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Prescription Drug Coverage

A 1998 report by the consulting firm William Mercer shows an average increase in prescription costs of 11 percent. Some HMOs say drugs account for 10 percent of total medical costs but as much as 50 percent of total plan cost increases. Costs are rising because the average price of prescription drugs has grown, the number of older Americans is steadily increasing and prescription drug usage is usually highest at older ages, and drugs are increasingly used in place of surgery or other medical interventions. Some experts feel that the capitation method of reimbursing physicians may encourage them to prescribe over the phone, rather than actually seeing the patient, with the possible result of inappropriate prescribing. Still others feel that pharmaceutical advertising directed to consumers — and marketing to providers — has caused substantial increases in drug costs. Because many new expensive drugs are expected to be available in the near future, there will likely be little relief from these increases for some time.

Early pharmaceutical cost control efforts include the use of prescription drug cards, mail order maintenance drug programs, and generic drug substitution. These are all reasonable cost containment methods. Newer approaches to controlling prescription drug costs are more controversial.

Prescription Drug Cards

Q. How does a prescription drug card work and can costs be reduced through its use?

A. In a card plan, an insurance company or third party administrator solicits pharmacies to join the plan. The pharmacy agrees to reduce prices in exchange for the plan’s block of business. Employees present the card and pay a dollar copayment, typically between $5 and $15 per prescription. If an employee elects to use a non-participating pharmacy, he or she must pay for the prescription in full and then file a claim for reimbursement. Most plans apply a penalty if a non-participating pharmacy is used within the service area.

Mail Order

Q. Does the plan offer a mail order option for maintenance medications?

A. Through bulk processing and purchasing, mail order prescription programs can save money for the plan and the patient. Typically, mail order programs require lower copayments than those that apply to prescriptions filled at local pharmacies. Also, prescriptions are usually filled with 90-day supplies, rather than 30, as is typically the case with pharmacy filled prescriptions. Critics of mail order programs point out that they do not always save the plan money for two reasons. First, under traditional indemnity programs, many employees never submit their receipts for reimbursement; second, some patients never fill a prescription due to the upfront out-of-pocket costs. These are not good reasons to eliminate the mail order option.

Pre-Authorization for Expensive Drugs

Q. Does the plan require pre-authorization for expensive drugs?

A. Some plans require pharmacists to obtain approval prior to dispensing certain brand-name drugs for which there are less expensive, therapeutically equivalent alternatives. Restrictions of this nature should be clear to plan providers and plan members should be held harmless if a provider fails to obtain the required authorization. Authorization and decisions on appeals of denials should be provided on a timely basis.

Experimental Treatment

Q. How does the plan define experimental or investigational drugs?

A. Health plans often will not cover drugs or treatments that they consider to be experimental. Plans are increasingly refusing permission for patients to participate in clinical trials, even when the trials are of high quality and there is no conventional treatment that can improve or cure their condition. This is of particular importance to cancer patients, where the treatment of choice is frequently a clinical trial. Ask about the plan’s decision process on these types of treatment. The more narrow the definition of exclusions the better.

Pharmacy Benefit Managers (PBM)

Q. What is the role of a pharmacy benefit manager?

A. The main function of pharmacy benefit managers is to control the cost of prescription drugs. PBMs negotiate discounts and rebates with drug manufacturers, negotiate retail pharmacy networks, and develop generic and formulary substitution programs. More recently, PBMs have begun to investigate disease management programs which attempt to control overall medical costs by encouraging those with chronic disease, such as diabetes, asthma, and cardiovascular disease, to use their drugs correctly.

Q. Are there any problems associated with PBMs?

A. Some PBM companies are owned by drug manufacturers. Obviously, this could create a conflict of interest. Because the selection of drugs may be compromised, quality of care could be adversely affected. All parties, including employers and plan members, should be informed of any ownership between PBMs working with the plan and drug manufacturers.

Generic Equivalents

Q. What are generic drugs?

A. A generic drug has the identical chemical composition as its brand-name equivalent, and must meet the same government standards. Generics are therapeutically equivalent to their brand-name counterparts. Generic substitutions become available when the patent on the brand name drug expires, and generics are less expensive than brand names.


Q. What is a drug formulary?

A. Formularies are lists of drugs that a plan will cover. A formulary, which may be a brand name or a generic, is therapeutically similar to another drug, but not necessarily equivalent in its chemistry. Formularies are often referred to as therapeutic substitutions. Many experts argue that formulary drugs are often not interchangeable with the drug for which they are being substituted, and that formulary substitutions can be dangerous to patients. In essence, a drug formulary replaces the doctor’s judgment in determining the proper prescription drug.

