Health Affairs, 23, no. 1 (2004): 194-199 doi: 10.1377/hlthaff.23.1.194 © 2004 by Project HOPE	New Online   Pay Cuts For Medicare Docs   Access To Care Woes   Public Coverage More Efficient   Empowering Consumers

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Health Tracking

FROM THE FIELD

The Changing Face Of Pharmacy Benefit Design

Abstract

 
Employers, health plans, and pharmacy benefit managers—seeking to reduce rapid growth in pharmacy spending—have embraced multi-tier pharmacy benefit packages that use differential copayments to steer beneficiaries toward low-cost drugs. The consensus of fifteen pharmacy benefit design experts whom we interviewed is that such plans will become more prevalent and that the techniques these plans use to promote low-cost drugs will intensify. The effect on health outcomes depends on whether the high-cost drugs whose use is being discouraged have close, low-cost substitutes.

Nationwide, in 2001 more than half of employees with drug coverage were enrolled in three-tier plans.³ A growing number of health plans now include a fourth tier for lifestyle or cosmetic drugs such as those for hair loss, weight reduction, and smoking cessation.⁴

Health plans and PBMs have taken other steps to contain pharmacy spending, either in addition to or in place of tiered cost sharing. Such actions include prior authorization requirements (requiring the consumer, pharmacist, or physician to obtain permission from the health plan or PBM before a particular drug can be dispensed), step-therapy requirements (requiring consumers to try low-cost medications before covering more costly alternatives), physician counter-detailing (educating physicians about generic alternatives to brand-name drugs), and direct-to-consumer (DTC) counter-advertising (encouraging beneficiaries to discuss generics with their physicians). In this study we interviewed pharmacy design experts to determine the extent to which these mechanisms are being adopted.

Study Methods

Top Editor's Notes Study Methods Study Findings Discussion Notes

 
The future growth rate in U.S. pharmacy spending will be heavily influenced by how pharmacy benefit designs evolve. To gauge likely scenarios, we used an interview-based qualitative research design. We approached twenty-one people known to us to have expertise in pharmacy benefit design. The first ten respondents were asked to identify other suitable interviewees, a method known as snowball sampling.⁵ We approached a total of twenty-nine people from twenty-seven organizations. Our final sample included fifteen participants from fourteen organizations (four consulting firms, three pharmaceutical manufacturers, one large employer, two employer purchasing coalitions, two trade associations, one PBM, and one managed care plan).

Interviews were conducted during a four-week period in March and April 2003. Respondents could choose to remain anonymous.⁶ To ensure consistency, the lead author conducted all interviews using a semistructured survey format. RAND’s Human Subjects Committee approved the survey and study design.

Each respondent was told the purpose of the project and asked to comment on emerging pharmacy design trends—broad trends in the industry as a whole as well as within four specific high-cost therapeutic classes (statins, anti-ulcerants, antidepressants, and antihistamines) that together accounted for about one-fourth of prescription drug spending in 2001.⁷ We reviewed the interview notes for themes and then compared these themes across interviews. Unless otherwise noted, the findings we reported represent the consensus of our respondents. However, not every respondent answered every question.

Study Findings

Top Editor's Notes Study Methods Study Findings Discussion Notes

 
Although some purchasers are unlikely to embrace multi-tier plans (for example, employers with collectively bargained benefits), the trend toward multi-tier benefit designs shows no sign of reversing.⁸ Moreover, the financial incentives such plans use to steer beneficiaries to low-cost drugs will become more pronounced over time.

Larger differential between first- and third-tier copayments. The third-tier copayment, which PBMs and health plans have greatly increased during the past several years (Exhibit 1), is likely to continue to rise. Most respondents predicted that the average third-tier copayment will increase to $50 or more within three to five years. (By comparison, the average price of a brand-name prescription drug in 2002 was $76.)⁹

View larger version (17K): [in this window] [in a new window]   EXHIBIT 1 Retail Copayment Trends For Three-Tier Pharmacy Benefit Plan Designs, 1999–2001

Many purchasers are considering switching from tiered copayments to tiered coinsurance (for example, 20 percent for generics, 30 percent for preferred brands, and 40 percent for nonpreferred brands) or to a blend between copayments and coinsurance (for example, flat copayments at the first and second tiers, with coinsurance at the third and higher tiers). Our respondents agreed that coinsurance is superior to copayments because it automatically calibrates to the cost of the drug and does not need to be changed often, if ever. The main disadvantage is complexity: With coinsurance, beneficiaries might not be able to determine how much they will have to pay for a particular item until they go to the pharmacy to purchase it.

There has been much discussion among pharmacy benefit designers of an approach known as reference pricing, in which insurers cap the amount they will pay for a drug within a specific therapeutic class. Few or no major U.S. employers, however, have adopted reference pricing so far.

