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Health Plans’ Strategies To Control Prescription Drug Spending

Abstract

 
A number of recent studies have documented the sizable impact of consumer cost sharing without accounting for the other drug management strategies being adopted simultaneously. This qualitative case study of five of California’s largest health plans examines the strategies and methods used to control prescription drug use and spending. Higher cost sharing is being used increasingly. Concurrently, major administrative efforts directed at physicians—including rules, incentives, and education—are being undertaken. These efforts have focused on lowering the cost per prescription by emphasizing generic substitution and therapeutic interchange of less costly drugs.

Strategies directed at consumers in the form of cost sharing reduce the demand for prescriptions and shift costs to consumers in general.⁴ Strategies directed at physicians attempt to alter their prescribing patterns. The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 allows drug-only and Medicare Advantage (MA) plans to compete by offering actuarially equivalent benefits. If programs directed toward physicians are found to be effective when used in conjunction with higher consumer cost sharing, then health plans with stronger ties to physicians will be able to offer more attractive benefits.

In this paper we use a case-study approach to examine the different strategies and methods used to control prescription drug spending in five California health plans. Our goal is to provide more information about this emerging health benefit strategy in the wake of the Medicare reforms passed at the end of 2003.

Study Methods

Top Study Methods Study Results Choice Of Methods And... Discussion Editor's Notes NOTES

 
Choice of plans. We chose California plans because their competitive market has made them leaders in cost containment efforts and organizational change. We selected the five plans on the basis of their market share, tax status, and physician organizational relationship. These relationships varied from a preferred provider organization (PPO) arrangement with a large physician network to a staff-model health maintenance organization (HMO) whose physicians provided care only to its members.

We included four of the largest commercial health plans in California: Blue Cross of California (BCCA, a WellPoint company); Blue Shield of California (BSCA); Kaiser Foundation Health Plan; and PacifiCare. We also included CalOptima, a capitated Medicaid plan, to add the perspective of a public plan. The plans operate throughout California, in markets of different sizes with different competitors, but within a similar state regulatory environment (Exhibit 1). By using only California plans, this study highlights the important effect of plan characteristics on the methods chosen for managing drug benefits.

Our interview protocol included detailed questions about the interventions used, including physician network management (scope, compensation, and risk-sharing arrangements); pharmacy network management; benefit design (copayments, deductibles, coinsurance, number of tiers, benefit maximums, and mail-order options); formulary development (including negotiating with pharmaceutical manufacturers); drug utilization review activities (including prepayment screening, prior authorization, and dispensing limits); disease management; member education; and physician education. A technical advisory group comprising staff members from the plans we studied helped arrange access to the plans and provided feedback on their case study and the final report.

Our analysis plan was guided by how health plans have controlled hospital prices and use. Paying prices similar to one’s competitors is important, but plans historically have looked to a number of utilization management strategies that addressed the intensity, duration, and incidence of use to contain cost growth and differentiate themselves from competitors.⁵

Study Results

Top Study Methods Study Results Choice Of Methods And... Discussion Editor's Notes NOTES

 
Design of plans’ drug benefit. Four of the five plans studied used PBMs to process claims (Exhibit 2). Two plans used them to negotiate drug prices, while a third, CalOptima, used state-negotiated prices. In our sample, Blue Shield and Kaiser negotiated directly with drug companies. For the two plans using a PBM, the PBM was a subsidiary of the parent company. With the exception of Kaiser and Blue Shield, the pharmacy departments depended on the PBMs to negotiate drug prices. A health plan’s ability to negotiate lower prices than those of national PBMs depends on the plan’s membership size and its ability to shift market share. Only Kaiser claimed the ability to move drug shares to a large degree. Our investigation, therefore, focused on how plans managed drug utilization.

Encouraging greater use of generics and less costly brands was the overwhelming utilization management strategy among the five plans studied. Although we found a few instances of strategies aimed at controlling incidence, or the appropriateness of a medication, these were reserved for very expensive medications. Also, duration automated reviews (edits) existed for some medications but were not a major focus of any health plan.

