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Restrictive Formularies and Drug Exclusions: In Whose Interest?

Charging more for maintenance meds can increase health costs down the road

up​dated 11/20/2014

Employers can “push back” against their pharmacy benefit managers (PBMs) over what the formulary of covered drugs includes and excludes, and at what co-pay rate, according to an expert panel at the 2014 National Business Coalition on Health Annual Conference, held recently in Washington, D.C.

Drug formularies convey what medications will be covered and at what level, using a tiered approach in which the higher the tier, the greater the cost paid by employees. Tier 1 has traditionally been designated for generic drugs (lowest co-pay), Tier 2 for branded drugs designated “preferred” (higher co-pay) and Tier 3 for “nonpreferred” branded drugs (highest co-pay).

PBMs are primarily responsible for developing and maintaining the formulary, contracting with pharmacies, and negotiating discounts and rebates with drug manufacturers.

But in marketing their services, PBMs are shifting toward formularies that seem to lower costs for employers while passing those costs to employees. Such actions can include creating a tier for nonpreferred generics with higher co-pays, including certain maintenance drugs for chronic conditions, noted panelist Mark Fendrick, director of the Center for value-Based Insurance Design at the University of Michigan. value-based insurance design (VBID) encourages employees to use high-value drugs and health services by covering them generously, often at 100 percent of the cost.

Incentives and Deterrents

“An elementary rule is that when costs go up, people will use less of it. Cost-sharing can be counter-productive,” Fendrick noted. “It’s certainly appropriate to charge more for drugs employees should think twice, or thrice, about using”—because of unproved therapeutic efficacy or the presence of lower-cost generic versions. But charging more for high-value maintenance medications can mean higher health care costs down the road.

“I’d prefer to spend more on statins [for controlling cholesterol] than on stents [used in heart surgery for clogged arteries],” said Fendrick. (He further addresses rising co-pays for generic drugs in an article he co-authored in the American Journal of Managed Care, “Is All ‘Skin in the Game’ Fair Game? The Problem with ‘Non-Preferred’ Generics.”)

“Most PBMs act in their own self-interest to maximize revenue,” said Chuck Gamsu, senior vice president of Envision Rx, itself a PBM, albeit one committed to transparency within the PBM marketplace. “It can become a race to the bottom.”

That point was echoed by Terry Baskin, president and CEO of RxResults, a pharmacy risk management company that works with employers and their PBMs. “Drug inclusion often isn’t based on clinical evidence, but on marketing,” with formulary decision swayed more by pharmaceutical firm sales reps, or even direct-to-consumer advertising, than therapeutic value, he noted. “Beware of playing their game, based on their rules,” which may serve the PBM’s interests, but not yours or your employees, Baskin cautioned. “You want to assume control.”

At Caterpillar, Putting Employees First

One large, self-insured U.S. company that has taken a stand in favor of a formulary that puts the interests of employees first is Caterpillar Inc., explained Darin Hinderman, the firm’s North America health care and wellness benefits manager.

Caterpillar hired a team of physicians and pharmacists to design its formulary, rather than accepting what a PBM put on the table. “We now manage our own formulary, and decide what drugs we will and will not cover,” Hinderman said. “We decide what’s best for our employees. It’s a transparent process.”

He added, “I don’t want to have a conversation [with PBMs] on rebates; I want to have a conversation on how I can keep my employees more compliant with the medications they need to stay healthy.”

Another issue Caterpillar considers is which pharmacies are best at promoting medication adherence by following up with employees about their refills. “We then contract with, and direct our people to, those pharmacies,” Hinderman said.

Exclusions on the Rise

A worrying trend is the increase in medications excluded entirely from formularies when there is no lower-cost generic equivalent, Fendrick said. “I don’t mind excluding low-value drugs, and excluding brand drugs in favor of true generic equivalents is not a problem,” he explained. But excluding brands for so-called “therapeutic equivalents”—which are chemically different, and may operate differently in the body from the excluded medication—“can be problematic. These medications provide high value for some participants. They shouldn’t be entirely excluded, but tiered,” he advised.

