Prescriptions for Employers’ Drug Costs

By Stephen Miller Aug 1, 2008
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.0808cover.jpgCost-sharing still dominates efforts to harness rising drug costs, but additional tactics are gaining attention.

Most increases for pharmacy benefits still outpace increases for employee medical coverage overall, but the gap has been shrinking, mainly because employers have been adopting tactics designed to better manage their prescription drug costs

Most tactics involve increased cost-sharing by plan participants, but an additional approach that some employers are exploring goes beyond costs: It’s an effort to encourage employees to raise the levels of their compliance with drug regimens. The reasoning? Keeping employees as healthy as possible can help keep their health care costs under control, according to a study by global human resource consultancy Mercer.


Results from Mercer’s latest Hot Topics in Health Care survey, released earlier this year, drew information on drug benefits from more than 500 large employers -- those with 500 or more employees. Actions by employers and the companies that manage their pharmacy benefits have slowed the pace of cost increases for prescription drug benefits, Mercer researchers reported.

In 2000, for example, drug benefit costs rose 18.3 percent while health benefit costs rose 6.6 percent -- a difference of nearly 12 percentage points. But by last year, the difference had shrunk to about 4 percentage points -- prescription drug benefit costs rose 9.3 percent among large employers, while overall medical costs rose 5.1 percent.

“Employers and their pharmacy benefit managers have made significant changes, such as moving from an open formulary to a tiered structure, or increasing the percentage of drug expenditures paid by members,” says Lisa Zeitel, senior consultant and co-leader of Mercer’s managed pharmacy business. “Our survey indicates that many employers have achieved as high a level of member cost-share as they deem appropriate -- for now -- and are exploring other ways to manage costs. This presents new challenges, especially in the management of highly expensive specialty drugs.”

Rx Cost Management

Among the plan design methods that have proved most successful in helping tame the rising costs of pharmacy benefits are tiered co-payments, co-insurance and the use of mail-order prescription drug providers.

Tiered co-payments. Most employers offering a prescription drug benefit have adopted tiered co-payments. The most common arrangement -- used by 72 percent of plan sponsors for employees’ retail drug purchases and by 68 percent of plan sponsors that offer mail-order drug purchasing -- is a three-tier structure with increasing co-payment amounts for generics, formulary brand-name drugs (those on the plan’s list of drugs covered by the benefit) and nonformulary brand-name drugs.


Co-insurance. More than one-fifth of all large employers, and nearly half of those with 20,000 or more employees, require co-insurance for one or more drug categories, meaning the employee pays a certain percentage of covered expenses.

Co-insurance offers greater price transparency and allows employers to share costs consistently with employees, even when drug prices increase or fluctuate. In addition, because co-insurance has been shown to have an immediate effect on participants’ buying habits, it supports consumerist strategies.

Mail-order option. Virtually all respondents to the Mercer study said they provide a mail-order plan. In 77 percent of the plans, members have a co-pay incentive to obtain drugs through the mail. A small portion penalize members who don’t use the mail-order plan for maintenance drugs: Six percent require an additional co-pay from members who continue to use retail pharmacies after a specified number of fills, and 10 percent discontinue retail coverage altogether.

More commonly, employers use targeted communication to educate members on the value of the mail-order plan; 36 percent said they use this method.

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Promoting Generics

During the next several years, some significant brand-name drugs will become available as less-expensive generics, creating an opportunity to lower costs, according to Mercer.

To encourage use of generics, some employers require an extra payment from plan members who request a brand-name drug when a generic equivalent is available. The extra payment -- in addition to the normal co-payment -- equals the difference in cost between the brand-name drug and the generic. Forty-nine percent of survey respondents said they use such a program, often called a “Dispensed as Written (DAW)-2 penalty.” Moreover, 29 percent said they use a stricter version called “DAW-1,” which imposes the penalty even if the physician requests the brand-name drug.

Use of these penalties appears to be growing. An additional 9 percent of respondents said they will implement DAW-1 within two years, and 10 percent of respondents said they will implement DAW-2.

Sixty-four percent of respondents said they now use targeted communications to promote the selection of generics, up from 48 percent in 2005.

Specialty Drugs

Management of specialty or biotech drugs is becoming important for employers, and a growing number of respondents -- 45 percent in 2007, up from 34 percent in 2005 -- said they have recently reviewed plan benefits and limits for specialty or biotech drugs. This figure rises to 68 percent among the largest employers, up from 51 percent in 2005.

“Since there is such a large number of specialty products in the pipelines of drug manufacturers, employers are very concerned with how to manage this high-cost and rapidly expanding area of pharmaceuticals,” says Peter Wickersham, senior consultant in Mercer’s managed pharmacy business.

Paying Employees To Take Their Meds

Encouraging evidence-based clinical practices has become an aspect of health management, according to Mercer. This includes using incentives in pharmacy plan design to improve drug compliance and adherence.

Specifically, employers were asked if they provide financial incentives -- such as lowering or waiving drug co-payments or co-insurance for specific drug therapies -- to encourage employees to increase their compliance with drug regimens.

Survey findings suggest that this is still an emerging trend used by a limited number of employers. Only 6 percent of employers use financial incentives for diabetes treatment, the largest percentage in any therapeutic category. However, 26 percent of employers said they are considering implementing a financial incentive program for diabetes therapy in the future, and approximately one-fourth said they are considering the same approach for other therapeutic classes used to treat chronic conditions, such as high cholesterol, asthma and high blood pressure.

A slightly smaller percentage of employers now waive or reduce co-pays for specific classes of drugs, contingent on members’ participation in a related disease management program that helps patients follow the drug treatment plans prescribed by their physicians for certain high-cost chronic conditions.

“Many employers have heard the buzz over evidence-based designs or value-based formularies, and a small group of them have become early adopters of this approach,” Wickersham says. “Other employers are still weighing their options but are asking very good questions about how to apply these concepts to their own employee population.”

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