Curing the Cost Affliction

Human Resource Executive Magazine
August 18, 2003
By Bruce Shutan

About two 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.

Despite a 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.

In 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 pharmacy-benefits manager.

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 foundation."

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 $40.

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 outlets. 

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 expenses.

"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 PBMs.

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 adds.

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.

Serving 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 costs."

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 platform.

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.

Preliminary data 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 provided.

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 utilization.

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.

Since 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.

Working Solutions
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.

"We're 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.

Another 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.

As a 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 disease.

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 equation.

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 anything."

This article was published in the August 2003 issue of Human Resource Executive.

All materials are copyright of, 2003. All rights reserved.