Rx for prescription drug benefits
The rising cost of prescription medication presents a challenge to local governments with self-funded employee health care plans. While cities and counties want to continue offering prescription drug benefits to meet employees’ needs, mounting bills are making them evaluate the breadth of those benefits.
“Our health care costs [have been rising] more than 20 percent annually,” says Cathy O’Brien, human resources operations manager for Multnomah County, Ore. “Our prescription drug [costs] went up 18 percent this year. Now, they’re about 12 percent of our total plan cost.”
Because prescription drugs are contributing sizable increases to the total costs of health plans, self-insured local governments are devoting more energy to finding ways to control those costs. “We now study [prescription drug costs] and spend as much time on [them] as we do all the other elements of medical care,” says Vicki Robinson, manager of insurance services for Las Vegas. “It used to be just part and parcel of the program and represented a small percentage of the overall costs. That’s not the case anymore.”
Cities and counties with self-funded health plans have developed several solutions to help keep prescription cost increases to a minimum. For example, many are sharing more of the prescription drug costs with employees, negotiating discounted prices with pharmacies, and educating employees and doctors about cost issues and medication alternatives.
Nationwide, spending on prescription drugs almost doubled in the last four years. According to the Washington, D.C.-based National Institute for Health Care Management, Americans spent $154.5 billion on prescription medications last year. In 1997, they spent $78.9 billion.
On average, individuals with health insurance paid less than $100 each for prescription drugs last year, according to a national survey by The Commonwealth Fund, a New York-based philanthropic organization. For those people, insurance picked up the difference between the total cost of medication and the amount paid by the health plan members.
Several factors have contributed to the recent rise in prescription drug costs. “More people are utilizing more drugs more frequently,” says Sean Brandle, vice president for The Segal Co., an actuarial and consulting firm based in New York. “That’s really the reason, and that’s a function of a number of things. It’s a function of new drugs coming on the market, physician prescribing patterns, and direct-to-consumer advertising by pharmaceutical manufacturers that is designed to drive market share for products and increase utilization.”
Last year, those phenomena produced a dramatic increase in medication use among members of Peoria, Ill.’s self-funded health plan. “Every new drug that came out, our participants wanted it,” says Patrick Parsons, human resources director for Peoria. “Our usage of new drugs was escalating. Not only that, doctors — rather than giving a generic prescription or something known to work in a satisfactory manner — went to these very high-level, modern, latest drugs.”
The city began working on the problem with its pharmacy benefit manager (PBM), which is responsible for processing prescription drug claims, tracking plan members’ drug use and reporting use and costs to the city. The city reviewed the PBM’s formulary — the list of medications that it recommends as the most cost-effective drugs in their classes — and members’ costs.
Under the city’s former plan, members paid only a small copayment for drugs on the formulary, and they paid slightly more for non-formulary drugs, which usually were the newest brand name options. To cut down on the rate of new drug use, Peoria shifted more responsibility for the costs of those drugs to plan members.
The city developed a four-tier copayment system based on a one-month supply of drugs. For generic drugs and brand name drugs on the formulary, members pay $7 and $15, respectively. For a non-formulary brand name drug that does not have a generic equivalent, members pay $30 or the price of the prescription, whichever is less. For a non-formulary brand name drug with a generic equivalent, members pay $50 or the price of the prescription, whichever is less.
“We wanted something simple enough that the patients could understand it and, at the same time, would significantly impact the choices [members made] while making sure that people got the proper drugs,” Parsons says. “If there’s a generic available, and you want to take a brand name drug, you’re going to pay for it.”
Other local governments also are using tiered formularies to shift medication costs to health plan members, but they are using coinsurance instead of copayments. For example, in July, Multnomah County introduced a three-tier coinsurance system under which plan members pay 20 percent of the cost of generic prescriptions and preferred brands on the county’s formulary. Once they have spent $1,000 out of pocket for prescriptions, the county covers all of their costs for formulary drugs.
However, if members want a drug that is not on the county’s formulary — usually a new, brand name medication — they pay half the total cost of that drug. Additionally, non-formulary drug purchases do not count toward members’ maximum limits.
“If you want Claritin, you’re paying the difference all the way, and it doesn’t go to your out-of-pocket maximum,” O’Brien explains. “Because some of the new drugs really help our employees in productivity and pain management, we don’t want to say that drugs are bad — because they’re not. Employees just need to be wise consumers of those drugs.”
Besides shifting some prescription costs to members, self-insured cities and counties are bargaining for lower prices with retail pharmacy networks and mail order pharmacies. That is the case in Las Vegas, which began offering a self-insured health plan in 1998.
About two years ago, Las Vegas started working with a PBM to process prescription drug claims for its members and to negotiate deals with pharmacies. “We started out with the same copayment program that we had with our fully insured plan — that was $7 for generic and $12 for brand — and [members] could go anywhere,” Robinson says. “There were no incentives for generic usage aside from that $5. The costs just seemed to increase dramatically on a monthly basis.”
To correct the problem, the city introduced a three-tier copayment system for prescriptions, along with a conservative formulary and a limited pharmacy network. “Our PBM has done a wonderful job of negotiating some very good prices with a couple of the major stores in town,” Robinson says. “By limiting the pharmacies, we have been able to have some wonderful prices.”
Las Vegas also allows plan members to order drugs through a mail order pharmacy. Members can order a three-month supply at one time and pay only two copays.