Q. Does the plan have a drug formulary? If so, is it an open, incentive-based or a closed formulary?

A. In an open formulary, which is most common in non-HMO settings, physicians and pharmacies are often provided with financial incentives to use specific drugs (i.e., those on the formulary list), but the patient does not incur any financial penalties for using non-formulary drugs. Participants in plans with incentive-based formularies pay a higher copayment for non-formulary drugs. In a closed program, non-formulary drugs are not covered at all. Closed formularies are most prevalent in HMOs. Studies have shown that patients in plans with closed formularies tend to incur higher Medicare costs and have poorer outcomes than those in plans without such restrictions.

Q. How are drug formularies selected?

A. Drugs are rated on clinical efficacy (effectiveness) and cost. Drugs that are considered too costly or whose efficacy is considered less than acceptable are not included on the formulary list. Efficacy should always be the first criteria, but cost is often the driving factor in the selection process. The smaller the formulary list, the more cost effective it is, but the physician is also more restricted in selecting an appropriate medication.

Q. Who selects the drugs on the formulary list?

A. Formularies, if used, should be selected by an independent committee of physicians, including plan physicians, pharmacists and other clinical experts. Ask whether the plan has a financial relationship with any of the manufacturers of drugs on the list. Anyone with such a relationship, including a plan’s prescription benefit manager (PBM), should not be involved in the drug selection process.

Q. Does the plan use outcomes data in developing its formulary list?

A. Prescription drug outcomes research, which is supported mainly by pharmaceutical manufacturers, is a study of the clinical and cost effectiveness of prescription medications. Although outcomes research is in its infancy stages, available data should be considered in the formulary selection process.

Q. Does the plan have a process for members to access medications that are not on the formulary, when medically indicated?

A. Formulary decision makers make their selections on the basis of which drugs are considered to be the most effective treatment and least costly for most people. People are different, and patients with the same condition may react differently to the same drug. In closed formularies, the physician loses the ability to choose the drug he or she feels best fits the needs of each patient. The plan should have a process by which the treating physician may provide patients with non-formulary drugs, when deemed medically necessary by the prescribing physician.

Q. Does the plan notify patients and their physicians of changes in drugs on the formulary list?

A. Some patients are on complex regimens of numerous drugs. Similar drugs can have very different effects and a change in only one prescription can result in adverse health consequences. Many health plans revise their formulary lists frequently, resulting in changes that the patient and his or her physician are not aware. Patients often learn of the change only when their pharmacist informs them, or when they pick up their prescription and notice the difference, which leaves insufficient time for appeal. California has passed a “continuity of prescription drugs” law.

Q. If the plan has a formulary list, do the physicians have pharmacy budgets or other incentives to prescribe the formularies?

A. Some plans provide physicians with a monthly drug budget, financially penalizing them if they go over budget and rewarding them if they stay below budget. This is commonly referred to as “pharmacy risk sharing.” Advocates claim that these programs give physicians an incentive to consider the cost effectiveness of the drugs they prescribe. Critics, however, believe that this type of system serves as an incentive to underprescribe or prescribe less costly, possibly less effective, alternatives. While a plan may not have a ban on disclosing these arrangements, such information is usually provided only upon request. Ask specifically what incentives apply.

FDA Approval

Q. Does the plan cover medications for treatments other than those specifically approved by the Food and Drug Administration (FDA)?

A. Many drugs are developed to treat one type of illness and subsequently found to be effective in treating other illnesses as well. Because FDA approval of multiple drug uses is often slow, physicians may prescribe medications that have FDA approval for at least one condition to treat a condition for which the drug does not yet have FDA approval. This is a perfectly legal practice typically referred to as prescribing “off label.” Off-label prescriptions are frequently written for cancer patients. At least 19 states have laws requiring coverage for off-label medications and the National Association of Insurance Commissioners approved a model act calling for coverage of such drugs under specified conditions.

Over-the-Counter (OTC) Drugs

Q. Does the plan cover OTC — non-prescription — medications? Does the plan have a policy that encourages physicians to prescribe OTCs?

A. Although most plans do not currently cover the cost of OTC medications, that policy is slowly changing in response to the increasing number of prescription products that have gained approval for OTC sales in recent years. Plans that do cover OTCs generally do so only when they are recommended by the physician. The most frequently covered items are diabetic supplies and antihistamines. The increasing availability of OTC treatments, and the frequency that plans are promoting OTC treatment in lieu of prescription medications, may necessitate greater OTC health plan coverage in the future.