runs out other companies, will manufacture the identical drug and sell it as a generic drug at a greatly reduced price. When a drug is about to come off patent the original company reformulates the drug with enough improvements to get a new patent.

In most industries, the producer and consumer directly communicate with each other. This allows natural price controls to exist. If the consumer feels a product is too expensive he/she will not purchase it or will look for another vendor offering a better price. Or a substitute product will be purchased that gives similar benefits. The economics of healthcare are different because the insurance companies pay most of the bills and the consumer (the patient) frequently does not know the cost of what they are purchasing. In my prescription plan I pay the same amount ($15) no matter what the price of the medication. Since there is also no cost to my doctor, when we are discussing treatments there is no incentive to choose a generic drug.

My suggestion to return some of the market forces to prescription drugs is for the co-payment to be a percentage instead of a flat dollar amount. If a percentage of the price were used then the incentives are back on the patient. For example if the co-payment is 15%, then for a medication that costs $100 the co-payment is the same-$15. However, if there is a generic available for $50 the co-payment would only be $7.50. Obviously there would have to be some modifications and safeties put in place such as maximum and minimum amounts. For example no co-payment should be over $75 or under $5.

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