VideoWhen the cost to provide prescription-drug coverage to employees at SRA International increased 8 percent during the company's fall 2004 insurance renewal, Wayne Grubbs was delighted. An odd response from SRA's corporate controller and treasurer? Not at all: for other customers of insurer Unicare in the Washington, D.C., metropolitan area, where SRA's employees are concentrated, the cost was going up an average of 17.5 percent. Grubbs credits close attention to pharmacy costs and changes to the company's plan design for an annual savings of more than $350,000.
One key change came in January 2004 when SRA, an IT-services firm with $756 million in revenues and 3,800 employees, adopted a preauthorization program for some types of common drugs. The program requires employees and their doctors to first try cheaper medication options for certain ailments, such as arthritis or common allergies, and move to more-expensive medications only when necessary. That had an immediate effect on costs, recalls Ann W. Denison, vice president and director of human resources at SRA.
"As soon as we started asking the [medical] providers to verify that they had tried over-the-counter or other nonprescription solutions before they went to the prescription, we saved money on drugs," says Denison. Other efforts also helped to moderate cost increases, according to Grubbs, including the use of nurses on staff to help manage large medical claims.
SRA isn't alone in rethinking the way it structures prescription-drug benefits, which now account for about 18 percent of active employees' health-care costs. Companies everywhere are looking for new ways to manage their drug spend, from redefining which drugs or drug classes are considered "preferred" to adopting reference-based pricing (where employees pay the difference for more expensive drugs in the same class) or consumer-driven health plans. (One strategy they won't try: buying drugs from Canada. "It's technically illegal," observes Sean Brandle, vice president at The Segal Co.)
In Towers Perrin's health-care cost survey for 2005, more than 60 percent of employers responding said they are considering new approaches to the prescription-drug benefits they offer. Like Wayne Grubbs and Ann Denison, they are trying to at least slow down this alarmingly fast growing expense. According to an October 2004 report from the Kaiser Family Foundation, $162.4 billion was spent on prescription drugs in the United States in 2002—four times the amount spent in 1990. "We have seen double-digit trends in prescription-drug costs for most of our employer clients dating back to 1999," says Ron Fontanetta, a principal in the health and welfare practice at Towers Perrin.
What's behind the rapid escalation of costs? Kaiser estimates that 42 percent of the increase between 1997 and 2002 was due to increased use of prescription drugs; about a third to shifts to newer, higher-cost drugs; and a quarter to manufacturers' price increases. (It's important to note that in some cases, higher drug costs may be balanced by reduced health-care costs elsewhere, as when drug treatment replaces surgery. Changing medical guidelines for treating such conditions as high cholesterol also, arguably, reduce the long-term cost of heart disease.)
Moreover, marketing and advertising by pharmaceutical companies have also contributed to higher drug prices. According to Fontanetta, there has been a "very direct correlation between the increased spend that employers are witnessing and the promotional efforts" of the pharmaceutical manufacturing industry. A study prepared for Kaiser by researchers at Harvard and MIT estimates that direct-to-consumer advertising accounted for 12 percent of the growth in spending on prescription drugs between 1999 and 2000.
Price Check
The biggest obstacle to managing drug costs is that neither employers nor consumers have a handle on the real prices of drugs. That lack of pricing transparency presents challenges as employers go beyond the flat co-payment approach to plan design. If employers are asking employees to pay a percentage of a drug's price through a co-insurance arrangement, or all of it through a health reimbursement account or health savings account, "we have to be comfortable [that we know] the real cost," says Kenneth Sperling, health-care market leader at Hewitt Associates. The problem is, "nobody really knows what drugs cost," adds Sperling.
One reason is that the most common compensation model for pharmacy-benefit managers (PBMs, third parties that administer prescription-drug plans for large employers and for insurers) can complicate drug pricing. The PBMs often don't charge large employers a fee for administering their pharmacy benefits, but instead are compensated by drug rebates from drug makers.
For some employers, that model raises doubts about whether the financial incentives of the PBM and the plan-sponsoring employer are aligned, says Sperling. "There's a question as to whether PBMs are driving toward the lowest net cost to the employer and the employee, or whether they're chasing the largest rebates," he says.
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