‘It’s just bad luck’: Rising pharmaceutical costs, especially for ‘orphan drugs,’ driving 36% increase in Spokane’s health premiums

Spokane city employees face a 36% increase in health insurance premiums in the coming years as City Hall grapples with soaring pharmaceutical costs, particularly for a category of prescriptions called “orphan drugs” that treat rare conditions with few or no other treatments.

“I’ve been doing HR for more than 20 years,” said city Human Resources Manager Allison Adam at a recent city council meeting, and “this is the first time I’ve seen this.”

The premium rate hike won’t come all at once for city workers, and instead will be phased in over the coming years , Adam added.

The city does not know which employees are driving the costs, what conditions they have or what orphan drugs are being prescribed to them, Adam emphasized in an interview. The city only learned that orphan drugs were a major driver of rising costs through its pharmacy benefit manager, the organization that negotiates drug costs on behalf of the city, which is self-insured.

Adam stressed that it is no employee’s fault that their medical conditions, or those of their dependents, require costly treatment. But the city does need to raise premiums to cover those costs.

It’s not unusual for the city’s insurance plan to get hit with a bad month here or there – a complicated birth, an expensive surgery or other costly one-time or short-term expense will occasionally dip the plan into the red for a month or so. According to Adam, the city typically sees six months in the red and six months in the green, averaging out to stable rates and a healthy reserve account to absorb the bad months.

But between July 2024 and the end of this June, every single month has been in the red, Adam said. In 12 months, the city spent $7.5 million more in insurance payouts than it brought in from premiums, with losses of $1.2 million in October alone.

And while costs appear to be rising across the board – monthly costs per member have risen from $55.65 in 2021 to $85.17 in 2024 across all businesses that use Alliant Insurance Services, for example – the city’s costs have increased much faster since 2023, driven in large part by the specialty drug costs for fewer than 10 beneficiaries on the city’s health insurance plan.

“In one claim in particular, we’re nearing $1 million in one year’s costs,” Adam told the city council in August.

What are orphan drugs?

Congenital conditions like cystic fibrosis. Rare blood cancers and autoimmune diseases. For patients with rare life-altering and -threatening conditions with few if any other treatments, orphan drugs can be the only option .

And while these diseases are individually rare, there are thousands of different kinds, collectively impacting an estimated 25 to 30 million Americans, according to the National Institutes of Health.

It was for this reason that Congress passed the Orphan Drug Act of 1983, which provided massive incentives for the development of drugs that treat conditions experienced by fewer than 200,000 Americans: tax credits, fee waivers, grants, and possibly most significantly for patients and prescription costs, monopolies that bar other drugs treating the same rare disease from entering the market for seven years.

Companies often charge high prices for the treatments, arguing it is necessary to recoup the costs of developing a drug that relatively few people will ever buy. Prescriptions are already exorbitantly expensive in the U.S., nearly 2.8 times higher than in comparable countries, and orphan drugs are frequently the most expensive in the market; newly available gene therapy treatments can cost as high as $4.25 million for a single dose.

By 2030, orphan drugs alone are projected to make up a fifth of the estimated $1.6 trillion in worldwide prescription drug sales, according to market researcher Evaluate.

Notably, many of these expensive drugs are increasingly prescribed for more common conditions. Among the top-selling “partial orphan” drugs, which can be prescribed for both rare and common conditions, more than 70% of spending on the drugs is for treating common conditions, according to a 2021 study by the Institute for Healthcare Policy and Innovation at the University of Michigan.

This is not what is driving costs at the city, however. Federal law requires the city’s insurance to cover at least one treatment option for a given condition, and while the city’s pharmacy benefit manager can decide which drugs are covered under the city’s insurance plan, there are no other options available for the rare diseases except for orphan drugs.

Bad luck

For three years, the city was able to completely hold off on increasing health insurance premiums while still maintaining a healthy reserve. Even in prior years, the premiums grew slower than Alliant had recommended. As costs are now spiking faster than expected, the time has come for the city to catch up.

“You’re looking at two separate mayors before us; my first thought was they put us in this position, but in full honesty and transparency, I’m not sure I would have done any different,” City Administrator Alex Scott told the city council in August.

The city’s health insurance reserves had been healthy and growing steadily, so increasing premiums would have only padded those reserves further at the expense of employee paychecks.

But with a recent surge in beneficiaries requiring orphan drug treatment, the pendulum is swinging fast, and reserves are depleting.

“It’s just bad luck,” Scott said.