Human Capital & Careers

The War on Drug Costs

Why health-care purchasers are fed up with swelling prescription drug costs, and what they're doing about it.
Joseph McCaffertyNovember 5, 2001

This year, General Motors Corp. will spend somewhere in the neighborhood of $1.4 billion on prescription drugs for its employees and retirees. And senior managers at the world’s largest private purchaser of health care are none too happy about it.

GM’s executives aren’t alone. Scores of employers and health insurers say they’re growing increasingly alarmed by what they spend each year to cover pharmaceutical purchases by plan members.

They’re right to worry. According to the National Institute for Health Care Management, spending for outpatient prescription drugs jumped nearly 19 percent in 2000 — a huge bump up in a time of relatively low inflation. What’s more, it doesn’t appear the pain is going to go away anytime soon. Spending on prescription medicines is expected to go up 16 percent to 17 percent this year. And Aon Consulting Inc., a human resources and benefits consulting firm, predicts that total prescription-drug spending will double by 2005.

Not surprisingly, many employers say they feel helpless in the face of rising prescription drug bills. And in truth, companies have little control over the root causes of these double-digit price increases. As observers rightly point out, there’s not a lot a plan sponsor can do about an aging population, the proliferation of expensive high-tech drugs, or the ever-increasing use of drug therapies.

But with health-benefit costs soaring, a number of employers are now beginning to zero in on prescription drug costs. Some companies are designing plans that penalize members for using high- cost, branded drugs when a low-cost alternative exists. Others are petitioning regulators to take action. Still others are targeting controversial marketing practices by drug manufacturers — practices which they believe are at least partially to blame for out-of-control drug costs.

Side Effects May Include Headaches, Nausea, and Swelling Budgets

Indeed, for many health-care plan sponsors, the biggest bone of contention is the barrage of direct-to-consumer (DTC) ads put out by drug makers. Employers say these television and print ads — for drugs like Claritin, Prilosec, and Prozac — create a demand for drugs that many employees simply don’t need. “Direct-to-consumer advertising drives unnecessary utilization,” says Robert Minton, manager of health-care communications at GM. “When someone walks into a doctor’s office and asks for a drug they saw advertised on TV, most of the time the doctor will prescribe it, even if the patient doesn’t need it. As long as it won’t do any harm, doctors don’t have time to argue with their patients.”

In fact, General Motors conducted a study of plan members that seems to back up Minton’s assertion. The report examined GM employees’ use of the acid-reflux drug Prilosec. The study showed that, over a three-year period, 92 percent of plan participants who received prescriptions for Prilosec had no prior prescriptions or treatments for gastrointestinal disorders or heartburn.

Surprising stuff. The fact is, many physicians agree that Prilosec, a “proton pump inhibitor,” is the drug of choice only when a patient exhibits a severe case of gastrointestinal acid reflux. In most other instances, generic versions of Tagamet, Zantac, or even over- the-counter Milanta would work just as well — at a fraction of the cost. “In most cases, the most expensive drug was the very first therapy when only a small percentage really needed it,” says Minton. The reason? Minton blames direct-to-consumer advertising.

So do others. According to Aon Consulting, 28 percent of patients who asked for a specific drug did so after seeing an advertisement for it, and 87 percent got the medicine they asked for — whether they needed it or not. Notes Joanne Sica, assistant vice president of Aon, “Direct-to- consumer advertising has a tremendous impact on what is prescribed.”

Don’t think executives at drug companies don’t know about the power of such ads, either. In 2001, pharmaceuticals will spend $2.5 billion on DTC advertising. “The pharmaceutical companies may be the country’s most able marketeers,” claims Kevin DeStefino, senior consultant and national pharmacy expert at benefits consultant Watson Wyatt Worldwide. “They have discovered the power of consumerism, and they are making products that tap into it.”

The drug manufacturers don’t see it that way, however. They consider DTC advertising a good way to educate the public about ways to improve their health. “Direct-to-consumer ads have a huge benefit to the health-care system,” says Judy Lewent, CFO of Merck & Co., the world’s third-largest drug maker. She says that studies show DTC advertising gets the greatest response from those with the highest risk factors for a particular ailment. “These are major health initiatives,” says Lewent. “It’s about getting the patient population to pay attention to their risk factors.”

To be sure, the increase in the use of prescription drugs not only improves the health of employees in general, but it can also lower costs elsewhere in the health-care system. “The most efficient way to address health issues is through breakthrough drug therapies,” notes Lewent. She says the use of prescription drugs pays off by decreasing the need for other expensive utilization of health care such as surgery, hospital stays, and long-term care.

Just Saying No

Still, GM management is not entirely convinced. Earlier this year the Detroit-based automaker sent its house pharmacist, Cynthia Kirman, and the company’s former executive director of health-care initiatives to meet with representatives from the top five drug manufacturers. “We wanted to let them know that we think their marketing practices are inappropriate and that we are not happy about it,” says Minton. Although Minton doesn’t expect drug manufacturers to suddenly reverse course, he says GM wants them to know the automaker is watching. “We want to start the dialogue, without having to get government and regulators involved,” explains Minton.