Plans focused their utilization management efforts on new drugs, particularly trying to limit use of costly treatment substitutes that did not greatly expand the scope or efficacy of existing treatments—for example, substituting celecoxib (Celebrex) for older and less costly nonsteroidal anti-inflammatory drugs (NSAIDs). Since introducing new treatment substitutes may not lead to discontinuation of older drugs, management of these new medications affects both average cost per prescription and total utilization.⁶

All five plans readily and rapidly switched to generic, bio-equivalent versions of drugs (drugs produced after a brand patent expires), which typically sell for about 80 percent less than equivalent brand-name drugs.⁷ This is consistent with national data showing that bio-equivalent generics are substituted more than 90 percent of the time.⁸ Therapeutic substitution, in which providers prescribe therapeutically similar generic medications for brand-name drugs where no exact generic bio-equivalent exists, accounted for the different generic use rates across health plans. Plans recognized that their generic substitution strategies depended on the cooperation of physicians, consumers, and pharmacies. They therefore used diverse methods for influencing the behavior of each of these groups but concentrated on influencing physicians to select therapeutically similar generic medications.

Choice Of Methods And Intensity Of Implementation

Top Study Methods Study Results Choice Of Methods And... Discussion Editor's Notes NOTES

 
The history, covered population, and contractual arrangements with physicians of each plan made some methods for managing physicians’ prescribing behavior more attractive than others. In particular, a history in private insurance, rather than managed care, made rules and restrictions a less attractive approach than the more indirect approaches of consumer cost sharing, education, and information. Group or staff-model plans and plans that made up large portions of physicians’ patient panels relied more on education and feedback to create physicians’ prescribing norms. Three plans could be categorized as choosing one category as their core method, while two plans had mixed approaches (Exhibit 2).

The data collected for this study do not allow us to compare the effectiveness of one method over another. Each plan reported achieving percentages of generic use that were higher than both the national average for insured plans and the 45 percent reported by IMS for all pharmacy sales. However, the range for the five plans was from slightly more than 45 percent to almost 70 percent.

We observed marked differences in the strength with which plans applied their chosen methods—in particular, in plans’ ability and desire to closely manage physicians and consumers. Kaiser and CalOptima, both of which reported aggressive use of methods to increase generic use, reported rates of 65–70 percent. BCCA and PacifiCare, the two for-profit plans self-described as being consumer-oriented, reported rates in the low to mid-fifties. Finally, BSCA, which described itself as a partner with its physicians and as avoiding heavy-handed attempts to influence physician practice, reported a rate in the upper forties.

Financial incentives as primary method. In 2000 California’s medical community essentially stopped accepting a capitation payment for prescription drugs, and very few physicians in the state now bear any risk for drugs. This greatly limited the ability of California HMOs, particularly PacifiCare, to use physician risk sharing. For all of the plans (except CalOptima, which does not use any financial incentives), the California plans have tended to use financial incentives directed at consumers—in particular, tiered copayments. However, all of the plans using tiered copayments kept the copayment levels low because of market competition. Without major consumer cost sharing and limited physician risk sharing, health plans had to select methods other than financial incentives for influencing physicians. However, BCCA, consistent with its history and mission, chose to emphasize financial incentives.

The WellPoint family, including BCCA, is one of the largest publicly traded U.S. health care companies. BCCA emphasized financial incentives to encourage physicians to prescribe generic drugs whenever possible: "In the HMO, physicians are given a bonus based on generic utilization—the target is 50 to 52 percent...If they hit certain thresholds of generic utilization, the medical groups get paid real dollars...[The goals are] conservative." Since California physicians have eschewed risk sharing, BCCA uses an upside-only, bonus-sharing approach. Asked about using other methods, a representative stated reluctance to intervene too directly in doctors’ prescribing decisions: "We look at community standards: What do the doctors like to do, what are they comfortable with. Our relationship is toxic enough. I’m not going to tell them to use some drug that no one wants to use."

To supplement this physician incentive, BCCA provides financial incentives to both members and pharmacies. Consistent with its stated emphasis on "consumer choice and empowerment," BCCA has implemented creative financial incentives for consumers in addition to copayments: For example, the plan distributes coupons that cover copayments for the first fill of a recent generic conversion. The plan also rewards pharmacies for dispensing generic drugs. BCCA tracks the percentage of generic prescriptions that each pharmacy dispenses quarterly and rewards pharmacies that meet their target with a higher dispensing fee for generics in the following quarter.

Education and feedback as primary method. The efficacy and attractiveness of using education and feedback depended upon the plan’s relationship with physicians in its network. Kaiser, with only 4,500 physicians in its network (compared with 12,000 for Cal-Optima; 45,000 for BSCA; 55,000 for BCCA; and 89,975 for PacifiCare), all of whom were employees of the plan and treated only Kaiser patients, stood to gain the greatest strategic advantage from this method.

