High-Deductible Headaches

While these days most employers are asking employees to take on a greater share of their health care expenses, so far prescription drug coverage has been largely sheltered from the cost-shifting currents. That’s because drug coverage is usually a distinct component of an employer-sponsored health care plan, with employees’ co-payments administered separately from the rest of their costs of coverage.

But things may be about to change.

Some health policy analysts say the separation should be eliminated, particularly in health plans with high deductibles. Their argument: High-deductible plans are designed to make employees more judicious consumers by involving them in their health purchasing decisions, and there is no reason consumerism should not be applied to all health expenditures, including prescription drugs. In effect, many say, there should be no “carve-out” for drugs in a health plan, especially a high-deductible plan.

The groundswell for boosting employees’ costs for prescription drugs could be spurred on by a number of other factors as well, including rising drug costs and new government regulations that affect a small percentage of health plans.

However, there are potential downsides to this approach. Most notably, shifting a substantially larger share of prescription costs to employees could discourage them from taking maintenance medications, which in turn could lead to more serious, and more expensive, health problems.

HR professionals who manage and design health benefits programs should be considering whether the high-deductible approach and the push toward consumerism in health care will be useful in promoting healthful behavior over the long term. In particular, should prescription drug benefits be drawn into the high-deductible approach or left to stand on their own? Before putting employees’ drug coverage onto a high-deductible track, benefits specialists should consider not only the pros and cons but also other approaches that some insurers and employers are adopting to make employees more cost-conscious about drug purchases.

The Changing Drug Picture

Certainly, employers’ rising drug costs and the growing use of pharmaceuticals have generated debate over whether the high-deductible approach would curtail employers’ drug expenses and motivate employees to be more cost-sensitive about drug purchases. But the biggest push for opening the debate has come from the federal government.

Under Treasury Department regulations that have been on the books for two years and that took effect in January, employers that offer tax-favored health savings accounts (HSAs)—which must be part of a high-deductible health plan—cannot let HSA participants keep their drug costs separate from the plan’s required deductible. It was permissible during a two-year transition period, but now HSA participants’ prescription drug costs must be blended with other health costs in meeting the HSA’s deductible—$1,050 of health care costs for an individual, $2,100 for a family. (Only “preventive” medications are exempt from the HSA deductible.)

Thus, HSA participants must now pay full price for prescription drugs and apply their outlays toward their deductible. Until they meet the deductible, there can be no separate discounted coverage such as the familiar co-pays of, say, $15 or $30 for a prescription regardless of its cost.

Because under 1 percent of employees with employer-sponsored health coverage have HSAs, the drug rule will have little direct effect on health coverage overall. But it may have a large indirect effect by prompting employers to implement sharply higher co-pays in prescription drug plans or establish high deductibles for drugs.

Employers may already be open to these higher deductibles given that prescription drug prices have been rising at even higher rates than overall health insurance premiums. While employers’ total health coverage cost increases are only now slipping below the double-digit threshold so common for many years, drug cost increases are not tapering off as noticeably.

Estimating the Side Effects

Implementing high deductibles for prescription drug plans is not necessarily a bad idea, says economist Paul Zane Pilzer, an authority on high-deductible health plans. The person who has to pay the full price rather than a relatively modest co-pay for a blockbuster heartburn medicine, for example, “may well become more motivated to make lifestyle changes instead—say, improve his diet and exercise more,” he says.

But some fear that if drugs prescribed for managing conditions become too costly, plan participants will reduce or eliminate those drugs, thus compromising their ability to ward off costlier health problems. “I’m very worried employees will stop taking their maintenance medications, thus endangering their long-term health,” says David Neikrug, a principal with Capital H Group, a New York-based employee benefits consulting firm that advises HR departments nationwide.

No one can say for sure how employees would react if they had to pay a lot more for prescription drugs, but inferences can be drawn from the most rigorous study on the impact of cost-sharing on health care utilization—the Health Insurance Experiment, done in the 1970s by the RAND Corp., a research and policy-analysis organization based in Santa Monica, Calif.

According to the study, when asked to pay more for prescription drugs, consumers cut their spending across the board, regardless of how much they needed a given drug. For example, adults in cost-sharing plans were three times less likely to buy antibiotics prescribed by their doctors.

