Human Capital & Careers

A Preferred Way to Cut Drug Costs

Companies can slash prescription-drug costs by using a preferred provider approach – if they can get pharmacies and PBMs to go along, that is.
David McCannFebruary 22, 2011

A relatively new but little-used approach to structuring prescription-drug benefits plans could save self-insured companies up to 13% of such plans’ costs, research by consulting firm Milliman indicates.

The strategy revolves around using a preferred network of pharmacies rather than allowing access to virtually all drugstores, as the vast majority of employers do. The concept is similar to that of the popular PPO (preferred provider organization) plans for medical benefits, in that participating drug retailers agree to lower their prices in return for a larger share of a company’s business.

Milliman’s research was paid for by Restat, a pharmacy benefit manager (PBM) that is promoting the preferred network approach. So far it has 12 clients for its program, called Align. The companies benefit from cost savings and the transparency of the pricing model. Under the typical spread-pricing model, a PBM profits from the difference between what it pays to the pharmacy and what it charges the plan sponsor. In Restat’s program, companies simply pay a flat, cost-plus administrative fee to the PBM.

Under a preferred pharmacy plan, a company’s average per-prescription cost would fall 31% for generic drugs (see chart) and 5% for brand-name drugs, according to Milliman’s research. The potential total savings is only 13% because there are no generic versions of many brand-name drugs, and patent-protected brand names can cost self-insured companies up to seven times more than generics.

(Milliman principal and consulting actuary Bruce Pyenson defends the research against suggestions of bias, pointing out that the firm used its own data gathered from industry sources, not information provided by Restat. The research report says that “Milliman does not endorse particular business structures [and] this paper reflects the findings of the authors.”)

drug costs chart

So far, however, the PPO-like approach has been slow to catch on. Pharmacies and PBMs are in no hurry to give up any of the high profit margins they enjoy from prescription drugs, points out Matthew Holt, a health-care consultant and well-known blogger. And companies may worry that limiting pharmacy access could create a competitive disadvantage in the labor market.

The strategy isn’t a viable option for small businesses in particular, because they don’t have the clout to attract a network of pharmacies seeking an increase in their market share of such companies, says Pyenson. Mostly it’s a potential option for large, self-insured companies.

One such company, Caterpillar, is Restat’s poster child for the limited-network approach. Indeed, Caterpillar first came up with the idea. The large-equipment maker, a customer of Restat since the 1990s, launched its program in 2009. To gain a customer with about 100,000 employees, even such large prescription-drug retailers as Walgreen and Wal-Mart were willing to give up some profit margin. Those two are preferred providers just about everywhere Caterpillar operates, with independent pharmacies serving a handful of remote locations. Restat continues to process claims.

Initially there was some resistance from employees, acknowledges Todd Bisping, Caterpillar’s health-care benefits manager. “There’s always some pushback with any change in benefits, and employees are always going to like endless choice better than limited choice,” he says. “But I’ve been surprised overall by how accepting they’ve been. They appreciate that we’ve found ways to keep their costs from going up; we have not raised our co-pay structure since 2003.”

The savings from the program, says Bisping, has been in the “double digits, percentagewise. It’s millions.” According to published reports, Caterpillar was spending $150 million a year on prescription-drug benefits when it launched the program.

To lower costs further, Caterpillar may be reforming its preferred network by the end of 2011, when its two-year contracts with Walgreen and Wal-Mart expire. The company already is talking with those and other pharmacy retailers to determine which may want to bid on the business. “It brings competition to the marketplace,” says Bisping.