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Drug Cards Manage Rising Prescription Costs

May 1, 1993
Related Topics: Benefit Design and Communication, Featured Article
The continually increasing annual cost of employer-provided medical benefits is alarming. To cope with the problem and to attempt to forestall or reduce it, HMOs, PPOs, IPAs, HPAs, UCRs, POSs, 125s, and every other imaginable program have been employed. Although these programs are useful, they haven't been able to halt the annual increases. The battle demands more attention to detail.

Benefit prices increase as a result of cost excesses in each element of a benefit package, such as dental coverage, drug purchases, maternity care and mental-health coverage. By examining each part separately and reducing the cost of each, the total cost should shrink.

Prescription-drug costs present a clear target for reduction. According to the Health Care Financing Administration, a federal agency, drug costs are the fastest-growing segment of health care and generally account for approximately 12% of the cost of medical benefits. On an average, 50 employees will spend a total of $1,000 per month for prescription drugs. Despite these figures, this portion of health care costs has been ignored to a great degree.

One program that has been instituted to remedy the high cost of prescriptions is the issuance of drug cards to employees. These magnetically coded cards allow employees and their dependents to purchase prescriptions from pharmacists for minimal, previously specified fees. Because drug cards are a visible benefit, employees value them.

Many workers who might not obtain prescriptions otherwise—because of the up-front costs or the hassle of filing a claim—can use the cards to get needed medication. This saves an organization money in the long run because the price of the initial prescription will be considerably lower than the treatment cost incurred by postponing treatment of the medical problem.

Drug cards aren't without drawbacks, however. Their existence often generates abuse, mismanagement, nonmanagement and fraud. They can increase drug use by making medications readily obtainable. In addition, they're expensive for employers in the short-term. Consider the following example: A Blue Cross franchise charges a company $298 to cover the premium for a worker and his or her family under a major medical plan. The cost of prescriptions is included in the price and represents 12% of the total, or $36. If the company decides to purchase a drug card for the same policy, Blue Cross will charge it $347, or $49 extra. That means that instead of paying $36 for prescriptions for this policy, the or-ganization now is paying $85. If asked, Blue Cross will offer a rate reduction for excluding drugs from the major medical, but the reduction usually only amounts to 4%.

Fortunately, there's now a groundswell of change—a new breed of prescription cards emerging from private retail chains that can alleviate these problems. These cards integrate strategic pricing methods, management skills and communication to reduce drug costs significantly—even when the introduction of the cards increases prescription use.

Implemented with a continuing-education program that elicits employee cooperation, these cards can reduce drug costs by as much as 30% to 50%. These potential savings, which could be 5% to 7% of a total health-care benefit package, often are enough to influence an employer's decision to select one carrier over another and sometimes even to change providers.

Retail cards provide more-flexible pricing.
The price of drugs using most traditional prescription cards is based on retail pricing, which is somewhat protected with a usual, customary and reasonable (UCR) limit. Retail pricing seems to be rapidly becoming obsolete, however, and is being replaced by the new cards with the reduced pricing of average wholesale price (AWP). The AWP is a published price that wholesalers charge retailers. There are four widely used services that publish this information—First Data Bank, Medispan, Red Book and Blue Book. Most pharmacies and third-party payers use one or a combination of these sources to arrive at their basic reimbursement cost. However, the prices published by each source may vary, leading to price differentials when trying to calculate a drug-product cost. Furthermore, the average wholesale price can be discounted when pharmacists purchase large quantities of a particular drug. The task, then, is to identify the true average wholesale price.

"Drug cards are the fastest-growing segment of health care and generally account for approximately 12% of the cost of medical benefits."

This can be difficult. There are several other cost factors that can affect the average wholesale price. These include:

  1. Maximum allowable cost (MAC). This is the maximum reimbursement price that the Health Care Financing Administration will pay to providers for generic and some trade-name drug products. The agency periodically revises the list, based on manufacturers' price increases or decreases. It computes the price by averaging the cost of multisource generic drug products from sources throughout the U.S. Maximum-allowable cost price is 90% of this average price, assuming that most pharmacies throughout the U.S. can purchase the drug product at that time.

  2. Actual acquisition cost (AAC). This is the net cost that the pharmacy pays. Consumers rarely are aware of this cost. Because the AAC varies, based on the quantity bought, this price directly affects the average wholesale price discount.

