It may be instinctive to simply say that pharmaceuticals are paid for by managed care organizations like health maintenance organizations or by employers. However, pharmaceutical reimbursement cannot be described by such simple statements. Two interrelated concepts — opportunity costs and insurance risk — better define the true payer of pharmaceuticals.

Understanding opportunity cost

Employers pass risk to MCOs

The term "opportunity cost" is based on the premise that all resources are scarce, and therefore every time we make a choice to use a resource (for example, to pay money for a prescription), we forsake the opportunity to use that resource (the money) in another way. The value of the sacrificed alternative is called the opportunity cost. For instance, making a sales call to a physician on the far side of town may bear the opportunity cost of not seeing three physicians on the near side of town.

The concept of opportunity costs can help identify the organization or individual paying for a prescribed pharmaceutical. (Often the opportunity cost is borne by many payers.) Because the true payer is sacrificing other opportunities when buying a pharmaceutical, this payer can have enormous influence on the sale of your drug. The true payer must believe in the value of the drug in order for you to log a successful sale.

Understanding insurance risk

Three primary entities fund pharmaceuticals: employers, the government (Medicare and Medicaid) and individuals. Although they may "fund" pharmaceuticals, these three payers may not necessarily hold the opportunity costs. In fact, they often pass the opportunity costs to other members of the healthcare system, as in the following example:

Employers pass risk to MCOs. On January 1, 2006, Acme Birdseed — an employer — contracts with GoodCare HMO for health insurance and pays GoodCare $40,000. In return for this prepayment, GoodCare agrees to cover all of the future healthcare costs for Acme's five employees at a defined level of service. GoodCare bets that the care it provides will cost less than Acme's prepayment (GoodCare holds the risk). As the year progresses, it becomes clear that GoodCare has made the wrong bet, as total costs will exceed the prepayment. GoodCare thus loses money from the Acme contract (see figure).

As in this example, organizations that offer health insurance (such as HMOs and other managed care organizations) contract directly with employers, governments or individuals. These contracts stipulate that, in return for a prepayment (known as a premium), the health insurer agrees to cover a defined percentage of an unknown, future level of healthcare services. Because there is a defined prepayment and an undefined future utilization of defined services, the health insurer is at risk for financial loss if the cost of services exceeds the prepayment. The insuring organization — in this case, GoodCare — assumes what is commonly known as insurance, or actuarial, risk.

We can also use the Acme Birdseed example to explain the transfer of opportunity costs. When Acme transfers the premium funds to GoodCare, Acme also transfers the opportunity cost for any healthcare decision to GoodCare. From the point of the transfer, GoodCare bears the opportunity cost: Each time a dollar is spent on medical care for Acme's employees, GoodCare sacrifices the opportunity to spend that dollar elsewhere. This transfer creates the incentive for managed care organizations like our fictional GoodCare to "manage" care.