Long-term solutions could lead to lower net drug costs for your benefit plan

January 1, 2006

A value-based formulary enables the payer and pharmacy benefit partner achieve lower net cost.

As healthcare costs for employers continue to rise, increasing copayments, establishing deductible limits and moving to multi-tier formularies have become common solutions. It is understandable why employers choose these routes because they are simple to deploy, are predictable and highly measurable. However, these strategies don't guarantee a lower total net drug spend.

The increases in copayments alone between 2001 and 2004 have been considerable according to the 2004 Annual Employer Health Benefits Survey released by the Kaiser Family Foundation and Health Research and Educational Trust. The survey found that copayments for generics have risen 42.9% from $7 to $10 on average, while branded drugs rose 61.5% ($13 to $15) and non-preferred branded drugs rose 94% ($17 to $33). The survey also found that nearly two-thirds of employees and their dependents were covered by three-tier plans by 2004.

This raises several questions for those responsible for developing and managing prescription drug benefit programs:
1. What evidence do we have now about the impact of increased member costs on adherence that can guide us today?
2. What are the probable long-term effects of greater financial support from members on adherence?
3. What is the impact on total net cost to the payer and the member?
4. What is driving the changes in total net cost?
5. What are the alternatives to increasing the member's financial share of drug spend?

Even though empirical evidence is not as definitive as we'd like, it stands to reason that we should be concerned that shifting costs to employees is a short-term solution that has long-term ramifications. A Harris Interactive survey in 2001 showed that at least one in five adults, or about 22%, did not fill prescriptions because of cost, and a 2000 Harris survey showed that 14% of adults took medications in smaller doses, and 16% skipped doses because of cost.

These statistics are almost good news compared with the World Health Organization's estimates that about 50% of individuals in industrialized countries adhere to long-term therapy for chronic conditions. Depending upon what forecasts you read, the cost estimates range from $45 billion to the healthcare industry alone to $300 billion to the U.S. economy when considering lost productivity and other factors.

During the late 1990s and early 2000s, numerous studies were conducted to measure the impact of multi-tier formularies on adherence. Several found that as copayments rose for maintenance and chronic illness drugs, adherence decreased, while others found that members were price insensitive when electing to fill prescriptions for essential medications. Clearly, these mixed results do not provide the evidence needed to help clients make informed decisions when redesigning pharmacy benefits.

To date, there is no conclusive evidence measuring the impact of reduced adherence on the healthcare industry as whole. Snapshots have been done of specific segments of the industry such as one reported in a New England Journal of Medicine article on "Adherence to Medication" (August 4, 2005), which stated that up to 11% of hospital admissions and 40% of nursing home admissions were the results of lack of adherence to drug therapy. This study also reported that an estimated 128,000 deaths occur annually in the United States as a result of non-compliance.

Based on what studies have revealed, it is clear that there are associated risks that may not be fully considered if an employer and its pharmacy benefit advisers look only at the premiums being paid for healthcare coverage and the accompanying cost of pharmacy benefits.

Admittedly, requiring the member to assume a greater share of the drug cost is a powerful educational tool as the increasing use of generics demonstrates. But, before strategies to alter the employer/employee cost ratios are implemented, additional alternatives should be evaluated and factored into the plan design.