Curing the Cost
Human Resource Executive Magazine
By Bruce Shutan
years ago, Kwik Trip Inc. assembled a task force to re-evaluate ways to
put the brakes on runaway health-care costs that were growing faster than
any other expenses in the organization and eroding profits. The
health-care tab has soared 97 percent on a per-store average since 2000
compared with 26.5 percent for wages, 22 percent for occupancy-rent and
depreciation costs, 21.8 percent for utilities and 15.3 percent for
supplies and maintenance, while gross profit increased 19.1 percent.
largely young workforce, the writing was on the wall. For starters, a 10
percent annual head count growth rate would trigger new costs associated
with covering additional employees and their families. One area of concern
involved prescription drug costs, which The Segal Co. estimates will surge
20 percent this year, making it the fastest rising portion of employers'
health-care spending for the third year in a row.
"We were told
that eventually our drug program would catch up to us," says Rose
Levendoski, benefits manager for the La Crosse, Wis.-based
convenience-store chain, which employs about 6,300 people.
January 2001, the company abandoned $10 co-pays for generics and brands in
favor of the increasingly popular "three-tiered" benefits design featuring
a 10 percent rate for generics, which cost roughly one-fifth of brand
names, 25 percent for all brands and an additional $15 charge for pills
not on a list of preferred drugs called a "formulary."
As a result,
generic utilization rose to 51 percent from 43 percent, helping Kwik Trip
avoid more than $500,000 in pharmacy-benefit costs. "For each percentage
point, we can improve their generic utilization, we can drop the
per-member monthly expense about 40 cents," says Mark Campbell, PharmD,
president and CEO of Innoviant in Wausau, Wis., Kwik Trip's
PBMs, such as Innoviant, which have been
around for years, are making some headway in the war on drug-benefit
costs, but also are under fire. In a sign of the times, <I>The Wall
Street Journal</I> facetiously suggested AWP stands for "ain't what
paid," not average wholesale price.
Then there are the court
battles. The American Federation of State, County and Municipal Employees
became the latest plaintiff to sue the nation's largest PBMs for allegedly
cozying up to pharmaceutical companies. Employers, consumers and
pharmacists already have sued Medco Health Solutions, AdvancePCS, Express
Scripts and Caremark Rx to recover costs associated with prescription drug
prices that were deemed inflated - an action Medco, the nation's largest
PBM with some 65 million members, claims is "without
Moreover, the U.S. Justice Department recently joined
two lawsuits against Medco and soon intends to file its own complaint,
charging the PBM with placing the pursuit of profit ahead of patient care.
In a prepared statement, Medco refutes the charges, explaining that "when
all the facts are presented, they will show that our business has one
focus: providing the highest quality of prescription health care to our
clients and members."
The charges don't end there. Bob Garis, an
assistant professor of pharmacy at Creighton University in Omaha, Neb.,
has accused some PBMs of excessively marking up the cost of generics for
health plans and pocketing the difference. For example, one employer was
billed $100 for a generic painkiller that cost its PBM just
PBMs dispute the findings, citing a recent General Accounting
Office report suggesting managed plans save consumers 47 percent on
generics and 18 percent on brand-name drugs compared with over-the-counter
purchases at retail pharmacies. The GAO also identified savings of 53
percent below average cash prices for generics and 27 percent below brands
when drugs are ordered through the mail versus retail
And while prescription drugs have been identified as
the fastest rising portion of group medical costs, increased
pharmaceutical spending has been linked to an overall reduction in
health-care spending. A recent study by Columbia University economist
Frank Lichtenberg shows a 4:1 return on investment for every dollar spent
on newer generations of drugs when a hospital cost comparison is factored
into the mix. PBM proponents say the resulting "true" cost justifies the
expense of these services.