Separate tier for high-cost drugs. Many respondents said that tiered copayments are ill suited for high-cost drugs, such as injectibles and expensive orals like Gleevec (imatinib mesylate), used to treat chronic myeloid leukemia. Biologics are of special concern, because of their high cost (often $1,000 or more per month), the large number of products under development, and the lack of generic competition.¹⁰ (Whereas the FDA can approve generic equivalents of small-molecule drugs on the basis of bioequivalence data, generic versions of biologics are required to go through the entire clinical and manufacturing approval process.)

As the number of high-cost drugs increases, PBMs’ interest in monitoring and containing their use will intensify. Health plans are likely to require consumers to share the costs of high-cost drugs via coinsurance rather than copayments. A plan might, for example, require beneficiaries to pay 25 percent coinsurance for high-cost drugs, with a maximum out-of-pocket expense of $1,000 per year. Plans that now cover physician-administered injectibles under their medical benefit are likely to begin covering them under their pharmacy benefit, where they can be more easily subjected to the same cost-sharing requirements as tablets and capsules.

Thinning out of second tier. Our respondents agreed that pharmacy and therapeutics (P&T) committees, which are sensitive to cost-effectiveness concerns, will reduce the number of drugs in the second tier during the next several years.¹¹ There are two reasons for this. First, during the next several years an unusually large number of "blockbuster" drugs (drugs with sales of more than $1 billion per year) will lose patent protection, resulting in the introduction of generic competitors. This trend began with the introduction of generic versions of the antidepressant Prozac (fluoxetine) in August 2001 and the antidiabetic Glucophage (metformin) in January 2002 and is expected to continue at least through 2005–06, when a number of blockbuster products are expected to lose exclusivity in the U.S. market. Second, a number of blockbuster products are being made available over the counter (OTC). Claritin (loratadine) has been available OTC since December 2002, and other nonsedating anthistamines might follow. Prilosec (omeprazole), the anti-ulcerant that was the top-selling medication in the world several years ago, has been available OTC since September 2003. As blockbuster drugs become available as generics or OTC or both, many health plans and PBMs are likely to move their brand-name, prescription-only competitors to the third tier. Antihistamines, anti-ulcer agents, and statins are among the top therapeutic classes expected to be affected.

Antihistamines. After the conversion of loratadine to OTC status in December 2001, most major health plans and PBMs moved all prescription nonsedating antihistamines to the third tier or were seriously considering doing so. One health plan, WellPoint Health Networks, not only moved prescription non-sedating antihistamines to the third tier but also began restricting coverage to patients who fail to get relief from loratadine. Some plans are considering moving nonsedating antihistamines to a fourth tier (along with cosmetic/lifestyle drugs) or dropping coverage altogether. Few if any major plans are covering loratadine now that it is available OTC.

Anti-ulcerants. Most PBMs and health plans are likely to move brand-name prescription proton-pump inhibitors (PPIs) to the third tier now that omeprazole is available OTC. This tendency will be reinforced by the expiration of the patent for Prevacid (lansoprazole) (expected to occur in 2005) and the subsequent U.S. introduction of its generic equivalent.

Statins. Most of our interviewees expect PBMs and health plans to move brand-name statins that are now on the second tier to the third tier once generic versions of Pravachol (pravastatin) and Zocor (simvastatin) are introduced in the United States (expected in 2005–06). There is considerable uncertainty regarding the tier placement of new statins such as Crestor (rosuvastatin) and Zetia (ezetimibe). The majority of our respondents predicted that such products will be placed on the second tier only if they are markedly superior to generic statins; even then, some plans might restrict their use to patients who fail to reach their cholesterol target with generic statins.

Antidepressants. There was less consensus on how health plans and PBMs will manage antidepressants. Three blockbuster antidepressants—Prozac, Paxil (paroxetine), and Well-butrin (bupropion)—are now available as generics in the United States. But there is a widespread perception that psychiatric drugs are not as highly substitutable as drugs in other therapeutic classes. As a result, plans might be reluctant to move brand-name products to the third tier.

This viewpoint is reinforced by the failure of generic fluoxetine to take market share from Zoloft (sertaline), Effexor (venlafaxine), and paroxetine following the expiration of Prozac’s patent in 2001. Many observers had expected health plans and PBMs to steer beneficiaries away from brand-name antidepressants toward generic fluoxetine, which is relatively inexpensive.¹²

Prior authorization and step-therapy requirements. There was no consensus among respondents about whether the use of prior authorization and step-therapy requirements will increase among employer-sponsored plans. Some respondents said that these restrictions would become more common, particularly for high-cost products such as injectables designed to treat mild cognitive impairment or medications that are prone to abuse, such as OxyContin (oxycodone HCl controlled-release) and human growth hormone. Others stated that these restrictions, like closed formularies, have fallen out of favor because they are perceived as burdensome to health plans, beneficiaries, physicians, and pharmacists. These respondents stated that tiered copayments or coinsurance rates can achieve the same goals as prior authorization and step-therapy requirements while causing less irritation to consumers and providers.