Thus, higher deductibles might save employers in the short term but might ultimately discourage employees from taking the medication necessary to help them lead healthier lives—undermining the very reason for providing the plan in the first place.

A Fuller Picture

An additional element of any decision on whether to make drug costs a high-deductible element of a health plan should be the broad context of prescription drug prices.

While it is true, for example, that prescription drug costs have been rising at a faster rate than health premiums in general, it is also true that drug costs are a relatively small proportion—11 percent—of total national health care spending. The figure appears in a recent survey by the Kaiser Family Foundation, a nonprofit health research organization based in Menlo Park, Calif.

Also, prescription plan increases have been trending downward. Drug coverage costs rose 11 percent in 2003, down from increases of about 20 percent per year in the late 1990s, according to the Kaiser report.

In short, employers have been taking steps to modify prescription plans for some time, and these seem to be having an effect. The steps involve shifting more costs to employees in various ways. Among them:

• Broader co-pay arrangements. The familiar three-tiered arrangement—the participant is charged, say, $10 for a generic drug, $15 for a preferred brand name (a brand-name drug not available as a generic, sometimes one on which the pharmacy gets a substantial discount from the manufacturer) or $20 for a nonpreferred drug (a brand-name drug for which there may be a generic equivalent)—is giving way to four- and five-tiered arrangements. The higher tiers may cover lifestyle drugs or those with little or no discount available. The more tiers, the more cost-shifting to employees who opt for the costlier drugs; employees who select lower-cost options pay less.
• Higher co-pays. Escalation of co-pays is under way. Some have risen two- or threefold in recent years. Under the terms of one program offered to public employees in Georgia, for example, co-pays for drugs in the costliest category—the top tier—have more than doubled, to $100.
• Percentage formulas. Under some drug plans, participants pay a percentage of a drug’s cost, often discounted, rather than a flat co-pay. It’s widely called coinsurance.
• Elimination of coverage. Some plans do not cover any brand-name drugs of essentially identical formulation if one of the brand names is available over the counter.

Moreover, it appears that the traditional three-tiered co-pay system has been having an effect on holding down the escalation of drug costs, according to Paul Ginsburg, president of the Center for Studying Health System Change, a consulting firm in Washington, D.C.

In a recent article on health care costs in the journal Health Affairs, Ginsburg says that three-tier plans have been effective in steering consumers toward generic drugs, and the higher co-payments for nonpreferred (as opposed to preferred) brand-name drugs are forcing drug manufacturers to be more hesitant about raising prices. In 2004, for example, manufacturers raised their prices 3.3 percent, down from the 5.2 percent increases seen in both 2002 and 2003.

Ginsburg says he fears that a movement away from co-pays could prove to be a strain on both employees (if they cut back on needed medications) and employers (if productivity slips because workers’ health declines). Under the current system, employees can still get even the newest drugs at a reasonable price: The average co-pay for nonpreferred drugs is just $35.

“The tiered system, which is now the norm, is not interfering with the basic medical decisions of doctors or patients,” says Ginsburg. “But there’s no doubt that a large deductible would.”

Sidestepping the Drawbacks

To ease employers’ concerns that raising employees’ costs for drugs with a high-deductible approach might dis- courage their taking maintenance medicines, some insurers are trying to narrow the gap between traditional and high-deductible rules on drugs. In particular, some health insurers are deciding to exempt certain drugs from the high-deductible requirements for HSAs.

In effect, those insurers are liberally interpreting Internal Revenue Service (IRS) guidance on HSAs in 2004 that lets health plans provide first-dollar coverage (no deductible is applied) for preventive medications. Examples listed by the IRS include statins for patients with high cholesterol and ACE inhibitors for stroke victims. A health plan can have a traditional tiered co-pay arrangement—separate from the HSA-mandated deductible—for employees to use for drugs designated by the plan as “preventive.”

Aetna announced last July that it would give employers the option of providing first-dollar coverage for drugs used for five major conditions: sthma, diabetes, hypertension, high cholesterol and osteoporosis. Some of those drugs, such as antidiabetics and antiasthmatic agents, do not actually prevent illness but rather treat prevalent chronic conditions.

Robin Downey, head of product development at Aetna, says the new policy is a response to the unwillingness of some large employers to offer HSAs without such a provision. “We met with Treasury and told them this is what we are going to do,” Downey says. “My sense is that the IRS is not going to interfere with anything insurers do as long as they can back up their decisions with research.”