The physicians or the Permanente Medical Groups are accountable for plan performance and wield a great deal of influence over the plan’s policies, including formularies and protocols, and its direction. Although the plan provides physicians with sizable educational resources to support evidence-based medicine and patient outcome information, senior managers claim that physicians’ decisions are not subject to any form of administrative override.

Physicians at Kaiser are subject to few explicit rules and restrictions on their prescribing, but there is a strong implicit commitment to prescribe within the formulary. However, because Kaiser values physician autonomy, a physician can consistently prescribe in conflict with the formulary. A medical director provided this real-case example:

We’re not going to ever tell him he can’t write for Celebrex or Vioxx because it’s sort of in violation of the culture of the organization. And if we started to do that, we’d lose. To go after the 1 percent, we’d lose the 99 percent, and so it’s really a matter of harnessing the culture of professional pride and professional clinical expertise.

The plan has a department that analyzes prescribing data by physician and the deviation from peers. The findings are shared with the physician, local pharmacy and therapeutics (P&T) committee members, service chiefs, and drug education coordinators. The goal is to create an environment in which physicians consider their prescribing practices and compare themselves with their peers. As a senior manager stated: "There is no hammer other than peer pressure, good data, good clinical research that backs up what we are trying to say. And for the most part it works. Our doctors believe in what we’re telling them." The plan also restricts drug company representatives’ access to physicians, allowing detailing only for drugs that are on the formulary.

In contrast to other plans, Kaiser viewed patient education and influencing consumers’ behavior as a less important part of managing drug spending. Instead, it relied on doctors to guide patients toward cost-effective options. However, at the time of our interviews, Kaiser was developing systemwide programs to align consumers’ behavior and compliance.

Rules and restrictions as primary method. Of all of the plans we studied, Cal-Optima placed the greatest emphasis on rules and restrictions, particularly concurrent utilization review. CalOptima is a county organized health system (COHS).⁹ It receives a capitated payment per member, which includes over-the-counter drugs when prescribed by a physician. CalOptima has extremely high drug usage because of the complex medical needs of its members—in particular, its dual eligibles (those eligible for both Medicare and Medi-Cal, California’s Medicaid program).

Financial incentives and education and feedback to physicians or consumers proved unfeasible for CalOptima because of regulatory and budgetary constraints. Federal regulations prohibit CalOptima from effectively requiring consumer cost sharing: Medi-Cal permits pharmacies to ask Medicaid recipients to pay a nominal copayment, but the pharmacist cannot withhold the prescription if the member does not pay it. Physicians therefore have no direct financial incentive to reduce the number or cost of the prescriptions they write for CalOptima members.

CalOptima’s administrative budget is limited to 6 percent of its total budget, which makes it difficult to have physician incentive programs. There is no bonus or withhold for drug spending. Educating members can be difficult because the population is so diverse and transient, and all member education must be provided in three languages. Finally, CalOptima’s physician network is very large, which makes communicating with the network expensive. Since most physicians have only a few CalOptima patients, they have little reason to learn the plan’s formulary and policies.

Given these circumstances, the plan’s method for managing drug spending relies on aggressive implementation of an extensive collection of rules and restrictions. The criteria are applied at the pharmacy when the prescription is submitted to CalOptima’s processing system. The system suspends payment for 1.5 percent of claims. The prescribing physician must then submit a prior authorization form. The percentage suspended is much higher than the percentage reviewed by other insurers. As one manager put it, "We talked to the fourth largest PBM in the country about contracting with them. If they took us on, it would be a 50 percent increase in authorizations for them."

Choosing a combination of methods. BSCA and PacifiCare had less clearly defined methods for managing utilization than the other plans we studied. The large size of these two plans’ networks presents challenges in managing drug usage, and they have both chosen to use a combination of methods.

BSCA’s founding by a medical society has made it trustworthy to physicians and has resulted in a high rate of physician participation in its original commercial and Medicare insurance programs. Continuing this long-standing relationship with physicians, BSCA sees itself as a partner with the physicians in its network and is hesitant to interfere in physicians’ practices. The plan uses a combination of rules and restrictions and education and feedback, but neither method is pursued as aggressively as plans that focus on one of these methods.

BSCA’s claims suspension process provides an example of its mixed-method approach. The plan sees claims suspension as much as an opportunity to educate physicians about prescribing the right drugs as a restriction of payment for the wrong or more costly drugs:

[Academic detailing and meeting with physicians in their offices] is not where most of our focus is...if you look at the number of edits and the number of coverage requests...We have more people here answering the phones, prior authorizing Vioxx or Celebrex, [so] we get a lot more opportunity [to educate our physicians] than mandating things.