Regardless of what happens in employer-sponsored plans, the use of prior authorization and step-therapy requirements in Medicaid programs is likely to increase. Since Medicaid programs are prohibited by federal law from charging more than a nominal copayment, they cannot adopt the multi-tier cost-sharing structures that have become so prevalent in employer plans. As an alternative, many Medicaid programs are considering requiring manufacturers to provide supplemental rebates to prevent having their products put on a list of nonpreferred drugs requiring prior authorization.¹³ Some Medicaid programs also use step-therapy requirements, such as restricting coverage of PPIs to patients who have tried histamine-2 (H2) receptor antagonists. A study of a step-therapy requirement for brand-name nonsteroidal anti-inflammatory drugs (NSAIDs) in Tennessee’s Medicaid program showed that its implementation was associated with a large reduction in the payer’s pharmacy costs.¹⁴

Counter-detailing. Physician counter-detailing, a strategy that has been discussed for at least two decades, is finally gaining momentum, several respondents said.¹⁵ Blue-Cross/BlueShield of Florida sends letters to doctors who are low prescribers of generics.¹⁶ Other plans are preparing to distribute generic drug samples to contracted physicians, just as brand-name manufacturers do. In the public sector, some Medicaid programs have recently hired physicians and pharmacists to visit doctors’ offices and encourage them to prescribe generics.¹⁷

DTC counter-advertising. Several respondents said that health plans are increasing efforts to promote generics directly to beneficiaries. One health plan sends letters to beneficiaries who use nonpreferred brands, encouraging them to switch to lower-cost medications. Another plan sends e-mail notices about low-cost drugs to patients who look for drug information on the plan’s Web site. One large employer sends a newsletter to beneficiaries encouraging them to discuss generic options with their physician.

Discussion

Top Editor's Notes Study Methods Study Findings Discussion Notes

 
Implications for drug spending. Some of the trends we describe, such as the increase in multi-tier cost sharing, have been documented by previous researchers. Other findings, such as the anticipated hollowing out of the second tier, have received little attention to date. If our respondents are correct, beneficiaries will soon face very strong financial incentives to use generic or OTC products rather than brand-name prescription drugs. To the relief of purchasers, such incentives are likely to lead to sharply reduced growth (or even declines) in spending within many of today’s top therapeutic classes, including statins, anti-ulcerants, and nonsedating antihistamines.

Implications for health. The effects of increased financial incentives on beneficiaries’ health outcomes depend on the characteristics of the drugs being targeted. If beneficiaries are discouraged from using high-cost drugs that have pharmacologically similar, low-cost substitutes, there should be little or no impact on health outcomes. By contrast, if beneficiaries are discouraged from using high-cost drugs that do not have close substitutes, the risk of adverse health outcomes will be increased. The challenge for pharmacy benefit designers is to make beneficiaries more sensitive to the costs of different treatment options (particularly within therapeutic classes where different drugs are similar) without encouraging them to forgo cost-effective care.

Implications for drug coverage. A key unknown is whether a Medicare prescription drug benefit will be enacted and, if it is, what form it will take. The role of private benefit plans—and their ability to innovate—is particularly difficult to predict. If Medicare coverage ends up being more generous than private coverage, employers are likely to drop their retiree drug benefits and offer secondary or "wraparound" coverage, as they now do with existing Medicare benefits. It is also possible that the Medicare drug benefit will serve as a model for private pharmacy coverage, just as Medicare’s prospective payment system (PPS) for hospital inpatient care, implemented in 1984, was subsequently mimicked by many private-sector plans.¹⁸

Study limitations. There are several limitations to our study. Our sample of respondents was small and was obtained through unsystematic means, preventing generalization. Fourteen of the twenty-nine people we approached, including officials from most of the country’s largest PBMs and health plans, declined to participate or could not be reached—a nonresponse rate of 48 percent. It is possible that those who participated hold different opinions from those who did not. The mix of organizations in our sample, however, ensures that a range of perspectives was represented. Moreover, our respondents were unanimous on most issues, which suggests that our findings are robust. There is no guarantee, however, that the consensus is correct.

Editor's Notes

Top Editor's Notes Study Methods Study Findings Discussion Notes

 
Jesse Malkin is an associate policy researcher at RAND in Arlington, Virginia. Dana Goldman is director and corporate chair, Health Economics, at RAND in Santa Monica, California, where Geoffrey Joyce is an economist.

This study was partially funded by the California HealthCare Foundation.

