Let’s Talk About Prescription Drug Copay Coupons: Do They Operate as Unregulated Secondary Insurance?

April 18, 2018, 4:02 PM

As news accounts about the activities of the companies Turing and Valeant have highlighted, drug manufacturers are employing billions of dollars in copay coupon schemes to increase the sales of prescription brand drugs over less costly generics or alternatives. At first glance this appears to benefit an insured but in reality it only increases dramatically the cost charged to the health plan and later reflected in higher premiums for all. Branded drugs are five times as costly as generics. This practice could be characterized as “tortious interference” with health insurance contracts that is deliberately intended to “disable” the cost-sharing terms and conditions in health plan formularies designed to encourage lower-cost alternatives.

This arguably predatory practice results in significant upward cost spikes and premium increases for health benefit plans because higher-cost prescriptions are paid by the plans.

In effect, the sponsoring pharmaceutical manufacturer is operating as an unauthorized insurance entity. The copay coupon operates as an insurance contract wherein the sponsor assumes risk as a third-party payer by agreeing to indemnify the coupon holder for higher-cost sharing of more expensive “brand” prescription drugs. In return (“consideration”) the coupon holder agrees to exchange a less costly “generic” prescription required under the health plan contract for the more costly “brand” prescription without meeting the health plan contract’s higher cost sharing obligation. The health plan, however, must pay for the higher-cost “brand” prescription.

A study published last year estimated that drug copay coupons increased retail drug spending by up to 4.6-percent, with each 1-percent increase corresponding to about $1.5 billion in higher drug spending annually. For the sample of 23 drugs studied during a period from June 2007 to December 2010 researchers estimated the copay coupons increased retail spending of the branded drugs by up to $2.74 billion. The study found that copay coupons meaningfully reduce the use of generic drugs and increase the utilization of branded drugs by up to 60-percent. See “When Discounts Raise Costs: The Effect of Copay Coupons on Generic Utilization,” Amer. Econ. Jour. (May 2017) at 93, 115-16.

Copay Accumulator Programs as Defense Against Contract Interference

Major medical health plans (insured and self-insured) providing the primary insurance coverage have a duty to protect the terms and conditions of the health insurance contract from such “interference.” Insurers have recently informed policyholders that copay card payments will not count towards meeting their required deductible and out-of-pocket maximums under the terms and conditions of the health plan. This is because these coupon copay payments are not paid by the policyholder out-of-pocket but rather are paid by another third-party payer, the pharmaceutical manufacturer.

State insurance regulators are just beginning to address inquiries about this new development in the insured market. Protecting health insurance contracts from this type of “interference” is an appropriate issue of concern for state insurance regulators. This is because protecting the enforceability of the terms and conditions of approved health insurance contracts has a direct impact on reducing prescription drug costs. State regulators must review and examine the character of prescription drug coupons as a form of unauthorized insurance being offered by an unlicensed entity.

Manufacturer Coupon Campaigns Circumvent Health Plan Contracts

Because state insurance regulators have jurisdiction over the terms and conditions of health insurance contracts, the more important matter of concern in the prescription drug cost debate is ensuring that the cost-sharing requirements of a health insurance contract are effective and enforceable. Pharmaceutical drug manufacturers have found ways to circumvent the terms and conditions of health benefit plans that require cost-sharing for covered prescription drugs. This is a significant and costly incursion that merits a much closer scrutiny by insurance regulators.

An article in Bloomberg Business entitled “That Drug Coupon Isn’t Really Clipping Costs” highlighted a scheme where Valeant Pharmaceuticals International lured consumers to a website providing online coupons promising no out-of-pocket costs for expensive drugs. Couponing is described as a “high stakes” game of chicken with insurance companies that have raised copays on some drugs to encourage the use of less expensive but effective drugs. Consumers take the coupon directly to the pharmacy for the more expensive drug and pay no cost-sharing.

In the Fall of 2017 several major health insurance companies sent out notices to policyholders announcing a “pharmacy coupon adjustment” policy (also known as a “copay accumulator program”) beginning in 2018. Under this practice prescription drug copay card or coupon dollars do not count towards meeting the policyholder’s required deductible and out-of-pocket maximum because the copay card or coupon payments do not reflect out-of-pocket payments. On March 27, 2018, the PhRMA announced a campaign to oppose health insurance policy copay accumulator programs as “an insurance scheme.”

