Cost sharing in managed care and the ethical question of business purpose

Abstract

For-profit managed care organizations face decisions about cost sharing that can involve a tradeoff between the interests of investors and the interests of patients. No successful business can ignore the interests of its investors, but moral philosophy points to ethical reasons for managed care organizations to make patients’ health, rather than investors’ profit, their primary goal. One reason is the ethical obligation of all businesses to avoid wrongful exploitation of vulnerable customers. An insurance company’s cost-sharing policy can exploit customers either by collecting an unfairly large amount of money from them or by unfairly deterring them from making claims for resources they medically need. Another reason stems from the fact that managed care organizations’ profits derive in part from the existence of artificial barriers to access to medicine, notably including patents. Putting a fence around a water well in the desert is legitimate only if doing so facilitates a financial arrangement that maximizes people’s access to water they need. Likewise, patents and other artificial barriers to access to medically necessary drugs are legitimate only if they are used to help finance access to medical resources people need. For these reasons, managed care organizations should make cost-sharing decisions that maximize the sustainable availability of effective drugs to patients who need them.

DISCLOSURES: The thoughts and opinions expressed in this article are those of the author only and are not the thoughts and opinions of any current or former employer of the author. Nor is this publication made by, on behalf of, or endorsed or approved by any current or former employer of the author.

Plain language summary

Copayments and coinsurance can make drugs difficult to afford. This article makes the ethical case that managed care organizations should try to reduce these burdens and make drugs affordable to all plan members. For-profit managed care organizations cannot forget about profit. Still, patients’ interests should come first.

Implications for managed care pharmacy

Managed care organizations have an ethical obligation to maximize the affordable availability of medically necessary drugs to plan members, within the constraints of business sustainability. For-profit managed care organizations should reject shareholder primacy in favor of a stakeholder business orientation. To the extent possible, all managed care organizations should avoid cost-sharing policies that make medically important drugs unaffordable.

Decisions by health insurance programs about cost sharing have profound effects on patients’ welfare and longevity. Many Americans do not take medication as prescribed because of cost—29% of adults, according to a 2019 survey.¹ A 2011 literature review found that increasing cost sharing is associated with reduced medication adherence and worse health outcomes.² There is evidence that the Medicare “donut hole” has caused patients not to take highly cost-effective drugs, such as statins and antihypertensives, leading to loss of life.³ Cost-sharing arrangements that place excessive financial burdens on patients contribute to racial health disparities.⁴ Cost sharing can lead to adverse health outcomes both because it can create incentives for nonadherence and because patients often understand cost structures poorly.⁵

That said, some form of cost sharing may be unavoidable. If managed care organizations do not institute appropriate cost-sharing arrangements, premiums may go up, forcing some patients to switch to lower-quality plans or to give up their health insurance altogether. In a pharmaceutical market without price regulation, the option of offering a preferred place in a formulary may be important to managed care organizations’ negotiations with pharmaceutical companies. In making decisions about cost sharing, including decisions about the overall structure of the pharmacy benefit and decisions about specific drugs’ placement in the formulary, managed care organizations make value judgments. In particular, for-profit health insurance plans and pharmacy benefit managers face the question of how to balance the interests of patients against the interests of investors.

A broader debate about how to weigh the interests of investors and other stakeholders is roiling the business world. Advocates of shareholder primacy, such as Milton Friedman, maintain that businesses should do what their equity investors want. Friedman further argued that shareholders of publicly traded corporations typically want to maximize profits within the constraints of “law and ethical custom.”⁶ The point of keeping customers and workers satisfied, on this view, is to provide financial returns to investors. Despite the influence of shareholder primacy, many business ethicists reject it. Social contract theorist Thomas Donaldson, for instance, argues that the true measure of a business’s success is what it does for consumers and workers.⁷ The point of providing financial returns to investors, on this view, is to enable the company to do more for consumers and workers.

In the United States, corporate law does not decisively settle the debate about shareholder primacy. Although some journalists and economists believe that publicly traded corporations are legally required to maximize financial returns to shareholders, this belief is mistaken. In the words of corporate law scholar Lynn Stout, “directors of public companies enjoy virtually unfettered legal discretion to determine the corporation’s goals.”⁸ Consensus in the business community may be shifting. The Business Roundtable, an organization representing chief executive officers of many large US companies, formally supported shareholder primacy for 22 years. However, in 2019, it endorsed a vision of business that gives equal priority to several stakeholder groups: customers, employees, suppliers, broader communities, and shareholders.⁹

Even if it is morally acceptable for most businesses to adopt a profit-maximizing shareholder orientation, there are distinctive ethical reasons for managed care organizations, including health plans and pharmacy benefit managers, to adopt a stakeholder orientation. Although organizations of both types need to be able to raise capital, the proper measure of their success is what they do for patients, not what they do for investors. Their aim should be to maximize the availability of necessary care to patients, subject to the constraints of business sustainability. One source of this moral requirement is the general ethical norm against exploitation of the needy.^10,11,12,13 Another is the moral obligation to maximize access that one acquires when one constructs or profits from artificial barriers to a scarce and necessary resource.^13,14 These obligations should guide managed care organizations’ decisions about cost sharing.

