A Bitter Pill to Swallow: Runaway Prescription Drug Costs (1999)
Prescription drug spending is increasing at four times the rate of overall medical cost inflation. Drug costs are expected to increase by an average of 16 percent in 1999.1 Costs are rising for a number of reasons: Pharmaceutical companies are producing more sophisticated and expensive drugs resulting in higher average prices per prescription; usage is higher because there are a greater number of older Americans; and because drugs are increasingly used in place of surgery or other medical interventions. Also, there is evidence that direct-to-consumer pharmaceutical advertising — and marketing to providers — has caused substantial increases in drug usage. One recent study revealed that more than 30 percent of drug cost increases over the past 5 years were the direct result of sales of heavily advertised drugs. Early pharmaceutical cost control efforts include the use of prescription drug cards, mail order maintenance drug programs and generic drug substitution.
Prescription Drug Card —
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 co-payment, typically between $5 and $15 per prescription.
Mail Order —
Through bulk processing and purchasing, mail order prescription programs can save money for the plan and the patient. Mail order programs are suitable for maintenance drugs, typically used to treat chronic conditions. It is estimated that between 65 and 75 percent of prescription drugs are for chronic conditions.2 In most plans, mail order programs require lower co-payments 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.
Generic Equivalents —
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. Generics are less expensive than brand names.
These are all reasonable cost containment methods provided that safeguards are built in to ensure, for example, that an adequate number of pharmacies participate in the drug card plan, that mail orders are filled on a timely basis, and so on. Newer approaches to controlling prescription drug costs, however, are more controversial. Some plans are dropping drug coverage entirely or shifting more costs to employees. There are some areas of potential danger where the health and well-being of employees can be jeopardized. Among them are the use of formularies, budgeting/risk-sharing, preauthorization, and pharmacy “benefit managers.”
Formularies
Formularies are lists of drugs that a plan will cover. A formulary drug, 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.
There are three types of formularies: open, incentive-based, and closed.
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Open Formulary
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Incentive-Based Formulary
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Closed Formulary
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Where formularies are used, they should be selected by an independent committee of physicians, including plan physicians, pharmacists and other clinical experts. Plans with formularies claim that drugs are rated on clinical 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 criterion, but, in reality, cost is often the driving factor in the selection process.
Formulary decision makers make their selections on the basis of which drugs are considered to be the best treatment for most people and the least costly alternative. 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.
Plans often make changes in their formulary lists, either for financial reasons and/or for drug efficacy purposes. Some patients are on complex regimens of numerous drugs. Similar drugs can have different effects and a change in only one prescription can result in adverse health consequences. The plan should keep patients and their physicians updated on changes in the formulary lists.
Pharmacy Budgets
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.
Preauthorization Requirements
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
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 treatments. The more narrow the definition of exclusions the better.
Pharmacy Benefit Managers (PBMs)
Originally, PBMs provided prescription claims processing and mail-pharmacy services only. In the past few years PBMs have expanded their services to include negotiations for discounts and rebates with drug manufacturers, negotiations for retail pharmacy networks, and development of generic and formulary substitution programs. More recently, PBMs have begun to investigate disease management programs that attempt to control overall medical costs by encouraging those with chronic disease, such as diabetes, asthma and cardiovascular disease, to use their drugs correctly.
Some PBM companies are owned by drug manufacturers. Critics of PBMs claim that this type of ownership structure creates a conflict of interest. PBMs may be influenced to use their owner’s products over competing products, when other manufacturers’ drugs may be comparable or even better. All parties, including employers and plan members, should be informed of any ownership between PBMs working with the plan and drug manufacturers.
There are also several favorable changes in delivery of services. These more favorable activities include the following:
FDA Approval
Many drugs are developed to treat one type of illness and are 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.” At least 19 states have laws requiring coverage for off-label medications and the National Association of Insurance Commissioners (NAIC) approved a model act calling for coverage of such drugs under specified conditions.
Over-the_Counter (OTC) Drugs
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 with which plans are promoting OTC treatment instead of prescription medications, may necessitate greater OTC health plan coverage in the future.
The rapidly increasing cost of prescription drugs has led to a variety of cost-containment measures — some are innocuous and others may pose serious problems. For more information or assistance on various approaches and how to build in protections for members, contact the Department of Research and Collective Bargaining Services at (202) 429-1215 or e-mail.
1. Segal Company NewsLetter 5/99
2 EBRI Issue Brief 4/99