However, the city strictly limits the use of the mail-order pharmacy to maintenance drugs because members had a tendency to abuse the discounted prices. For example, they would order a larger supply than they needed for a temporary ailment, and the city paid the difference between the employees’ two copays and the total bill. “Once we got to the point where maintenance drugs were the only ones you could buy in large quantities, [mail order] saved us money,” Robinson says.
Like Las Vegas, the city and county of Broomfield, Colo., added a mail-order option to its self-funded health plan. Employees had begun asking for the option, and the local government’s health benefit consultant recommended it as a cost-saving measure.
“[Members] can get a 90-day supply for just two copays rather than three,” says Suzanne Smith, human resources director for Broomfield. “It incents the employee to use the mail order, and, with more volume and only one dispensing fee, [the plan] can save some money.”
However, mail order pharmacies are not suitable for every self-insured local government, Brandle says. “A lot of times, using mail order is viewed as taking business away from the local retail pharmacies,” he says. “I have seen some creative arrangements where the retail pharmacy agrees that, for maintenance drugs, it will give a deeper discount [to retain business].”
Proper doses of education
Self-insured local governments are trying to educate their health plan members about prescription prices and medication alternatives to help reduce the plans’ drug costs. Cities and counties are finding that the more information plan members have about the health industry and their own health, the better decisions they can make regarding prescription medication.
Some self-funded health insurance plans have started including the total price of prescriptions on members’ receipts to show how much money members are saving as a result of having health insurance. “[Members] see that they paid $20 for their Claritin, but the cost of the drug was $120,” Smith says. “Then they can see that $100 came out of the plan. When you just pay the $20, you may not think as much about cost containment. But if you see the total cost, sometimes that’s an eye opener.”
Prices on prescription receipts vividly illustrate to plan members the reason for copayments or coinsurance. “In the past, the patient paid $2 or $5, and that was their concept of the script,” Parsons says. “In reality, those pills could have cost $300. We believe one of the keys [to containing costs] is really making the consumer aware of what it is they’re taking.”
As part of their education efforts, cities and counties are distributing employee newsletters containing information about health plans and articles about health management. Some newsletters have directly addressed the problem of pharmaceutical advertising and the ways it affects prescription drug costs for members.
“We can’t sit back and let the pharmaceutical industry use mass advertising to influence behavior,” says Robert Goodman, health benefits manager for Manatee County, Fla. “We have to educate our own members about the best way to use prescriptions. We feel that we have to give them alternatives.”
Many cities and counties also offer exercise programs, health screenings and behavioral programs to manage diseases like diabetes or to help members stop smoking. Manatee County offers a health management program for diabetics under which members work closely with their doctors to manage the disease. The program has resulted in getting two members off diabetic drugs. The county also has reduced the health plan’s rate of hospitalization for breast cancer by providing regular screenings for the disease.
Some counties use data from their PBM to create programs with the goal of reducing members’ use of particular drugs. “We review our prescription drug utilization and our large case claims to address our big cost drivers and develop programs that address those concerns without violating the members’ privacy,” O’Brien says.
Employees are not the only targets for health education. Doctors have to be informed of alternatives to high-priced medication, too. With that in mind, Peoria distributes copies of its formulary to plan members and suggests that they give it to their doctors when they need a prescription. “It eliminates a lot of the hassle for the patient and also lets the doctor know [what the insurance will cover],” Parsons says. “We’ve got to provide education for the doctors, for the patient and for the whole range of folks involved.”
Other cities and counties use PBMs that make formularies available on the Internet so doctors can check them when they write prescriptions. “Our PBM offers a Web site, so if a doctor wants to log on to the Web site, they can see what our drug coverage is as a cost to the employee when they’re prescribing drugs,” O’Brien says. “But most of the doctors know anyway. It’s not a secret what is more expensive than what isn’t.”
While doctors may have a sense of which medications are most costly, they may not have strong incentives to prescribe lower cost drugs unless the patient specifically asks them to. Manatee County has begun providing those incentives by paying rewards to doctors who prescribe a high percentage of generic drugs or brand name drugs on the county’s formulary. The county bases its reward payments on data provided by its PBM, which it began using in 2000.
“If [doctors] prescribe 40 percent or better in generic drugs, they can earn anywhere from one to two percentage points more in their total reimbursement levels,” Goodman says. The highest performing office receives as much as $6,000. In 2000, the first year incentives were offered, 46 doctors (23 percent of plan doctors) were eligible for the incentives.
Formulating a plan
By instituting cost containment strategies such as cost sharing, price negotiating, and employee and physician education, self-insured local governments have realized some significant savings. For example, Manatee County’s prescription costs rose only 4.3 percent in the 12 months after it began its drug management program, compared to 21.8 percent in the 12 months before the program. Additionally, after Multnomah County reorganized its health plan and began using a PBM three years ago, it saved $5.5 million in one year. Peoria expects its four-tier copayment system to save $400,000 this year.
PBMs can be instrumental in cutting those costs. “The first step at controlling costs is making sure you have a deal with a PBM that’s adequate,” Brandle says. “What kind of discounts are you getting? What are your dispensing fees? What kind of rebates are you getting? The next step is working with the PBM and seeing if it has any specific programs that are geared to save money. Look at the drugs that are being consumed and then wrap an intelligent design around the consumption patterns of your population.”
By reviewing drug usage trends and prescription benefit costs, cities and counties can strike a balance between offering attractive benefits to employees and keeping plans manageable. “Integration is a critical piece,” O’Brien says. “Looking at data and statistics and making sure you’re getting the best bang for your buck is all there is to it.”