Drug Carve-Outs and HSAs

Fendrick favors “carving out” altogether from insurance cost-sharing medications for diabetes, depression and other chronic conditions when employers are able to do so.

He warned that one consequence of the growth of high-deductible health plans (HDHPs) is that employers end up “telling employees [who are] taking medications for chronic conditions that they are now responsible for 100 percent of the cost until a deductible is met,” which can be up to several thousand dollars, often resulting in employees going off their medications.

He noted that under the tax code and Internal Revenue Service (IRS) regulations, only “preventive” health care and prescriptions are exempt from the deductibles in HDHPs with health savings accounts (HSAs). But a long-standing issue has been uncertainty over whether drugs for chronic conditions are treating an existing health issue (not exempt from the deductible), or preventing worse health conditions from developing.

Fendrick urged regulators to clarify this matter in a way that would make coverage of maintenance meds outside an HDHP/HSA plan deductible clearly permissible.

Employers, moreover, are already moving in this direction. As Business Insurance reported in November 2014, a Mercer survey shows that the percentage of employers treating maintenance medications as “preventive” has been steadily increasing. As of last year, 42 percent of employers with 500 or more employees were not subjecting certain maintenance medications to deductibles in HSA-qualified HDHPs, up from 31 percent in 2012. Among the largest employers (5,000-plus employees), their HSA-qualified HDHPs were even more likely to use a liberal definition of preventive medications, Mercer found, with 57 percent covering them at 100 percent of cost in 2013, up from 46 percent in 2012.

Formulary Action Steps

A National Business Coalition on Health action brief, value-Based Purchasing: Pharmaceutical Management, advises employers to step up their oversight of the PBMs with whom they do business. Among the recommended steps:

Base selection criteria for formularies on clinical outcomes to ensure that pharmaceutical costs do not decrease at the expense of rising medical costs.

Verify that pharmacy and medical benefits are aligned, and link data between the two in order to evaluate cost and outcomes across both types of benefits and the entire health care spectrum, not just through the lens of drug benefit costs.

Conduct an independent review of your formulary and the adequacy of the medications on it. Ask how formulary changes/exclusions and requests for formulary exceptions are handled. How do your pharmacy vendors—your plan and/or PBM—monitor and encourage patients to start and remain on their medications?

A Generic Drug Price Spike

Unprecedented price hikes for formerly inexpensive generic prescription drugs are putting patients at risk, according to testimony before a Senate subcommittee.

Rob Frankil, a pharmacist in Sellersville, Pa., testified on behalf of the National Community Pharmacists Association (NCPA) at a Nov. 20 hearing of the Senate Subcommittee on Primary Health and Aging. He described to senators the sudden nature of the price spikes and their impact on patients, payers and community pharmacists.

“Historically, generic drugs have provided significant cost savings to payers and consumers alike by providing safe and effective alternatives to typically more costly brand name drugs,” Frankil testified. “Therefore it was extremely concerning when, about a year ago, pharmacies began noticing a rash of dramatic price increases for many common, previously low-cost generic drugs.”

Patient Shock

The cost increases, he warned, have a “profound effect on patients,” including those with high-deductible plans. For instance, at Frankil's pharmacy the cost of Digoxin, used to treat congestive heart disease, jumped from about $15 to $120 for a 90-day supply—an 800 percent increase. That astounded one of his customers, who thought Frankil was overpricing the medication. Phone calls to a few competing pharmacies confirmed the new reality.

“Ultimately, everyone pays for these cost increases, now or later,” said Frankil. “Insurance plans aren’t likely to simply just absorb these higher costs, so even those with generous insurance plans will pay the price in higher future premiums.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related Article:

Drug Plan Cost Rise Outpaces Health Benefits, SHRM Online Benefits, October 2014

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