Print this article | Return to Article | Return to CFO.com
Employers may start to move away from fixed co-payments.
David M. Katz, CFO.com | US
January 24, 2001
With the cost of prescription drugs rising at an alarming rate, employers are likely to ask employees to foot a greater percentage of pharmacy benefits bills.
But the tight labor market may make it hard for employers to get workers to accept coinsurance plans. The market could also make it difficult for companies to boost the percentage amounts employees already contribute to their drug bills.
Nevertheless, 65 percent of the employee benefits specialists polled in a recent survey by the International Society of Certified Employee Benefits Specialists (ISCEBS) said they think rising drug prices will push benefit-plan sponsors to shift from copayments to percentage-based coinsurance.
That shift will come in response to a powerful upward surge in the cost of pharmacy benefits to employers, according to the survey. Sixty- two percent of the 268 poll respondents said that prescription-drug-benefit costs would continue to rise at an annual rate of 15 percent to 20 per cent for the next few years.
Though not the biggest chunk of health-plan costs, prescription drug benefits are widely considered to be the fastest rising expense item. To curb those costs, employers are likely to move away from copayments, which are set dollar amounts which employees must pay when they buy prescription drugs, regardless of the price.
With drug prices inflating rapidly, a copayment of $5 or $10, for instance, may soon seem paltry, thus negating any incentive for an employee to think about the purchases he or she is making. And such second thoughts are a key to holding down costs, many employers think.
In contrast to a copayment, a coinsurance provision, which calls for employers to pay a percentage of the drug-benefits bill, generally takes a bigger bite from employees— perhaps as much as 20 percent—and enables employers to keep pace with pharmaceutical inflation.
Melody A. Carlsen, the author of the ISCEBS survey and associate director of research for the International Foundation of Employee Benefit Plans in Brookfield Wis., says there may be initial employee resistance to coinsurance.
But once the resistance is overcome, it may amount to less of an employee-communications hassle than frequent boosts in copayments, she thinks.
"Coinsurance will automatically keep pace with increases," in the cost of drugs, she says. In the case of copayments, employers would "have to make a specific increase in the plan," she adds. "This change would have to be communicated [to] employees…They would feel a direct impact."
In the case of coinsurance, however, [employee] cost increases are "built into the design," she notes. And as a result "increases are felt a little more gradually."
At first, installing a drug coinsurance provision is likely to involve a "considerable amount of communication," according to Carlsen. After that "it can pretty much run on its own," she says.
One problem with installing across-the-board coinsurance provisions, however, is that they have "a disproportionate effect on lower paid people," says Steve Gross, the head of employee compensation consulting for William M. Mercer Inc. in Philadelphia.
While they have to pay a greater percentage of their overall compensation in coinsurance than higher paid workers do, they "get just as sick," Gross notes. The consultant suggests that employers put in different levels of coinsurance and deductibles for pharmacy benefits to correspond to different pay levels.
Skin in the Game
While coinsurance saves employers more money than copayments, the actual decrease in dollars spent isn't the most important factor that could cause employers to shift from copayments to coinsurance, says Carlsen. More important to employers is the fact that employees will have more "skin in the game," in common parlance.
In other words, the theory goes if workers must pay more per prescription, they'll give more thought, say, to the choice of buying a generic drug rather than a brand-name one or making a lifestyle change rather than taking a drug at all.
The benefits researcher acknowledges she hasn't seen any studies that provide evidence that making employees pay for a bigger percentage of costs actually cuts benefit costs. However, she says, an employer's attempt to control utilization "goes hand-in- hand" with coinsurance provisions.
Despite the emphasis on using benefits as a tool to retain or attract talented employees, the costs are becoming too great for employers to ignore, Carlsen thinks.
"My feeling is that employers want to offer employees as much as they can. But they still have their own bottom line[s] to deal with," she says. "They're walking a tightrope between giving [workers] what they want but encouraging them to be mindful of their expenses."
Fifty-nine percent of the respondents to the ISCEBS survey said they expect plan sponsors to limit coverage for "lifestyle drugs"—like anti-wrinkle medications or hair-loss treatments—in spite of the growing demand for such coverage in the tight labor market. Carlsen thinks that's an indication that employers are ready to draw the line on pharmacy benefits.
Besides limiting coverage, employers can cut drug-benefits costs by educating employees about the tactics of direct-to-consumer (DTC) marketing of prescription drugs. And there's plenty of room for improvement in that area, she thinks. Only 9 percent of the survey respondents said their employers have communicated with employees to temper the effects of DTC marketing.
With celebrities often advocating the use of costly brand-name prescription drugs on television, employers can curb utilization by pointing out that such commercials encourage people "to take a drug rather than [change] a habit," Carlsen says.
After watching such commercials, "employees and consumers in general are savvy [enough] to go to doctors and say, `I want this drug,'" she notes. She adds, doctors will respond by saying: "This is what you want, and it works, so I'll give it to you. That's where education comes in."