Although HSA plans account for only about 50,000 of Aetna’s 14.5 million covered lives, the company typically provides first-dollar preventive coverage for other services, such as annual checkups, so it decided to apply the same philosophy to the use of prescription drugs.

Says Joseph Newhouse, a professor at Harvard Medical School who worked on the RAND study and is a member of Aetna’s board of directors: “Modifying cost-sharing for chronic drugs that patients should be on makes high-deductible plans conceptually smarter.”

Although Aetna is the only major insurer providing first-dollar drug coverage in HSA plans, a few regional insurers are taking the same approach. For example, Destiny Health, a Chicago-based company that offers consumer-directed plans in six states to firms with 300 or fewer employees, provides first-dollar coverage for 10 common conditions ranging from asthma to seizures. “That’s how our medical advisory board recommended that we apply the IRS principles,” says Stuart Slutzky, the firm’s vice president for group products.

Employees enrolled in a Destiny plan, like those with Aetna, pay the same co-pay regardless of whether they have already reached the deductible. The co-pays under the Destiny plan are $10 for a generic drug, $25 for a preferred brand and $45 for a nonpreferred drug.

Educating Rx Consumers

Another strategy for helping to keep prescription drug prices affordable is to supply plan participants with tools for making more-informed decisions about drug purchases. After all, some experts maintain, if consumers must become more responsible for their health care choices, they must have access to information.

Blue Cross and Blue Shield of Florida, for example, offers drug coverage in its consumer-driven BlueOptions plan and does not yet require that drug costs be included under the plan’s deductible. But like many health insurers, the company posts information about drug effectiveness in general on its web site—available to all of its health plans’ participants—to identify less costly alternatives to pricey brand-name drugs.

In addition, each quarter members of BlueOptions receive a Personal Health Report that reviews their drug purchases and offers concrete suggestions on drug usage, including, for example, specific questions to ask their doctor, such as, “How long do I need to be on X drug?”

Says Carey Hepler, director of innovation and analysis at BC/BS of Florida: “We wanted to make our product as personalized as possible.”

Likewise, pharmacy benefits managers (PBMs)—companies that administer drug plans—also now see themselves as purveyors of critical information. National Medical Health Card Systems Inc., an independent PBM based in Pittsburgh, offers both telephone support and Internet-based services to help consumers understand the economics of their prescription drug choices.

Robert J. Kordella, the company’s chief clinical officer, says PBMs must play an advisory role, keeping consumers up to speed about the “availability of clinically indifferent choices” such as generic equivalents of brand-name drugs. With co-pays, “consumers were essentially making their decisions with other people’s money,” he says. “They now need to understand the economic consequences of their decisions.”

Another outgrowth of the high-deductible influence on prescription drugs is decision-support providers, which focus exclusively on helping consumers weigh their prescription drug options. One such firm, Chicago-based Rxaminer, charges its clients—mainly large employers and health plans—a monthly fee to give employees access to its database of clinical and price information. A person taking Lipitor, for example, can look up both the relative cost and the benefits of all drugs in the statin class.

A Legislative Prescription

Some health care policy analysts contend that HSAs will never catch on as long as employees are required to pay the full cost for any prescription drug. “The prescription drug issue is the biggest deal-breaker,” says Susan Relland, health policy legal counsel at the American Benefits Council, a Washington, D.C.-based industry group representing large employers and health and retirement plans.

Relland says that in a survey of 764 large and small employers, the council’s HSA working group found that the significant change in prescription drug coverage under HSAs—namely, the high deductible—was the main reason for their unwillingness to offer the plans.

The council backs a proposed change in tax law that would allow HSAs to carve out a separate plan for covering all prescription drugs.

“This won’t happen tomorrow,” Relland says, “but a broad conversation has begun.”

Joshua Kendall is a freelance writer in Boston who specializes in health care and health policy issues.

Web Extras

• Surveys: SHRM's 2005 Benefits Survey Report.(Source: Society for Human Resource Management and Catalyst)
• Weblink: Which Is Which-HRAs and HSAs
• Weblink: IRS publication on health savings accounts.
• Weblink: Kaiser Family Foundation report on containing prescription drug costs.(March 2005)