A Pair of Metaphors

To see how a business involved in providing for human health can acquire distinctive ethical obligations, consider a metaphor. Imagine a desert in which there are currently no available fresh water sources. Travelers who run out of water while traversing this desert are doomed. There is, however, water underground. An enterprising hydrologist identifies one of the few places where it would be fruitful to dig a well. The hydrologist obtains investment capital and uses it to construct a well with a secure fence around it. The hydrologist charges travelers high prices for well water—a different price for each needy traveler, chosen to maximize financial returns. A wealthy traveler who is completely out of water might be charged half of their net worth. Travelers who value their lives are likely to agree to such harsh terms.¹⁰

The story of the hydrologist and the well is a metaphor for drug development. A pharmaceutical company searches a space of possible chemical substances for a substance that can serve patients’ needs. The company must “dig” (invest) to develop a drug. The resources to support the “dig” come at least partly from private sources. There are places that look like promising places to “dig” that will not lead to a successful discovery. There are places where researchers can “dig” and discover a safe and effective drug for a given condition. To recoup the investment and to secure a profit that would make the investment worthwhile, the pharmaceutical company must build a fence around its discovery: it must secure a patent.

There is a parallel metaphor for the business model of managed care organizations. Imagine a large desert in which several entrepreneurs have dug water wells, put fences around these wells, and charge for access to drinking water. Many people need to travel through this desert, and the lengths of journeys are often unpredictable. To reduce the financial risks of traveling through this desert, a company creates a water insurance plan. If a plan member runs out of water while traveling in the desert, the insurance company will cover part of the cost of well water. By covering only part of the cost of water, the insurance company gives its customers an incentive to try to bring sufficient water for their journeys to the extent advance planning is possible.

The water insurance company faces decisions about what premium to charge, what overall cost-sharing policy to adopt, and what to do when multiple wells are competing for customers in a given area. The company might reimburse all water purchases on the same terms, or it could make deals with some well owners. Insured travelers would have lower copayments at “in-network” wells, whose owners would charge a lower overall rate or offer a rebate to reward the insurance company for sending business their way. The water insurance company makes these decisions with the aim of maximizing long-run profit.

The enterprising hydrologist and the water insurance company both choose to give maximal investment return a higher priority than affordable service to customers. That is an ethically problematic choice for distinct but related reasons in each case. Pharmaceutical companies and managed care organizations with a shareholder orientation face parallel ethical challenges.

Pharmaceuticals and Business Purpose

What is ethically wrong with the hydrologist’s business model? It is not wrong to charge money for water, nor is it wrong to charge a higher price than water costs outside the desert. There is no other way to recoup the costs of building the well or to compensate the hydrologist for their efforts. There is also nothing wrong with charging higher prices to richer customers. If the enterprising hydrologist offered a uniform price high enough to recoup the cost of investment, some travelers would be unable to afford the emergency water supply.

The ethical problem with the hydrologist’s business model is their decision to maximize profit at the expense of vulnerable customers. This is objectionable for three reasons. First, if the well provides water only to paying customers, it may turn away indigent people, causing them to die of thirst. Businesses arguably have a moral obligation to save lives when they are uniquely able to do so and can do so at modest cost.¹⁵ The duty of easy rescue would not require a for-profit well to give away free water to everybody, but it may require providing free water to the indigent. Second, the well’s aggressive pricing policy will force paying customers to sacrifice long-term needs, such as the need for security in retirement, to satisfy the short-term need to maintain life and health. Choosing to structure a transaction in a way that makes it impossible for the other party to satisfy genuine needs, despite being able to offer more favorable terms, is wrongful exploitation.^11,12,13

Third, there is something distinctively problematic about the way the entrepreneur uses the fence. By enclosing one of few underground water sources, the hydrologist claims exclusive control over a scarce resource that was previously open to exploration. Even Robert Nozick, a prominent advocate for robust private property rights, acknowledges that there is an ethical problem with this: “A person may not appropriate the only water hole in the desert and charge what he will.”¹⁴ The remedy for this moral problem is not to leave the water in the ground. The remedy is to dig the well, build the fence, and adopt a pricing policy that sustainably maximizes access for those who need it. Such a policy would produce enough revenue to justify digging the well, but it would prohibit unrestricted price-gouging.