Like BSCA, PacifiCare also uses a mixed-method approach. PacifiCare had substantial physician-based capitation for prescription drugs until about four years ago. No longer able to rely on risk sharing, PacifiCare has increased the intensity with which it applies other management techniques.

The plan would like to manage more aggressively, but it has encountered resistance. PacifiCare’s goal of being an industry leader in customer service curbs the plan’s use of rules and restrictions, particularly denial of suspended claims. Although PacifiCare believes that it could deny more claims, it has learned through trial and error that a higher denial rate would generate more negative feedback from physicians, patients, and employers than the savings would justify. The plan has had to develop alternative methods for shaping physicians’ prescription decisions: "We don’t like to micromanage the doctors or the patient. That’s one of our basic philosophies. We give them the right incentives. We give them the right information. Both the doctors and the patient should be able to make better decisions."

Neither BSCA nor PacifiCare has found physician-directed methods to be sufficient. Therefore, they also have turned their attention to reaching out with education and clinical support to members with chronic conditions through disease management programs (DMPs), which provide literature for those with mild diseases and case management for the more severely ill. PacifiCare also informs members using specific drugs about less costly medications through direct mailings, hoping to reinforce the cost-effectiveness message by having patient-initiated physician dialogue about drug options.

Discussion

Top Study Methods Study Results Choice Of Methods And... Discussion Editor's Notes NOTES

 
The five plans studied focused almost exclusively on managing the intensity of the prescription, or the prescribing of a less expensive medication. For new medications, the issue for physicians was whether a generic medication, which is not a bio-equivalent, is still medically appropriate for a proportion of the cases. Only Kaiser developed explicit criteria on when a new, expensive medication was more appropriate. A surprising finding was the lack of attention to the duration and overall incidence of prescribing drugs. This occurred because the private plans did not want to micro-manage physician prescribing, fearing a physician backlash. The two plans in this study with the highest self-reported generic-use rates use very different methods: Kaiser relies on education and information, while CalOptima depends on rules and restrictions. This finding suggests that a variety of methods, if pursued consistently and vigorously, can be used to achieve the same goal of managing drug spending.

Some plans have found that their desired method for achieving generic substitution and therapeutic interchange has not been as effective as hoped in influencing physicians. For example, plans that wanted to focus on education and feedback but had large physician networks directed this method to consumers to enhance the power of their messages with physicians. Although in this case study each plan’s characteristics shaped the choice of methods and its direction, external forces also played a role.

Cultural factors. The plans we studied operated in California, where the vast majority of physicians had rejected risk sharing for prescription drugs. This limited plans’ ability to use financial incentives, and the plans that might have otherwise selected this method turned to other options (either financial incentives directed at consumers or pharmacies or an alternative method for influencing physicians).

Plans also faced different costs and constraints in trying to implement different methods. Kaiser, for example, saw use of rules and restrictions as anathema to the premium placed on physicians’ autonomy in clinical decisions and decided that reliance on that method would be more costly in the long run. Calculations of social costs affected judgments, about not only the desirability of using a particular method, but also the aggressiveness with which plans pursued that method. Pacifi-Care, for example, found extensive use of rules and restrictions too costly a strategy from a marketing standpoint.

Comparative costs. This case study could not draw conclusions about the comparative costs or effectiveness of one method over another for managing drug spending. All five plans shared their 2002 Health Plan Employer Data and Information Set (HEDIS) self-reported drug spending data. Although these data are not adjusted for case-mix or age, the per capita spending for the five plans varied by almost 100 percent, from a little above $200 to almost $400. Kaiser’s per member cost was the lowest. Also, according to published HEDIS data for 2000, Kaiser’s per member monthly outpatient prescription cost of $15.27 was almost 50 percent below the national HEDIS average of $29.11.¹⁰ A number of factors contributed to Kaiser’s performance. Physician acceptance is critical. At Kaiser this acceptance appears to be related to physician participation in protocol development, educational programs on why particular drugs are preferred, and the availability of an integrated drug, laboratory, and medical record for their patients at the point of care. Finally, Kaiser’s 2002 prescription costs for people over age sixty-five appear to be about 40 percent below the Congressional Budget Office’s baseline cost of $2,400 per Medicare beneficiary.¹¹

Lessons to be learned. We believe that these health plans can show others how to be both a high-value and a cost-effective drug manager. Just as a group or staff-model HMO such as Kaiser, for instance, demonstrated and set the standard in the 1970s that comprehensive medical care could be made less costly by coordinating care and substituting ambulatory services for hospital care, a similar standard might be set for managing drug use. While Kaiser’s lower drug costs result in part from lower negotiated prices and having its own pharmacies at its medical centers, we found Kaiser’s approaches to educating physicians and managing prescribing to be different from those of other health plans. Under the direction of a central decision-making body, the Drug Use Management Group, Kaiser has developed a comprehensive system of drug management from formulary development to extensive use of three-month supplies for chronic medications.