Still, critics challenge this rosy
assessment. Gerry Purcell, a former PBM executive, notes that drug
inflation has been significantly greater than all other health-care areas
during the past 10 years, including hospital and physician
"Hidden pricing spreads, undisclosed kickbacks from drug
manufacturers and excessive profiting on generic drugs, among other
practices, suggest PBMs are inflating drug costs to their own benefit,"
says Purcell, a managing partner of Pharmacy Partners in Alpharetta, Ga.,
who's assisting plaintiffs in a class-action lawsuit against
Mindful of all the PBM scrutiny, Levendoski believes the time
has come to scrap drug rebates in the group benefits market. She
appreciates that Innoviant hasn't pocketed more than 50 percent of the
Kwik Trip rebates, which rose to 80 percent in January. "I'd venture to
say most benefit managers don't understand this pricing structure," she
Levendoski also suggests PBMs can improve the drug
utilization review for potential red flags that could lead to substantive
plan-design changes. For example, she says, 50 percent of drugs traced to
antidepressants for a particular employee population could be a key
indicator of the need for an employee assistance program.
as drug-benefit "middlemen," PBMs have polarized the HR and benefits
community. They're credited with championing inexpensive, efficacious and
appropriate treatment options yet accused of squeezing profits from
clients and failing to rein in medical inflation. Industry observers say
now is the time for action. Purcell urges the nation's corporate HR
leadership to conduct a comprehensive audit of PBM services to ensure
vendors are acting in their best interest and to demand full disclosure of
practices and revenues "if the goal is to reign in out-of-control drug
Kudos for Creativity
Connie Perry, PharmD, a vice
president with Aon Consulting in Chicago, believes PBMs deserve kudos for
embarking on creative solutions such as arming physicians with generic
samples and generic-brand cost comparisons as part of an educational
One emerging area that's expected to be imported to the
United States from British Columbia, Germany and Australia within the next
few years involves evidence-based pricing. "All drugs in a particular
class will be scrutinized to determine the safest and most efficacious
product based on clinical trial data and enable payers to negotiate the
best possible price," according to Perry.
She also predicts the
emergence of a stand-alone "consumer-driven" pharmacy plan for employers
that would like to test the waters with this widely touted approach rather
than adopt a full-fledged program. One reason is that it's not easy to
break employees of the mentality that prescriptions cost only $10, their
traditional co-pay. "I've been approached by quite a few employers about
doing this," Perry reports.
Under a consumer-driven approach for
pharmacy benefits, she says, employers would establish a personal care
account with corporate funds modeled after health reimbursement
arrangements on the group medical side. Once the PCA allowance has been
used in its entirety, the health-plan member would be expected to meet a
high deductible, thereafter paying a more traditional co-insurance design
of 20 percent or 30 percent for each prescription. The hope, of course, is
that the arrangement will help employees become wiser consumers of
generics and preferred low-cost brand alternatives when faced with the
true cost of medication.
Blue Cross Blue Shield plan members in
Nebraska and Minnesota are among the first to take advantage of what is
believed to be the nation's first pharmacy-only consumer-directed product.
Prime Therapeutics in St. Paul, Minn., created the plan, which is expected
to be available to other Blue Cross plans Jan. 1.
involving the consumer-driven model show a reduction in drug costs and use
of prescriptions for acute therapy versus maintenance of various
conditions, Perry reports. Trouble is, she says, a dearth of data in this
area complicates efforts to explain whether unfilled prescriptions for
acute therapy can be traced to people failing to obtain refills on time or
intentionally skipping the treatment. The larger issue: Employers need to
ensure that appropriate care is being delivered.
But these very
same employers may be part of the problem. "In some cases, employers
aren't willing to let PBMs take a hard stance," says Mike Deskin,
president of the Pharmacy Benefit Management Institute Inc. in Tempe,
Ariz., which serves the buyers of PBM services. One indicator is the
absence of performance-guarantee agreements that spell out how specific
cost targets should be met when a relatively broad benefit is being
With 15 percent average cost hikes, Deskin doesn't
believe PBMs are doing a particularly good job communicating their value
proposition. "What's important is to monitor PBM activities to ensure what
they're doing is in the most cost-effective interest for the client," he
says, citing reimbursement discounts and attempts to modify
The kind of careful management Deskin refers to can be
found in the Motor City, where Medco's Generics First program has gained
traction among the Big Three automakers. The nationwide effort, which
provides physicians with generic drug education and access to samples,
saved nearly $1 million from physician office visits in 2001 in each of
its markets, including Michigan.
