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A Tough Pill to Swallow


A recent study separates the ingredients of the double-digit increase in employers' prescription drug costs.


A Tough Pill to Swallow

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Choose article section...Formulary use on the rise Higher rebate dollars Retail versus mail In the mailDisease managementGenerically speaking

A recent study separates the ingredients of the double-digit increase in employers' prescription drug costs.

Double-digit cost increases aren't just battering health care in general; they're hitting specific components like prescription drug coverage. Employers' prescription drug costs rose 16.9 percent in 2002, according to a recent survey by Mercer Human Resource Consulting. This follows an increase of 17.8 percent in 2001, and an 18.3 percent increase in 2000.

What's to blame for these drug benefit cost increases? Primarily, it's been changes in drug mix and increases in utilization. Beneficiaries are using more drugs and higher cost ones. The management tools having the greatest impact on the trend rate are those that affect these factors, according to a recent report from the Pharmacy Benefit Management Institute and sponsored by Takeda Pharmaceuticals North America, Inc.

Plan sponsors are finding success with the following:

  • Encourage generic drug use to replace the use of identical, expensive brand products
  • Use formularies to encourage the use of lower cost preferred brand drug products rather than higher cost nonpreferred ones
  • Implement drug exclusions, quantity limits and other system edits to curb excessive utilization
  • Implement utilization management programs to encourage appropriate use

PBMI's "The Prescription Drug Benefit Cost and Plan Design Survey Report Provided by Takeda," contains findings from a survey of large employers in the U.S. to assess trends in pharmacy benefit management, plan design, and cost issues. Following are highlights from the report.

Formulary use on the rise

The use of formularies continues to increase. In 1995, only 54 percent of respondents reported using a formulary. This percentage increased to 89 percent in 2002. The traditional open formulary has been replaced by the incented formulary concept, which has grown from just 25 percent of employers in 1999 to almost two-thirds (63 percent) of employers in 2002. During this time, the percentage of employers offering closed formularies decreased from 8 percent in 1999 to 2 percent in 2002.

Surprisingly, 19 percent of the respondents indicated they had requested that their PBM change the formulary status of a drug (e.g., from preferred status to nonpreferred status). Some of the requested changes were for simple issues such as making sure that the brand version of drugs that had become available generically was moved to nonpreferred status. Other changes were related to employer requests to include a step-therapy edit or a prior-authorization requirement on a preferred product. Finally, some employers asked their PBMs to change the drugs included on the preferred product list.

Higher rebate dollars

On average, employers are receiving a greater percentage of the rebate pie, with receipts of 79 percent of the total rebate dollars collected as compared to 73 percent in 2001. Employers receiving the greater of a percentage and a fixed amount reported receiving 86 percent of total rebate dollars collected. Employer size appears to have the greatest impact on the percentage of rebates received with the largest employers receiving 91 percent of rebates and the smallest employers only receiving 64 percent.

Retail versus mail

Retail copayments increased by approximately 10 percent for all tiers from 2001 to 2002. However, these increases are more pronounced in mail. From 2001 to 2002, average first-tier mail service copayments increased by 16 percent, second-tier increased by 20 percent, and third-tier by 10 percent. Because mail service copayments have increased more quickly than retail copayments for the last few years, the mail service second-tier copayment is now 1.8 times the retail second-tier copayment as compared to 1.6 times in 2001. The percentage of employers using coinsurance for second- tier retail cost sharing increased from 22 percent in 2001 to 26 percent in 2002. Although most employers who use coinsurance generally use coinsurance for all drug categories, some employers use coinsurance only for second- or third-tier drug prescriptions, with flat dollar first-tier copayments. This approach for the second- and third-tiers gives plans more flexibility to ensure patients pay a consistent portion of the benefit cost, while providing an additional incentive to use generic drugs.

In the mail

Mail service Average Wholesale Price (AWP) discounts are increasing, too. In 1996, 48 percent of employers reported a brand discounted AWP of greater than 84 percent; however, by 2002 only 3 percent of employers had an AWP greater than 84 percent. Similarly, only 10 percent of employers in 1996 had an AWP of 80 percent or less, compared with 56 percent of employers in 2002.

Volume, or the number of prescriptions, is an important factor in driving mail service reimbursement. Often, the number of beneficiaries is used as a proxy for claim volume. The largest employers, with more than 50,000 beneficiaries, achieved the lowest reimbursement rate of 79.0 percent. The smallest employers, with 2,000 or less beneficiaries, achieved the highest reimbursement rate of 81.9 percent. Similarly, coalitions that combine the purchasing power of many employers receive deeper discounts. Coalition employers reported a mail-service reimbursement rate of 79.6 percent, while noncoalition employers achieved a reimbursement rate of 80.7 percent.

For those respondents that were able to provide data about claim volume, this factor appears to have a significant impact on reimbursement rates. Employers with more than 50,000 mail service prescriptions received an average discounted AWP of 78.5 percent and an average dispensing fee of $0.64. Employers with less than 50,000 prescriptions per year achieved an average discounted AWP of 80.4 percent and an average dispensing fee of $0.85. Requiring patients to get refills through the mail service pharmacy is one way to guarantee the PBM greater volume. Respondents that require this received a reimbursement rate of 79.6 percent while respondents that do not require this received a reimbursement rate of 80.8 percent.

Disease management

The number of employers offering some type of disease management program increased from 46 percent in 2001 to 53 percent in 2002. Although little data exist documenting the impact of PBM-managed disease management programs, this lack of hard data has not dissuaded many employers from embracing the concept of disease management.

The growing trend of incorporating disease management programs as part of the drug benefit reflects a softening of previous concerns about higher initial expenses related to increased prescription drug utilization in exchange for potential savings. These concerns seem to have been tempered by industry-wide acceptance of disease management programs as a good starting point for managing many illnesses, including asthma, heart disease, acid reflux disorders, depression and other prevalent ailments.

Generically speaking

One of the most effective strategies to reduce drug benefit costs is to increase generic drug utilization. As cost sharing incentives and generic drug options have increased, and patients have become more familiar with the use of generic drugs, patients are more willing to accept the generic product in lieu of the brand-name alternative.

Average retail generic utilization increased from 40.4 percent in 2001 to 41.5 percent in 2002. Average mail service generic utilization increased from 30.4 percent in 2001 to 31.8 percent in 2002. These rates are expected to continue rising as more drugs become available generically, cost sharing incentives increase, and more and different utilization management programs are implemented.

Click here for a free copy of the full study, "The Prescription Drug Benefit Cost and Plan Design Survey Report Provided by Takeda."

More Business & Health Articles on This Topic:

A New Format for Making More Cost-Effective Drug Coverage Decisions Takes Off (Spring 2002)

Taking Stock of Your PBM (Mar. 1, 2000)

Resource Links:

Pharmacy Benefit Management Institutehttp://www.pbmi.com/

Mercer Human Resource Consultinghttp://www.mercerhr.com/


A Tough Pill to Swallow.

Business and Health

Mar. 17, 2004;22.

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