Reinsurance Protects Against Rising Drug Costs

By Matt Smith

Reinsurance Protects Against Rising Drug Costs

Consider these astonishing statistics about the cost of specialty drugs in the U.S.:

  • Zolgensma, which cures spinal muscular atrophy in children, costs $2.1 million for a single course of treatment
  • Actimmune, Myalept, and Daraprim, which are filled at pharmacies and self-administered, all cost over $40K for a typical monthly supply
  • From 1998 to 2017, the average per-patient cost for orphan drugs increased 26-fold. 88% now cost more than $10K per patient per year
  • Between 2013 and 2017, the national spend on prescription drugs rose by 25.7%

In the era of gene therapy, cures for once-incurable diseases are getting FDA approval on a regular basis. These treatments offer hope to thousands of people, but the price tags for these miracle drugs are escalating. Today, we’re seeing examples of a single member’s health claims exceeding $5 million, $10 million or even $20 million in a 12-month period, whereas 10 years ago, a $1 million claim was rare.

While most people aren’t faced with rare diseases that rack up excessive medical fees, the outsized cost of new drugs for rare, complex or chronic conditions are driving up costs for everyone, from the insureds to the insurers.

Here, we break down the main contributors of the sky-rocketing costs.

Orphan drugs are treatments for rare conditions that only affect a small portion of the population. It used to be that no pharmaceutical companies went after those illnesses because they couldn’t recoup costs. But that changed when the Orphan Drug Act passed in 1983, which encouraged pharmaceutical companies to invest in rare diseases. Now, orphan drugs are extremely profitable, and the jaw-dropping costs are passed on to insurance companies and health plan members. In 1998, orphan drugs accounted for only 10% of drug approvals in the U.S. In 2017, they accounted for 44%.

Cures for chronic conditions. Historically, chronic conditions like hemophilia, Hepatitis C and Crohn’s Disease meant that patients received treatments throughout their lifetimes, giving pharmaceutical companies a recurring, steady revenue stream. But recent medical breakthroughs for some diseases are changing the market dynamics. For example, the drug sofosbuvir, sold as Solvadi, which won FDA approval in 2013, offers a complete cure for the Hepatitis C in 90 days. So, the pharmaceutical company restructured its pricing model. After all, if you’ve been able to sell a drug to one patient every month for 40 years, but now you can cure the disease in 90 days, drug companies lose money. As a result, they can now charge the equivalent of a lifetime supply in one up-front sum.

National policy on health care has also failed to curb drug pricing. Because the U.S. doesn’t regulate drug pricing, there are no limits on how much pharmaceutical companies can charge. Additionally, when the Affordable Care Act passed in 2010, it stripped insurance companies’ ability to set annual and lifetime limits on a member’s coverage. A health plan that might have placed $1 million per person maximum on coverage per year, or a $5 million limit over a lifetime, now takes on unlimited exposure annually and for lifetime coverage.

For insurance companies, health plans, HMOs and underwriters, purchasing reinsurance is the primary protection against excessive claims, but it’s not a silver bullet. With new drugs being approved all the time and providers trying to meet the needs of patients, there is a significant risk that a reinsurer may determine a drug isn’t covered due to it being “experimental,” used “off-label,” or not “medically necessary,” according to the reinsurance contract. As a result, it’s critical to utilize pharmaceutical contract language that both parties understand and agree regarding the intent of coverage in the reinsurance agreement.

Pharmaceutical breakthroughs and their exorbitant price tags is a trend that’s not going away any time soon. Reinsurance helps with the volatility insurers face in covering costs, but it’s often complex and nuanced. As reinsurance brokers, our job is to be aware of the language in contracts regarding what claims are covered and to ensure our clients have the reinsurance coverage that matches their underlying claims exposure. That can mean adjusting contract language, and if necessary, changing the reinsurer to ensure you have the best coverage available in the market.


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