Big Picture on Drug Benefits

Getting the full view of your organization's health costs requires seeing how drug plans fit in.

By Joanne Sammer March 1, 2010

0310cover.jpgPharmacy benefits are coming to mean more than a week’s worth of an antibiotic from a drugstore or three months’ worth of a maintenance drug by mail order. A pharmacy benefit is fast becoming a larger, more complex and integral component of an employer’s total approach to managing health care.

Many employers have begun thinking strategically about how they structure and oversee pharmacy benefits and how changes in those benefits impact other costs. Organizations are adopting multiple strategies to manage pharmacy benefits based on two clear goals: lowering costs and improving employee health.

Drug therapies are increasingly tied to health and wellness. For example, the information generated through analyses of pharmacy benefits represents a tool for managing broader health care and wellness programs. The data also provide insight into the prevalence of specific conditions and illnesses driving health care costs. In addition, slices of data, such as refill frequency, indicate levels of compliance with drug therapies.

Pharmacy data can also make it easier to identify individuals with chronic diseases and to provide support in managing their conditions and improving their overall health. If a hypertension sufferer has stopped filling his prescription, for example, health program vendors can reach out to that individual to find out why and to explain the importance of compliance.

“Although pharmacy benefits make up only 15 percent to 20 percent of overall health care spending for an individual organization, the trend in prescription benefit costs is still significant,” says Ritu Malhotra, vice president with HR consulting firm the Segal Co. in New York. “While over the past several years prescription drug cost trends have outpaced medical cost trends, projected prescription drug trends are expected to continue to drop and stay below medical plan trends. However, as more-expensive specialty drugs enter the market, trends for these drugs are forecast to be double retail drug trends.”

Employers are carefully managing their formularies—lists of covered drugs—to ensure that they cover only the most effective drugs. A few years ago, Peoria, Ill.-based Caterpillar Inc. would cover every drug that the U.S. Food and Drug Administration approved, says Todd Bisping, the manufacturer’s in-house pharmacy benefits manager. “We now do a complete literature review using evidence-based practices and design our plan to cover [each] class of drugs in the most cost-effective manner.” Alternative therapies are tried only if one of the covered therapies is not effective.

Such evidence-based decision-making helps employers gain support from health care providers for efforts to manage pharmacy costs and helps employees understand decisions about coverage, thereby reducing the number of appeals and complaints.

The focus is on appropriate use of medication—the right drug in the right amount at the right time, says Keith Bruhnsen, assistant director of benefits and manager of the prescription drug plan for the 90,000 covered employees and dependents at the University of Michigan in Ann Arbor. “We continually emphasize the rationale for the decisions we make.”

Costs: Everybody’s Business

Taking steps to manage and reduce pharmacy benefit costs can significantly impact health care budgets. Some employers are “rethinking program design strategies to increase cost transparency so that patients have a sense of how much these drugs cost,” says Mike Thompson, a principal in the health practice of PricewaterhouseCoopers in New York. New designs include pharmacy deductibles and co-pay structures calculated as a percentage of a drug’s cost rather than as a flat dollar amount. As a result, employees’ cost-sharing increases as drug prices increase. “You want people to be sensitive to the magnitude of the costs,” he says.

However, while managing pharmacy benefit costs serves a worthwhile and necessary goal, keep the larger picture in mind when developing strategies. Cost-cutting that denies individuals access to necessary medication or makes purchasing prescription drugs a financial hardship may harm an employer’s long-term health care costs and workers’ health and productivity.

Often, employers’ pharmacy benefit cost decisions are of the pay-now-or-pay-later variety. Paying for certain drugs now can ensure compliance by patients and result in fewer medical complications later. An increasing number of people “will have to take drugs for a lifetime to manage chronic conditions,” says Helen Darling, president of the National Business Group on Health in Washington, D.C. But “prescription drugs help so many people avert the problems that used to send them to the hospital.”

By far, maximizing the use of generic medications—reducing reliance on much costlier brand-name drugs—remains employers’ most important tool. From 2008 to 2015, $105 billion worth of brand-name drugs will come off patent, says Tim Wentworth, group president for the employer accounts group at Medco, a pharmacy benefits provider in Franklin Lakes, N.J. The compound effect for employers that steer employees toward generics or require employees to start with generics “is very substantial.”

