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Finding the Cure for Pharmacy Costs

December 30, 2002
Related Topics: Benefit Design and Communication, Health and Wellness, Featured Article, Compensation
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Facing another year of double-digit increases in its pharmacy-benefitprogram, Baystate Health System was staring into a medicine-chestful oftroubles. There was seemingly no cost-reducing elixir. But the Springfield,Massachusetts, health-care provider implemented a major overhaul of its pharmacyplan, a repair that has successfully checked rising costs.

The organization’s strategy was to establish a more equitable level ofcost-sharing with its 6,000 employees. As a result, costs have crept up lessthan 6 percent, and expenditures that had been projected to soar by $841,253increased by a far more manageable $254,156.

As every business executive knows, reining in pharmacy-benefit costs is aleading item on HR agendas. At a time when single-digit cost increases forhealth care are cause for celebration and annual increases of 20 percent or moreare not unusual, any hope of cost reductions is reserved for the incurablyoptimistic. Today more than ever, HR executives must understand whatcost-controlling tools are available and how to wield them--from generatingemployee involvement and increasing co-pays to introducing tiers of coverage andmanaging and monitoring pharmacy-benefit managers.

In the past, the issue of increasing pharmacy-benefit costs took a backseatto the much greater challenge of keeping a lid on overall health-care costs.That was when prescription drugs accounted for only about 10 percent of anemployer’s total health-care expenditure. Today, pharmacy benefits representabout 15 percent of costs and are growing faster than any other area. Onlyhospital and physician services consume more health-care dollars.

There are two reasons for the change. First, employers simply could no longerafford to pay the bulk of pharmacy costs. And second, it had become imperativethat employees have some economic stake in their prescription drugpurchases.Baystate Health System serves as an example of a company thateffectively responded to these dramatically shifting realities. First, itscrapped its old plan, which had a $2 co-pay for generic drugs and $9 forbrand-name drugs, in favor of a plan with percentage-based co-insurance. Underthe new plan, employees pay 20 percent of a drug’s cost, with a $50out-of-pocket maximum for each prescription and an annual out-of-pocket maximumof $1,000 for single coverage and $1,500 for a family. "We wanted to make ouremployees aware of the cost of the drug and get them to take a more active partin the drug decision by engaging in a dialogue with their doctors," saysJoseph Brzys, the system’s director of benefits.

Even with this major revamp of the program’s design, Brzys had noexpectation that the efforts would actually reduce costs. "We are concernedmore about controlling future increases than about savings on current spending,"he says. "Our number one line item of expense is pharmacy benefits."

In this environment, companies cannot afford to leave their prescription-drugbenefits on automatic pilot. Instead, they must take a more active role in themanagement of pharmacy benefits to ensure that the company is getting the bestvalue for this increasingly problematic cost category. After another year of 15to 20 percent cost increases, preliminary numbers from The Segal Company’s2003 Health Plan Cost Trend Survey show that pharmacy-benefit cost increaseswill average about 19 percent this year.

Plan design
    As Baystate Health System’s experience shows, one of the most importanttools available to companies is altering plan design. The days when an employeecould fill a prescription for any drug for only a few dollars are gone. In thisenvironment, not only must employees share a larger portion of a drug’s cost,but they must also have an economic incentive to take a more active role intheir choice of drugs.

Changes in plan design such as increasing co-pays, switching topercentage-based co-insurance, and introducing tiers of coverage for differenttypes of drugs can be powerful tools for controlling overall plan costs. Arecent study of 25 employers with a total of 420,000 employees conducted by theRAND Corporation found that increasing co-payments causes employees to reducetheir use of medication and switch to lower-cost drugs. For example, increasinga single co-payment from $5 to $10 reduced annual costs from $725 to $563 perperson--22 percent. Doubling co-payments in plans with a tiered benefit designreduced average drug-plan spending by about a third.

Companies are also turning to tiered plan designs. In general, such designsprovide varying levels of co-payment or co-insurance for different types ofdrugs. For example, under a three-tiered plan design using co-pays, an employeemight pay $10 for generic drugs, $20 for preferred brand-name drugs, and $30 fornon-preferred brand-name drugs. J. B. Hunt Transport, Inc., in Lowell, Arkansas,has taken this concept a step further by adding a fourth tier of drugs. "Thistier is for the so-called lifestyle drugs" such as Viagra, which have a muchhigher co-pay than the other tiers, says Mark Greenway, the company’s vicepresident of human resources.

