Why payers should gain control of the drug benefit

May 10, 2013

Relatively little of healthcare re-engineering aims at the purchase and management of drugs.

One of the biggest changes in healthcare right now is the transformation from a fee-for-service economy, and it will likely take longer than we expect. Still, payers and providers-and the various big and small service providers hoping to serve them-are already trying to improve business processes as diverse as connectivity, transparency and consumer communication.

Yet, relatively little of this re-engineering aims at the purchase and management of drugs. 

There are a few experiments on the margin. Some payers are playing with tougher formularies. For example, UnitedHealth de-preferred major market leaders Januvia and Humira with significant success in moving the former’s market share to Onglyza and less success with Humira. Pathways in oncology show promise. And now that Medicare, through its star ratings, is paying plans to improve adherence, there’s an opportunity for new models that predict when patients will adhere to their meds and when they won’t.

But re-engineering pharmacy is pretty low on the priority list for payers, accountable care organizations (ACOs) and health systems that are increasingly acting like payers. This lack of urgency isn’t because they’ve deliberately chosen to let things slide. The real problem is that the lens through which payers and the provider proto-payers view the drug benefit shrinks the size of the challenge. 

That lens shows them cheap drugs. While overall health spending grew by about 4% last year, the cost of the pharmacy benefit (roughly 15% of total spending) actually shrunk a bit. 

But the pharmacy benefit doesn’t mean drug benefits. It mostly covers the chronic care drugs dispensed at pharmacies or mailed by pharmacy benefit managers (PBMs). That’s certainly the vast majority of total scripts, and those drugs are pretty cheap because plenty of them are generic. 

However, drug therapy overall is not cheap. The cost of pharmaceuticals, which generally fall outside the pharmacy budget-specialty drugs-is growing at 17% a year. That’s four to five times the cost of overall medical inflation-and a category likely to constitute 45% of total drug expenditures by 2016, says Express Scripts. The CEO of one major corporate health benefits manager told me that virtually 100% of his total cost increase was due to the increase in spending on specialty drugs.

Because these drugs aren’t usually paid for through the pharmacy budget, they aren’t managed by the pharmacy system or assessed with the same rigor applied to non-specialty product. That means utilization guidelines and limits are minimal and contracting with manufacturers scarce and ineffective. Indeed, most pharmacy and therapeutics (P&T) committees don’t review drugs covered under the medical side. These drugs are chosen and bought by the physicians or other healthcare providers who administer them, and they pass on their costs plus administration fees (usually 6%) to the plan or employer.

It’s not that medical-benefit drugs are entirely unmanaged, but their management is quite a bit looser and less consistent because payers simply don’t have the structures to do it. Many plans rely on their specialty pharmacy vendors. But judged solely on specialty drug inflation, those groups have helped mostly on the margin. 

Handling the drug benefit

Pharmacy directors already know they will have to figure out how to integrate what they already do (run the pharmacy-benefit side) with what they must do (get controls onto the drug side of the medical benefit). 

I don’t see insurers adding to the management side of their pharmacy operations. For example, plans increasing the resources allocated to P&T committee processes so they’ll have the time to look at medical-benefit drugs. P&T committees don’t have the resources or systems to look at all the new drugs on the pharmacy-benefit side, let alone regularly re-assess older drugs about which new information has cropped up. Adding a slew of medical-benefit drugs to their portfolio will simply swamp them.

Insurers are probably right in trying to transform their businesses. Aetna aims to get a third of its profits by 2018 from the new non-traditional operations it’s investing in or acquiring via its Emerging Businesses unit. But with that kind of focus on consumer-facing operations using unproven business models, top management would do well to direct more attention to better integrating the cost-management of pharmacy- and medical-benefit drugs. 

It won't be easy, but relative to what’s being attempted elsewhere in healthcare, redefining and improving drug management should be straightforward.

Roger Longman is the CEO of Real Endpoints LLC.