The required deductible of a health insurance plan is a “cost sharing” mechanism that is described by the ACA’s “Glossary of Health Coverage and Medical Terms” as a share of costs for services that a plan covers that “you must pay out of your own pocket” (also called “out of pocket costs” that include deductibles, copayments, and coinsurance). The National Association of Insurance Commissioners (NAIC) “Glossary of Insurance Terms” defines the deductible as the portion of the insured loss “paid by the policyholder.”

The deductible is the amount of money that an insured person must pay at the front end before the insurer will pay benefits and is designed to discourage the unnecessary use of certain services and also to reduce premiums for the insured.

Several pharmaceutical manufacturers disclosed in their Form 10-K reports filed for the fiscal year ended on Dec. 31, 2017, that the “copay accumulator programs” initiated by health plans represents a serious risk factor to the business and industry operations. In addition to consolidation among managed care organizations and the use of formularies and benefit changes by payers such as health insurers and self-insured group health plans to control costs, the reports note these “newer programs like copay accumulators” may cause consumers to favor lower cost generic alternatives over branded pharmaceuticals, and “could have a material adverse effect on sales.”

Manufacturer Coupons Operate as Unregulated Secondary Insurance

A risk not noted or recognized in the reports is the risk of the manufacturer’s coupon copay program being determined to operate as “secondary insurance” and the company found to be operating as an unauthorized insurance entity. Prescription drug copay coupons are a form of “secondary insurance” because the manufacturer agrees to cover a portion of the privately insured individual’s prescription drug expenses. Every state has laws providing that a person who transacts any insurance business while not authorized to do so under a license issued by the state and in full force and effect is subject to criminal and civil penalties.

In this case the copay coupon provides protection for the risk that the coupon holder may suffer a financial loss arising from the purchase of prescription drugs, or that the coupon holder may be financially unable to purchase the prescription drugs. The pharmaceutical manufacturer sponsoring the coupon assumes this risk by agreeing to indemnify the coupon holder for the extra cost, in return (the “consideration”) for the coupon holder exchanging a less costly “generic” prescription for a more costly “brand” prescription drug. This more expensive drug is still paid for by the health plan but without the payment of the higher cost-sharing amount required under the health plan’s terms.

It is the express intent of the copay coupon to disable the health plan’s terms and conditions of the drug formulary in order to get the health plan to pay for the more expensive “brand” drug cost.

The prescription drug benefit provisions of a health insurance contract include formularies that expressly establish terms for payment obligations and cost-sharing provisions. These drug copay coupons function as unregulated “secondary” health insurance that, after payments made by the primary insurer, relieve the insured of the specific cost-sharing obligations under the health plan and this fundamentally changes the nature of the relationship between the insurer and the insured.

A “contract” exists where the elements of offer, acceptance, and consideration are satisfied. Consideration is satisfied with the giving up of a legal right or benefit. A contract of insurance exists where the premium “consideration” is paid to the insurance company to transfer and bear a financial risk. See Group Life & Health Insurance Co. v. Royal Drug Company, 440 U.S. 205 (1979).

When prescription drug manufacturers can disable the cost-sharing obligation the insured has little or no incentive to choose less costly prescription drugs. This “disabling” of the cost sharing obligation of the insured is the legal value or “consideration”, and in effect is the “premium” that is paid by the coupon holder to the coupon sponsor as a benefit in exchange for the coupon sponsor bearing the risk to the policyholder of paying the higher cost-sharing required by their health plan for the brand name prescription drug.

Unauthorized and Non-Admitted Insurance Activities Are Illegal

Upon detecting an unauthorized insurance scheme, a state insurance commissioner will initiate an investigation of the activity. The National Association of Insurance Commissioners (“NAIC”) Unauthorized Entities Manual (August 2000) defines as “unauthorized” or “non-admitted” any entity that is not issued a certificate of authority or license by the state’s commissioner of insurance to transact insurance business and as such conducts an illegal activity. The certificate of authority or license to engage in the business of insurance in a state is required to even offer an insurance product in addition to the filing of any policy form for the insurance product.