Notes

Top Editor's Notes Study Methods Study Findings Discussion Notes

 

1. Novartis Pharmacy Benefit Report: 2002 Facts and Figures (East Hanover, N.J.: Novartis Pharmaceuticals, 2002); and J. Gabel et al., "Job-Based Health Benefits in 2002: Some Important Trends," Health Affairs (Sep/Oct 2002): 143–151.
2. G.F. Joyce et al., "Employer Drug Benefit Plans and Spending on Prescription Drugs," Journal of the American Medical Association 288, no. 14 (2002): 1733–1739;[Abstract/Free Full Text]K.N. Lohr et al., "Use of Selected Drugs and Procedures," Medical Care 24, no. 9 Supp. (1986): S39–S50;S. Schneeweiss et al., "Outcomes of Reference Pricing for Angiotensin-Converting-Enzyme Inhibitors," New England Journal of Medicine 346, no. 11 (2002): 822–829[Abstract/Free Full Text]; and T.S. Rector et al., "Effect of Tiered Copayments on the Use of Preferred Brand Medications," Medical Care 41, no. 3 (2003): 398–406.[CrossRef][ISI][Medline]
3. Novartis Pharmacy Benefit Report; and Gabel et al., "Job-Based Health Benefits in 2002."
4. Novartis Pharmacy Benefit Report.
5. L.A. Goodman, "Snowball Sampling," Annals of Mathematical Statistics 32, no. 1 (1961): 148–170.
6. The fifteen respondents were Becky Cherney, Central Florida Health Care Coalition; Perry Cohen, Pharmacy Group LLC; Helen Darling, Washington Business Group on Health; Michael Dillon, NMHCRX; Gerianne Hap, Eli Lilly; Emma Hoo, Pacific Business Group on Health; David Kaplan, Eli Lilly; Grant Lawless, Amgen; Eric Michael, Mercer Human Resource Consulting; Pete Penna, Formulary Resources; Debi Reissman, Rxperts—Managed Care Consulting; Rob Seidman, WellPoint Health Networks; Christine Simmon, Generic Pharmaceutical Association; and two others who asked not to be identified.
7. National Institute for Health Care Management Research and Educational Foundation, "Prescription Drug Expenditures in 2001: Another Year of Escalating Costs," 6 May 2002, www.nihcm.org/spending2001.pdf (23 October 2003).
8. One respondent observed that unions’ bargaining power has limited the ability of some large purchasers to adopt multi-tier cost-sharing structures. Beneficiaries in such plans have weak financial incentives to use low-cost drugs.
9. Generic Pharmaceutical Association, "Frequently Asked Questions," www.gphaonline.org/aboutgenerics/faqs.html (6 November 2003).
10. There were 370 products in clinical development as of March 2002; 800 products are expected to be under development by 2005. CIBC World Markets Equity Research, as cited in Advance-PCS, "Health Improvement Report: An Analysis of Prescription Drug Trends and Evaluation of Methods to Reduce Drug Expenditures," Spring 2002,media.corporateir.net/media_files/nsd/advp/reports/advp051702.pdf (4 June 2003).
11. Several respondents mentioned that cost-effectiveness considerations are taken into account by P&T committees. One respondent stated that cost-effectiveness studies are most likely to sway a P&T committee if the methods are perceived as transparent, objective, and rigorous.
12. B. Martinez, "Pharmacy-Benefit Firms Profit on Generic Drugs," Wall Street Journal, 31 March 2003.
13. Pharmaceutical Research and Manufacturers of America (PhRMA) asserts that such programs violate federal Medicaid law by improperly denying access to medicines for Medicaid patients. A lawsuit, filed 1 July 2003 in the U.S. District Court for the District of Columbia, asks for a preliminary injunction invalidating such a policy in Michigan and in other states considering implementing similar programs.
14. W.E. Smalley et al., "Effect of a Prior-Authorization Requirement on the Use of Nonsteroidal Antiinflammatory Drugs by Medicaid Patients," New England Journal of Medicine 332, no. 24 (1995): 1612–1617.[Abstract/Free Full Text]
15. J. Avorn and S.B. Soumerai, "Improving Drug-Therapy Decisions through Educational Outreach: A Randomized Controlled Trial of Academically Based ‘Detailing’," New England Journal of Medicine 308, no. 24 (1983): 1457–1463.[Abstract]
16. W.J. Guglielmo, "Rx Cost Control: What’s Your Role?" Medical Economics 4, no. 80 (2003): 27.
17. M. Kaufman, "Doctors Hear Alternatives to Drug-Firm Sales Pitches," Washington Post, 5 August 2002.
18. G.M. Carter et al., "Use of Diagnosis-Related Groups by Non-Medicare Payers," Health Care Financing Review (Winter 1994): 127–158.

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