Of course, GM management realizes words alone won’t likely get drug manufacturers to stop flogging products. In addition to encouraging plan members to seek low-cost alternatives, General Motors is also implementing an intriguing pilot program that enlists physicians in the battle to rein in drug costs. Through GM’s pharmacy benefit manager, Merck-Medco, the automaker is arming 5,000 local physicians with handheld computers connected directly to GM’s pharmacy network. The device will enable doctors to access a patient’s prescription medicine history. It will also alert physicians to possible drug interactions — and pinpoint what low- cost generics are available. “It’s about getting waste out of the health-care system,” says Minton. “That is at the root of cost management.”

When it comes to scripts, there’s plenty of waste. Roughly 30 percent of handwritten prescriptions need to be checked for clarification after they’re submitted to a pharmacy. In addition, doctors often prescribe medicines with little thought about cost to the patient. GM, for example, negotiates bulk discounts with drug manufacturers. Those discounts do little good, however, if doctors are unaware of the arrangements.

Accept No Substitutes

Of course, not all companies have the negotiating clout of a General Motors. At smaller companies, managers eager to control prescription drug costs may have to rely on their plan providers to do the job.

WellPoint Health Networks Inc., for example, has begun to actively challenge some of the practices of drug manufacturers. “The lack of responsibility on the part of the pharmaceutical industry has been appalling,” insists Rob Seidman, chief pharmacist at WellPoint. “If you want to bankrupt the health-care industry, this is a good way to go about it.”

Management at the Thousand Oaks, California-based WellPoint has embarked on a novel approach in taking on the pharmaceuticals industry. Last spring the health insurer petitioned the Food & Drug Administration to make the allergy drugs Claritin, Allegra, and Zyrtec available over the counter. It was the first time a request for over-the-counter status had come from an insurance company. If granted, the change could save WellPoint as much as $90 million a year in drug costs and unnecessary doctor visits, claims CFO David Colby. “We are trying to take on the abuses that exist,” he says. “It’s ridiculous to pay $69 for a medicine that would cost $12 over the counter” and is safer than other kinds of medications currently being sold over the counter.

But drug manufacturers, including Pfizer Inc., which makes Zyrtec, stand to lose millions if their best-selling products are given over- the-counter status. Not surprisingly, some pharmaceutical industry groups are lobbying against WellPoint’s FDA request. “It’s unconscionable that a drug company would fight it,” argues Colby. “There are a limited number of dollars that can be spent on pharmaceuticals.”

WellPoint is also backing a plan to put generic samples in physicians’ offices. The insurer currently has a program that provides free samples of generic Prozac to physicians in the network. Typically, free samples of brand-name medications are provided by drug companies — in part to familiarize doctors with the products and in part to help market those products. “Generic sampling is a huge opportunity,” argues WellPoint’s Seidman. “In the next 18 to 24 months, the gold-standard drugs that represent 25 percent of the cost structure go generic. There is an incredible opportunity to provide value through generics.”

But pharmaceutical companies, which spend billions each year developing new medicines, don’t generally let their name-brand drugs fall victim to generics without a fight. Eli Lilly and Co., the maker of Prozac, for example, recently launched a new medicine called Prozac Weekly. Featuring a different dosage and a coating that times the release of the drug into the bloodstream, Prozac Weekly was launched with a massive marketing campaign. Since the drug uses new technology, it also enjoys a new patent.

On the Prozac Web site (, a window pops up warning patients about the differences between Prozac and the generic equivalent. Along with the notice to ask for Prozac by name comes the warning: “Receiving medication with a different color or shape may be unsettling or cause concern.” The Web site also instructs patients on how to ask doctors to write “DAW” on prescriptions.

DAW? Dispense As Written.

Ixnay on the Co-Pay?

If the attempt to hold the line on drug costs is stirring up resentment from pharmaceutical companies, wait until employers try to shift more of the costs of prescriptions onto employees.

And make no mistake, that’s coming. The fact is, many health-care consultants insist that the best way for employers to rein in prescription drug costs is to rethink co-pay policies. Some consultants recommend that plan sponsors require patients to pay the difference between a generic and a branded drug when a doctor indicates that the generic equivalent will do.

Watson Wyatt’s DeStefino advises clients to rethink the traditional formula of a $5 co-pay for generic and $10 for name-brand drugs, and instead institute a multitiered co-pay system. “Many employers have not set co-pay prices at strategic levels,” DeStefino notes.

Indeed, some consultants advise employers to take a three- or four- tiered approach — one that blends co-pay with co-insurance. For example a plan participant might face a $5 co-pay for a generic, an $11 co-pay for a preferred brand, a 30 percent payment for a nonpreferred brand, and a payment of as much as 60 or 80 percent for a “lifestyle” drug like Viagra. Explains DeStefino, “They need to be ranges that will really have an effect on behavior.”

Such a plan will have an effect on behavior, no doubt — particularly at companies with powerful unions. Nevertheless, some health-care industry executives advocate an even more aggressive approach. Ed Feaver, CEO at Prescription Solutions Inc., a pharmacy benefit manager based in Costa Mesa, California, says that unless employers and purchasers take a hard line on managing expenses, they will lose the fight against prescription drug costs. One strategy Feaver suggests is a step-therapy edit, in which physicians first prescribe a low-cost alternative and move to the more expensive drugs only if the less expensive ones don’t work.

Not all health-care industry watchers believe such a radical approach is necessary. But by Feaver’s reckoning, open-access plans have sheltered employees from the real costs of medicine — and drug companies have taken advantage of this disconnect with direct-to- consumer advertising. “We have to accept the fact that the latest expensive prescription drug is not always what’s needed,” he says. “It’s fair to classify the state of affairs as almost a war.”

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