Doris J. Powers, manager of health
care communications for Detroit-based General Motors, says "it's important
to note that because of the double-digit increases in prescription drug
rates, GM took the initiative of hiring an in-house clinical pharmacist in
1999 who now has another pharmacist on her team, which is a rarity for a
corporation." Together, they work closely with Medco, in Franklin Lakes,
N.J., to monitor drug-use patterns and ensure that high-quality products
are being provided.
As the world's largest vehicle manufacturer
with roughly 355,000 employees, GM is the nation's largest private
purchaser of health care - providing benefits to 1.2 million employees,
retirees and their dependents (the breakdown, listed as head of
households, involves 180,700 salaried and hourly employees and 423,900
salaried and hourly retirees). Of the $4.5 billion GM spent on health-care
services last year, $1.4 billion went to prescription drugs.
January, GM's salaried employees have been paying $5 for generics, 25
percent more for formulary brands (between $15 and $25) and $35 for
nonpreferred medication at the retail level, and $10 for generics, $30 for
preferred brands and $50 for nonpreferred brands through the mail-order
option. Hourly workers pay $5 at retail outlets, regardless of medication
class, and $2 for mail order.
Even with a flat co-pay on the hourly
side, GM has seen a steady increase in generic substitution and
dispensing, according to Cynthia Kirman, the automaker's director of
pharmacy. She credits a comprehensive educational effort that explains the
value of generics.
The results are
impressive. In 1999, only one of 10 states that accounted for 80 percent
of GM's prescription drug spending reported a generic-substitution rate of
more than 90 percent - a figure that all 10 states met by the end of last
year. Nine of those 10 states were able to achieve a generic-dispensing
rate of 40 percent or greater during that same time frame.
trying to optimize the dollars we're spending by addressing any overuse,
under-use and misuse of prescription drugs," Kirman says. Pharmacists also
have fanned out across Michigan, Indiana and Ohio as part of a pilot
program to encourage health-care professionals to favor generics and
higher-strength doses of medicine where appropriate.
promising effort under way involves a health-and-disease management
program Medco calls Positive Approaches, which provides educational and
behavioral support for people with chronic conditions such as diabetes,
cardiovascular disease, respiratory ailments, digestive problems, multiple
sclerosis, hepatitis C and depression.
"The idea is that if you
help people take control of their disease, it will prevent avoidable,
adverse events such as hospitalization," says Mary-Ann Somers, Medco's
vice president of health management and product management.
result of the program, health-plan members have become 18 percent more
knowledgeable about their disease states (for example, 93 percent of
diabetics now check blood-glucose levels) and nearly 30 percent are more
likely to follow the right procedure for taking their medication. In
addition, 25 percent fewer emergency room visits and up to 44 percent
fewer sick days have been reported.
ROI averages about 3:1 for
Positive Approaches across a broad spectrum of clinical outcomes
essentially because program participation is so strong, with $730 in
savings for each diabetic enrolled in the program and about $600 in
savings per health-plan member suffering from respiratory
There's indeed a special place for patient education and
physician outreach in the pantheon of PBM solutions, with knowledge
powering decision making on both sides of the cost
Innoviant, a private-label PBM spun off from Wausau
Benefits last August, has spent the past four years promoting a percentage
co-pay structure rather than fixed out-of-pocket expense. "Our strategy is
to focus on the lowest net-cost medications, which usually are generics
and lower-priced brands," Campbell says.
Employers also can adopt
step-therapy "edit" programs that require health-plan members to try
preferred drugs ahead of nonpreferred brands - an approach he says is
proving popular in the "COX 2" category for treating pain and inflammation
associated with gastrointestinal bleeding. These programs are designed to
influence clinical behavior and promote more appropriate drug therapy
that, in many cases, may cost less.
With a growing emphasis on
cost-containment, Campbell believes patient education often is relegated
to the background.
In the case of Kwik Trip, he adds,
communications include a bulletin that gives employees enough advance
notice about changes in nonpreferred drug lists and out-of-pocket expenses
to encourage more cost-effective therapies that offer equal therapeutic
value. "Physicians seem more amenable to making changes under this
approach," says Campbell. "They don't want to feel forced into
This article was published in the August 2003 issue of
Human Resource Executive.
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