Since 2000, the number of companies using a three-tier plan design hasincreased from 29 to 57 percent, according to the 2002 Annual Employer HealthBenefits Survey, a study of 2,014 employer health plans conducted by the KaiserFamily Foundation and the Health Research and Educational Trust. This growth hasbeen at the expense of two-tier plans, which declined from 49 percent of plansin 2000 to 28 percent in 2002. Plans are also increasing deductible levels. Adeductible for a single person increased from $52.69 in 2000 to $75.50 in 2002,an increase of about 43 percent, according to the 2002 Takeda Prescription DrugBenefit Cost and Plan Design Survey Report.

More companies are also using co-insurance in tiered and non-tiered plans inan attempt to shield themselves from price inflation by ensuring that employeespay a set percentage of a drug’s cost rather than a flat dollar amount. Forexample, in a tiered plan with co-insurance, employees might pay 20 percent ofthe cost of a generic drug, 35 percent for a preferred brand-name drug, and 50percent for a non-preferred brand-name drug.

Even though plan design changes can be important tools in cost containment,they can also be a double-edged sword. It is crucial for employers to ensurethat these changes do not increase employees’ cost-sharing to the point thatthey forgo medication that is important or essential to their well-being. Afterall, it makes no sense to control pharmacy-benefit costs by taking steps thatcould worsen employees’ long-term health and lead to potentially catastrophicmedical costs.

Just how far companies are willing to go is open to question. Gettingemployees to take an active part in the economic decisions about theirprescriptions is one thing. Influencing medical decisions on the basis of costis another. "We want to control costs, but we don’t want to directdecision-making," says Edie Houck, human resources supervisor with MinnesotaPower in Duluth. "We want the doctor to make the decision."

Sean Brandle, vice president at The Segal Company in New York, says the keyto strong plan design "is understanding what drugs the employee populationuses and building a plan design that reflects both employer and employee needs."

Manage the PBM
    Many companies rely on pharmacy-benefit managers to negotiate and managethese programs on the company’s behalf. However, PBMs have come under fire inthe media for their close relationships with both employers and pharmaceuticalmanufacturers. The implication is that PBMs are not doing everything they can toget employers the best possible pricing. "I think a lot of the media spotlighthas been unfair to PBMs," says Kevin DeStefino, a national pharmacy clinicalconsultant with Watson Wyatt Worldwide in Phoenix. Nevertheless, employers mustmanage and monitor their PBM relationships carefully to ensure that theircontracts and pricing levels are still competitive.

To do so effectively, employers should understand what these managers do andhow they generate revenue. "PBMs have six or seven revenue sources, soemployers need to understand what those sources are and negotiate accordingly,"Brandle says. For example, PBMs routinely receive manufacturer rebates, soemployers should find out how much of those rebates is passed along to employersand how much the PBM keeps.

PBMs negotiate their pricing according to the employer’s market value as acustomer. An employer’s market value is based on the size of the plan, itsutilization rate, and its benefit levels. Therefore, the largest plans with thehighest utilization and richest benefits have the greatest market value, andthese employers have the greatest leverage with a PBM when negotiating pricing."An employer that knows its value can get a better deal," DeStefino says.

Given the highly competitive and rapidly changing PBM industry, companiescannot hesitate to put their business out for bid. That is what paper-goodsmanufacturer Georgia-Pacific Corporation did in an attempt to control the 26percent year-over-year increases in its pharmacy-benefit program. Theseincreases are largely the result of rising costs, an area in which a PBM canmake a big difference. "We have seen increases in utilization, but costincreases have been the more significant driver of our pharmacy-benefit costs,"says Patricia Muller, the company’s manager of health plans in Atlanta.

To minimize these increases as much as possible, the company has beenaggressively managing its relationship with its PBM. In 2001, the companysuccessfully renegotiated its PBM contract using information from a plan auditperformed in 2000. Last year, the company decided to put its PBM arrangement tothe test by issuing a request for proposal to several other PBMs. The companyhad not put its PBM contract out for competitive bid for six or seven years--aneternity in the rapidly changing and consolidating PBM industry. "We wanted tosee if we could get a more competitive deal," Muller says.

Although the company opted to stay with its current PBM, the process paid foritself, with cumulative savings of about 5 percent. More important for thefuture, the process allowed Georgia-Pacific to evaluate its PBM’s strengthsand weaknesses in customer service, clinical programs, and operationalprocedures. The new contract has performance guarantees that require the PBM topay a financial penalty if it does not meet agreed-upon quality and performancestandards for things like prescription turnaround time at the mail-orderpharmacy.