Under the NAIC Nonadmitted Insurance Model Act (“Model Act”) a person who represents, or even aids, a nonadmitted insurer may be found guilty of a criminal act and subject to a state law established fine. In addition to a criminal violation and monetary fine, the Model Act also provides for the refusal to issue a license and may include civil penalties as well. The Model Act also permits penalties and other remedies included in a state’s separate Unfair Trade Practices Act to apply to violations and activities determined to be fraudulent by any nonadmitted entity engaged in the business of insurance.

Each insurance commissioner has several tools available to address “unauthorized” or “non-admitted” insurance-related activities. The commissioner could issue a “cease and desist” order to any person who is acting in a capacity for which a license or certificate of authority from the commissioner is required. The commissioner is also authorized to impose money penalties in various amounts including in many states an amount that is five times the amount of money received by the person acting without a license. Many states authorize additional penalties of $5,000 (five thousand dollars) for each day the person acted in the capacity for which the license was required.

A state insurance commissioner could exact money penalties in substantial amounts for all of the years that drug copay coupons have been utilized in a state. Copay coupons were first introduced in the early-2000s, and the share of branded drug retail spending with copay coupons more than doubled from 26-percent to 54-percent during a 3-year period June 2007 to December 2010. See “When Discounts Raise Costs: The Effect of Copay Coupons on Generic Utilization,” Amer. Econ. Jour. (May 2017) at 93.

Sponsors Characterize Drug Copay Cards as Secondary Insurance

Copay coupons are presented directly at the pharmacy and the health plan is unaware until after a drug benefit claim is made to the plan. In marketing materials and instructions to pharmacists and on the back of the copay cards themselves the drug company sponsors characterize the card as “a secondary payer” or “secondary coverage” and instruct the pharmacist to submit the coupon card using a valid “other coverage code” when the patient has a primary third-party payer. Some copay cards even provide a strategy where the claim is rejected due to a formulary control and suggests two additional “other coverage code” options.

In litigation between the New England Carpenters Health and Welfare Fund and Abbott Laboratories, the U.S. District Court for the Northern District of Illinois observed that pharmacies process drug copay coupons as “secondary” insurance because they are presented to pharmacies as cards that are designed to look like insurance cards. New England Carpenters Health and Welfare Fund v. Abbott Laboratories and Abbvie, Inc., No. 12-CV-1662, 2014 BL 4783833 (N.D. Ill. Sept. 25, 2014) (“Carpenters”).

In its opinion, the court cited evidence that a patent application for a certain prescription drug copay card stated that the cards have on them the same indicia as a standard health insurance card and that as far as the pharmacy computer is aware, the information on the card is treated as yet another insurance card.

A review of the patent for the coupon card at issue in the Carpenters litigation is revealing. The patent is named “Method and System for Distribution and Payment for Pharmaceuticals.” The abstract describing the patent characterizes the coupon card as a “form of a standard debit card issued through a standard network, such as VISA.” The abstract further notes that “in addition to any debit card indicia, the cards have on them the same indicia as a standard health insurance card, although they are not issued by a health insurance provider.” See, U.S. Patent Application Pub. No. US 2006/0085231A1 (April 20, 2006).

Conclusion: Need to Address Coupon Copays as Secondary Insurance

State insurance regulators must review and examine the character of prescription drug coupons as an unauthorized insurance “contract.” Alternately, state regulators must support payers in establishing copay accumulator programs to ensure that the existing cost-sharing and formulary requirements for an insured policyholder in the health insurance contract are maintained as effective and enforceable both to maintain the integrity of the contract and to prevent steep increases in health plan premiums for all policyholders. Drug copay coupons function as a form of unregulated “secondary insurance” and allow manufacturers to engage in “tortious interference” to disable health plan contract cost-sharing terms and conditions. Copay coupons result in spiking significant cost increases for health benefit plans and consequent rate shocks for health insurance premiums.


William Schiffbauer is a health care attorney in private practice in Washington. He can be contacted at wgslaw@erols.com.

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