The metaphor of the well illustrates why drug prices that seem high may sometimes be justified. Just as the price for water at the only well in the desert is inherently higher than the price of water in a typical city, the price for a newly developed antibiotic is necessarily higher than the price of an antibiotic that is available as a generic. That said, it is unethical to price drugs in a way that maximizes profit, turning away the indigent and forcing other desperate patients to face financial ruin. Maximizing profit is not a business necessity for a firm that has potentially lucrative market power. For example, Turing Pharmaceuticals did not have to raise the price of the antiparasitic pyrimethamine (Daraprim) from $13.50 a tablet to $750.¹⁶ Ethically, pharmaceutical companies should try to make drugs affordably available to people who need them in a sustainable way. Put another way, pharmaceutical companies must reject shareholder primacy and adopt a stakeholder orientation. One way for pharmaceutical companies to facilitate affordable access is to offer financial assistance programs without excessive paperwork. Paperwork burdens can greatly reduce the number of eligible patients who successfully apply.¹⁷

Managed Care Organizations and Business Purpose

The water insurance company, like the operator of an individual well, has an ethical obligation to adopt a stakeholder orientation rather than a profit-maximizing orientation.

The company’s aim should be to make emergency water widely available to travelers without making them face financial ruin. This is so for some, if not all, of the moral reasons that applied to the well operator. It is at best debatable whether the duty of easy rescue requires insurance companies to provide free service to the indigent (which the duty does require of the well operator). The duty of nonexploitation applies squarely to the water insurance company. All businesses have a moral obligation to structure transactions so they are compatible with the other party’s meeting true needs. It is wrong to exploit customers’ needs for essential goods like water or medicine in ways that cause customers financial ruin. It is likewise wrong to set coinsurance so high that customers who paid premiums are tempted not to use insurance benefits for services they need. Finally, if a business constructs or relies for much of its profits on an artificial barrier to a necessary resource, the business must maximize access to make the barrier legitimate. The water insurance company does not itself construct fences around wells, but it relies on those fences just as much as the well operators do. Without these fenced-in wells, a water insurance company would not have a viable business model.

A managed care organization is like the water insurance company in that it creates a financial structure that enables more people to get access to resources their health and survival require. Like the water insurance company, a managed care organization must bargain with suppliers, and it must make a range of decisions that will affect plan members’ ability to get what their health requires affordably. Like the water insurance company, whose business model relies on the fences constructed around wells, the managed care organization has a business model that relies on artificial barriers to access to something people need. Patents are among these barriers. They also include regulatory barriers to entry for manufacturers of generic drugs and biosimilars.¹⁸ Managed care organizations do not construct these barriers, but much of their revenue relies on their existence. If we eliminated patents in favor of exclusively public drug development, and if regulatory barriers to competition among drug manufacturers were minimal, insurance companies would spend substantially less on drugs, and they would have to charge correspondingly lower premiums. It is doubtful whether pharmaceutical benefit managers could exist in these circumstances.

Patents may be justified as a way of making private drug development feasible. Patient safety may justify other barriers to entry for pharmaceutical manufacturers. Businesses whose revenues rely on these barriers (including insurance plans and pharmacy benefit managers, as well as pharmaceutical companies) should take on an ethical obligation to make artificially scarce necessities available to the people who need them. Doing so sustainably will require for-profit managed care organizations to provide returns to investors, but maximizing these returns should not be these businesses’ primary goal.

Determining what, concretely, a managed care organization should do to maximize access to necessary medicine requires knowledge of what is feasible for that organization. This, in turn, requires knowledge of the organization’s finances. Health insurance plans should consider copayment reductions tailored to increase access to medicine and to improve health outcomes. Doing so may increase adherence and offer long-run cost savings to health care systems.¹⁹ They might also consider setting coinsurance rates for expensive drugs on a sliding scale so that lower-income members of a health care plan could afford the drugs higher-income members can afford. Pharmacy benefit managers have been criticized for using “gag clauses,” which prohibit pharmacists from telling patients about cheaper options (and which are now prohibited by law), as well as charging patients a copayment or coinsurance that exceeds the cost of the drug for the insurance company after negotiated rebates.²⁰ Pharmacy benefit managers should refrain from business practices that pad profits while reducing the financial accessibility of necessary medicine.

Conclusions

The metaphor of the well illustrates why managed care organizations, including health plans and pharmacy benefit managers, have an obligation to adopt a stakeholder orientation to business decisions rather than adopting shareholder primacy. A for-profit managed care organization must provide returns to investors, but providing returns should not be the organization’s purpose. The purpose of the organization should be to enable patients to get medical care they need.