  3. Estimated acquisition cost (EAC) and direct price (DP). These prices may increase or decrease an employer's cost. Determining factors are dictated by the number of publication services on single or multisource drugs and their published prices. Estimates may be too high, costing the employer more. The published direct price might be higher than maximum allowable cost.

  4. Relative cost index (RCI). This is a weighted cost for particular drugs in designated geographical areas.

In addition, providers include two other elements of pricing of which employers need to be aware: a prescription fee, which can range from $2 to $4; and a fee for using the system, which can be between $.60 and $1 per prescription.

When an employer considers each of these, the cost of drugs becomes more variable, making it hard to determine if the large discounts off the average wholesale price that some programs propose are really such a good deal. The only way a human resources department can be sure that it's receiving the lowest average wholesale price when comparing various providers is by having the competing drug companies give prices on 15 or so of the most frequently used drugs.

Why so many? Because most pharmacists and drug companies have loss leaders. Almost every store has a favorite drug that it discounts, often below cost. This makes it necessary to price a reasonable number of drugs to find the most accurate reading of what costs will be. Naturally, average wholesale price is lower than retail. Often drug companies discount the drug 5% to 10% more.

Marketing techniques can add to the drug-pricing confusion. At first glance, a company that offers a drug card allowing for purchases of prescriptions at average wholesale price minus 30% seems overwhelmingly attractive. However, the average wholesale price minus 30% applies to generic drugs only. Comparing the average wholesale price minus 30% with maximum-allowable-cost pricing (which applies mainly to generics as well) reveals that maximum-allowable-cost pricing is still a significantly cost-effective arrangement.

The real savings, then, come in the pricing that drug programs can arrange for generic drugs. Are these savings justified? Are the generics just as effective as the brand names?

Generics are cost-effective alternatives to brand-name drugs.
Many years ago, the Food and Drug Administration discovered that companies producing generic drugs often weren't testing them properly to verify if marketing claims were accurate. Furthermore, certain dyes contained in the generics caused adverse reactions in a few people. Today, however, the FDA publishes the guide Approved Drug Products with Therapeutic Equivalence Evaluations, which assures pharmacists that a particular generic has been properly tested and rated for pharmaceutical equivalence. Therefore, the fears that were prevalent several years ago are no longer a concern regarding the drugs that are on the federal maximum-allowable-cost listing today. Currently 70% of the prescription drugs used in the U.S. have generic equivalents.

Having eliminated these worries, let's consider an example of the contrast in pricing between brand-name and generic drugs. A popular oral contraceptive costs $20 per prescription. The cost to the employer is $15 after the employee pays his or her $5 copayment. Maximum-allowable-cost pricing for the generic equivalent is $7 (which incidentally is made by the same company that makes the brand-name product using the same standards). This means that the employer pays only $2 after the employee pays the $5 copayment, saving the employer more than 600%.

Moving toward a pricing system that focuses on generic drugs requires educating employees to communicate with their doctors. Unfortunately, not all doctors are cost-conscious, and many will prescribe their favorite medications—often drugs that don't have a generic equivalent. Patients should understand that even if a physician prescribes a drug that doesn't have a generic equivalent, there usually are three or four other effective drugs that do have a generic equivalent. (If there aren't any drugs available that have a generic equivalent, the patient should ask the doctor if any formularies—similar drugs that cost less based on release time or other factors—are available.) The doctor may prescribe one of the other drugs if the patient asks him or her for a generic equivalent or a less-expensive medication.

Consider the following example: A certain drug costs $78 for one month's supply. After being questioned by the patient about generics, the physician orders a prescription for a different drug that would produce the same results but costs only $18. Because the employee's drug card provides an incentive for buying generics, the employee saves $5 on the copayment (see "Self-insurance Drug Cards Provide Greatest Flexibility"). The employer saves almost $60. This can happen only if the patient questions the doctor. The employee needs an incentive and education to ask the right questions.

Communication is the key to managing prescription benefits.
The newest drug cards allow human resources to manage prescriptions more effectively. What's most important is the communication between doctor, pharmacist, employer and card provider that's made possible by a comprehensive information system.

Because human resources managers need current and accurate information if they're going to be proactive in managing benefits, they need to evaluate a card-giving company's information system carefully. Not only should the system be capable of producing reports, but the system's operators also must be willing to provide information whenever it's requested. In this age of high technology, it's amazing how seldom we receive enough information from our sophisticated systems.