Use mail order
    Many employers view mail-order pharmacies, with their low overhead, as themost cost-effective distribution channel for prescription drugs and, hence, themethod most likely to offer the greatest discounts. The Segal survey predictscost increases for mail-order drugs to be 18.6 percent this year, more than halfa percentage point lower than the 19.3 percent increase expected for retail.

As a result, companies are doing everything they can to encourage greater useof mail-order pharmacies. Georgia-Pacific uses a mix of deductibles and flatdollar co-pays to influence employee purchasing behavior. This provides a moreadvantageous cost-sharing arrangement. Employees purchasing prescription drugsat retail must meet a $100 deductible. Then the plan kicks in to cover 80percent for generic drugs and brand-name drugs when no generic is available, and60 percent for brand-name drugs with a generic substitute. The out-of-pocketmaximum is $1,500.

By contrast, the mail-order plan offers a co-pay of $10 for generics, $10 forbrand names when generics are not available, and $20 for brand-name drugs whengenerics are available. Not surprisingly, this arrangement drives mail-orderusage. Fifty-nine percent of prescriptions are filled through mail order.

Consider employee reaction
    Whenever they make changes to pharmacy benefits, employers must consideremployee reaction. Brandle suggests mapping out how many employees would beaffected by a change and weighing that against potential cost-savings. Forexample, Minnesota Power requires that a change in PBM must save the company atleast $25,000 to justify such a disruption.

To effectively get employees to accept changes to pharmacy benefits, honestcommunication is the best policy. "Our employees used to complain aboutcost-sharing until they saw the cost themselves," Houck says.

At Baystate Health System, Brzys says, employees didn’t complain despite asignificant change in plan design. A year before the changes were implemented,he and his staff began talking to employees about the cost of pharmacy benefitsand, most important, explaining the reasons for the change. The only resistancewas to a proposal requiring prior authorization for prescriptions in a certaindrug category. The company later decided to shelve that proposal for a year.

Encouraged by employee acceptance of the first increase, Baystate once againincreased cost-sharing levels this year (out-of-pocket maximums for both singleand family coverage increased by $500) to offset another major increase inpharmacy-benefit costs.

Prepare for the next wave
    So what’s on the horizon for pharmacy benefits besides more cost increases?DeStefino predicts that employers will increasingly turn to tools likeutilization and case management, using integrated medical, pharmaceutical, andadministrative data to manage costs.

Some companies already have started: After realizing that only 10 percent ofthe employee population filled 72 percent of all prescriptions, J. B. HuntTransport, Inc., launched a disease-management program designed to help theseemployees.

"Pharmacy-benefit costs are a runaway train," DeStefino says. It’s timefor HR executives to jump aboard and slow it down. 


A Pharmacy Glossary

Before a company begins negotiating with vendors and tinkering with plandesign, it is a good idea to understand these key terms:

AWP: Average wholesale price. This is a common term used in pharmacy-benefitmanager negotiations. It is also a misnomer because a drug’s true wholesaleprice is actually AWP minus a variable discount.

Blockbuster drug: This is a top selling drug, usually patented and withoutgeneric alternative, that accounts for a large chunk of prescription drugspending. For example, ulcer drug Prilosec had about $4 billion in sales in2001.

Formulary: A list of drugs recommended for coverage.

Generic: Less expensive alternative drug made available after a brand namedrug’s patent expires.

Lifestyle drugs: This is an emerging category of drugs whose use is voluntaryrather than life saving. Viagra is the most cited example.

MAC: Maximum Allowable Cost. Pharmacy-benefit managers use MAC lists to setper unit rates for generic drugs.

Mail order: Prescriptions filled through the mail, rather than through aretail pharmacy.

PBM: Pharmacy-benefit manager. Vendors that specialize in prescription drugmarketplace and are hired by employers to negotiate prices and manage costs forpharmacy-benefit programs.


Plan design averages:

Generic
Co-pays, $9.00
Co-insurance, 21%

Preferred
Co-pays, $17.00
Co-insurance, 24%

Non-preferred
Co-pays, $26
Co-insurance, 28%

Source: 2002 Annual SurveyEmployer Health Benefits, Kaiser Family Foundation/Health Research AndEducational Trust.

Workforce, January 2003, pp. 44-48 -- Subscribe Now!

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