Policy implications for Medicare. Although the congressionally mandated standard drug benefit for Medicare has a well-publicized, large gap in coverage (the "doughnut hole"), MA and drug plans offering the benefit can provide actuarially equivalent coverage and thereby reduce this gap. This new benefit, together with the other MMA provisions allowing for increased payments to MA plans, could make it possible for health plans, particularly staff- and group-model HMOs, to offer a much more attractive and comprehensive prescription drug benefit. It seems ironic that the recent Medicare legislation, while seemingly most supportive of large PPOs, could render traditional HMO models the most effective in drug management.

Editor's Notes

Top Study Methods Study Results Choice Of Methods And... Discussion Editor's Notes NOTES

 
Stanley Wallack (wallack{at}brandeis.edu) is professor and executive director of the Schneider Institute for Health Policy, Heller School for Social Policy and Management, at Brandeis University in Waltham, Massachusetts. Dana Weinberg is an assistant professor in the Sociology Department of Queens College–City University of New York. Cindy Thomas is a senior scientist at the Schneider Institute.

First and foremost, the authors thank the pharmaceutical managers at each participating health plan. They also thank Paula Breslin, Wendy Colnon, Elizabeth Dichter, and Mike Doonan for their research and administrative support, and the California HealthCare Foundation for funding this study.

NOTES

Top Study Methods Study Results Choice Of Methods And... Discussion Editor's Notes NOTES

 

1. B.C. Strunk et al., "Tracking Health Care Costs," Health Affairs, 22 August 2001, content.healthaffairs.org/cgi/content/abstract/hlthaff.w1.39 (19 August 2004).
2. National Institute for Health Care Management Research and Educational Foundation, Prescription Drug Expenditures in 2000: The Upward Trend Continues, May 2001, www.nihcm.org/spending2000.pdf (19 August 2004).
3. C.P. Thomas et al., "Impact of Health Plan Design and Management on Retirees’ Prescription Drug Use and Spending, 2001," Health Affairs, 20 November 2002, content.healthaffairs.org/cgi/content/abstract/hlthaff.w2.408 (19 August 2004).
4. G.F. Joyce et al., "Employer Drug Benefit Plans and Spending on Prescription Drugs," Journal of American Medical Association 288, no. 14 (2002): 1733–1739.[Abstract/Free Full Text]
5. R.H. Miller and H.S. Luft, "Managed Care Plan Performance since 1980: A Literature Analysis," Journal of the American Medical Association 271, no. 19 (1994): 1512–1519.[Abstract]
6. C.P. Thomas, G. Ritter, and S.S. Wallack, "Growth in Prescription Drug Spending among Insured Elders," Health Affairs 20, no. 5 (2001): 265–277.[Abstract/Free Full Text]
7. IMS, Generic Focus, 2003, www.imshealth.com/vgn/images/portal/cit_40000873/43926288IMS_Generic_Focus_Report_2003.pdf (19 August 2004).
8. Ibid.; and G. Ritter et al., Greater Use of Generics: A Prescription for Drug Cost Savings (Arlington, Va.: Generic Pharmaceutical Association, 2002).
9. In 1982, state legislation created three county organized health systems (COHSs) in California. According to the California HealthCare Foundation, "Such a system allows a county to operate a managed care program. Enrollment in a COHS is mandatory for almost the entire Medi-Cal population, and occurs concurrently with enrollment in the Medi-Cal program." Medi-Cal Policy Institute, "MediCal Managed Care," Medi-Cal Facts no. 8, March 2000, www.chcf.org/documents/policy/mmc2.pdf (19 August 2004).
10. A. Baumgarten, California Managed Care Review, 2002 (Oakland: CHCF, 2002).
11. Congressional Budget Office, Issues in Designing a Prescription Drug Benefit for Medicare (Washington: CBO, October 2002).

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