How can this information be captured? A prescription slip that a doctor fills out for a pharmacist contains specific information, including:

  • The date
  • The name of the prescribing doctor
  • The patient's name
  • The specific drug prescribed (generic or brand-name)
  • The quantity of drug prescribed.

In addition, the patient's drug card provides such information as the employee's company name, the location and department in which he or she is employed and the status of the employee (active, COBRA, retired). A data-base drug-verification system can store all this information.

Of course, storing this information isn't enough. The information system must be able to search for:

  • Duplicate checks
  • Refills prescribed too early
  • Refills prescribed too often
  • The minimum and maximum dosages
  • Duplicate therapy
  • Drug interaction
  • Drug allergies
  • Maintenance-drug lists
  • Therapy-cessation warnings.

An ideal system will provide cooperative managers with all of this information in any format at almost any time. The system also should ask certain questions regularly and provide managers with answers. Some of the questions might be:

  1. What percentage of generics do your employees use?

  2. Are the prescribed quantities too large or too small?

  3. If this is occurring, which doctors are participating?

  4. Is underutilization or overutilization taking place? Who's overutilizing? Who's overprescribing? Is there a pattern?

  5. What's the average number of prescriptions per employee?

  6. What's the dollar amount of the average prescription?

  7. How does the quantity of drugs being prescribed for your employees vary for the different locations and divisions of your company, for different companies in the same industry and for companies in different industries? How does it compare with national averages, or how does it compare with the total number of employees in the system?

Analyzing this information periodically and then using the information in an effective manner gives HR managers several ways to reduce costs. Fraud detection and prevention is one way. Employers can cross-check on a random basis for workers' compensation claims that pass through the medical plan for convenience purposes. For example, employees may confess to the pharmacist that they're purchasing drugs for relatives and friends. It's also common for people to want an extra supply of a particular prescription, such as antibiotics, for future medical problems of the same nature. They accomplish this by requesting the same prescription from two separate pharmacies, or claiming to have lost the original prescription and requesting a refill. Informed human resources personnel and pharmacists—armed with the right system, guidelines and reports—can prevent much of this fraud and reduce costs substantially.

"Employees may confess to the pharmacist that they're buying drugs for friends and relatives. People also buy extra drugs for future illnesses."

Checking reports can help HR personnel reduce wasteful spending as well. Anyone who has helped clean the room of a deceased elderly person who had been ill for a while probably found enough accumulated drugs to fill a shopping bag. These could amount to a value of $1,000 or more. Although this type of waste occurs frequently, a system involving cooperation between doctors and pharmacists to limit quantities can prevent it.

Conversely, extending the limit on some prescriptions can account for savings as well. For example, a 30-day supply usually is maximum for standard prescription drugs. Maintenance drugs may be obtained in 90-day supplies by using a mail-order program. A more cost-effective method is to work out a system that allows card users to order a 90-day supply of maintenance drugs over the phone from a community pharmacist who will mail the medication. This eliminates the need for a mail-order facility.

The problem with increasing maximum limits, however, is that it can wind up costing employers more in actual drug costs. Here's why. When receiving a 90-day supply, an employee will make only one copayment rather than the three he or she would make for 30-day prescriptions. If the copayment is $10, the individual would have paid $30 if there had been a 30-day limitation. Instead, he or she pays only $10. Thus, a 90-day supply decreases the cost to employees but increases the cost to employers, who must make up the $20 difference. When considering extending limits, employers must determine where the greater cost savings lie.

A good information system not only can reduce the cost of drugs, but it also can prevent more serious situations. For example, a card carrier who's taking a certain medication for the treatment of ulcers goes on vacation in Florida. He develops a back problem, and a local doctor prescribes a drug to control the pain. The medication that the doctor prescribes could cause serious health risks if taken in combination with the ulcer medicine. Many pharmacists confess that it happens almost every day.

Because the patient's medical information is in the data base that the pharmacist can access through a network, however, the pharmacist can prevent disaster with a simple phone call to the local physician for a different prescription. This might not be direct drug-cost savings, but the system can prevent a significant hospitalization cost. Having a proper system that manages the prescription element of your benefit plan can reduce these dangers significantly. Finding a system that offers alternative pricing methods can reduce costs as well.

Although there's often a reluctance to introduce a drug card for fear that it will increase the use of drugs, it's a highly valued benefit. Efficient ones are available, but as is the case with everything, the buyer should be prudent.

Personnel Journal, May 1993, Vol. 72, No. 5, pp. 102-111.

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