Bruhnsen estimates that the University of Michigan saves $500,000 in health costs every time generic drugs as a percentage of prescriptions dispensed to participants goes up by a point and the use of brand-name drugs consequently decreases. The average cost for a 30-day supply of a generic drug is about $25, compared with $200 for a branded medication, he explains. Nothing else can make up that difference, including rebates by manufacturers and pharmacy benefit managers (PBMs). Since 2003, Bruhnsen estimates, the university has avoided spending $64 million by increasing the use of generic drugs to 74 percent from 42 percent.

It is not practical to achieve 100 percent generic use because generics are not appropriate for every patient. However, increasing use to 70 percent or more is not out of the question for many employers. Doing so requires patient and provider education and a plan structure that provides financial incentives for generic use, such as higher co-pays for brand-name drugs when generics are available.

A Harder Problem

Although employers are taking steps to control drug costs, the growing sector of specialty drugs may be harder for employers to manage. Specialty drugs on the market or in the pipeline offer promising advances for the treatment and prognoses of many illnesses and chronic conditions. Patients with hard-to-treat conditions such as multiple sclerosis, hepatitis C and rheumatoid arthritis are now benefiting from specialty drug therapies.

These drugs sometimes cost $1,000 or more per month per patient. One benefits executive estimates that specialty drugs are used by 1 percent of that organization’s covered population but account for 20 percent of pharmacy benefit costs. “Even if an employer doesn’t have a high level of specialty utilization today, it is still a virtual certainty that it will at some point in the near future,” predicts David Dross, national practice leader of the managed pharmacy practice at Mercer in Houston.

Many employers are rightly concerned that specialty drugs are going to break their benefits budgets. And there is not much they can do. Some employers are working with PBMs to add step therapy to their prescription drug plans. Step therapy requires patients to start treatment with a preferred drug, usually a generic, chosen on the basis of clinical research. Patients move on to brand-name or specialty drugs only if the drug at the previous step doesn’t work. PBMs also offer prior authorization to help employers ensure that specialty drugs are prescribed only after other, less-expensive options prove ineffective and that patients can manage the side effects and remain in compliance with these drugs.

Michael Jacobs, national clinical practice leader with Buck Consultants in Atlanta, suggests that employers tie specialty drug formularies to the medical return on investment. “You want to get the right drug to the right person,” he says, “so employers can require patients to try the less-expensive drug for 60 to 90 days to see if that works before trying a specialty drug.”

Value-Based Designs

Although employers may be concerned about how they’ll pay for specialty drugs, many are emphatically willing to pick up the tab for other prescriptions. Under so-called value-based drug programs, employers set employees’ drug costs for chronic ailments such as asthma, high blood pressure and diabetes as low as possible. The rationale: When maintenance drugs are available at little or no cost, employees are more apt to manage their conditions now and more likely to avoid expensive complications later.

Pitney Bowes Inc., based in Stamford, Conn., has adopted a value-based design for pharmacy benefits with ambitious goals. Using statistical modeling and other analyses, researchers have identified sources of future high-cost claims caused by failure to adhere to prescribed medication for certain conditions. High-cost claims go beyond medical and pharmacy benefits to include the cost of workers’ compensation and disability claims if, for example, an employee’s failing health leads to a workplace accident or an extended medical leave. Such claims also include lost productivity associated with an employee who is not 100 percent healthy on the job.

Based on these analyses, Pitney Bowes modified its pharmacy benefit structure to ensure that certain medications are affordable. For example, the company moved all brand-name and generic statins used to treat high cholesterol, and angiotensin-converting enzyme (ACE) inhibitors for treating high blood pressure, to a zero co-pay tier, making these drugs free of charge. The drugs have been clinically proven to help manage these conditions and can help the company avoid the long-term costs associated with hospitalization and other treatments for complications. “We see fewer emergency room visits, and we also see people being able to come to work and be more productive,” says Andrew Gold, executive director of global benefits planning. “That creates an overall benefit to the company and to employees.”

A Long-Term Investment

HR and benefits executives need to devote time now to managing pharmacy benefits effectively and understanding trends that drive costs.

Pharmacy benefits significantly affect overall health care costs as well as health conditions that can impact employees’ productivity. In effect, the topic of prescription drug benefits will expand from the area of employer health costs to include even broader workplace issues.

The author is a New Jersey-based business and financial writer.

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