PHARMACY BENEFIT DESIGN CONSIDERATIONS Is your pharmacy benefit designed for your employees or the big drug companies? The pharmacy (or prescription) benefit is one of the most sought after benefits by employees and prospective employees, often second only to the medical benefit. It is also a benefit considered by many employers to be a budget buster. And, indeed, if not properly designed, the pharmacy benefit can have a significant negative impact on an employer s bottom line. Often the pharmacy benefits provided by large companies are very comprehensive and very expensive to employers. However, the pharmacy benefit does not need to be expensive to provide high levels of coverage for employees. The high cost of the prescription benefit is due in a large part to the highly advertised brand name drugs that offer little, if any, therapeutic benefit over other, less expensive products in the same therapeutic category. This document will briefly describe the pharmacy benefit and its components. It will explain how these components interact and, most importantly, how they can be structured to provide a comprehensive benefit to employees while limiting the financial burden on an employer. The paper will further discuss the high cost of brand name drugs that are heavily advertised to patients and physicians. The pharmacy benefit can be part of the health plan offered by an employer (insured) or it can be freestanding (self insured) with the employer paying directly for each prescription claim processed for its employees. The concepts presented in this paper apply equally to both types of pharmacy benefit funding options. However, employers are able to exert a more significant influence on the pharmacy benefit design that is self insured; many insurers who offer a pharmacy benefit as part of their medical package often do not permit the level of customization available to self-insured employers. This document focuses on pharmacy benefit designs for employers. It should be noted that the concepts discussed apply equally to all pharmacy benefits regardless of the source of funding, processing or management. Several terms are used frequently throughout this paper. For clarity, the working definition of several such terms is provided below. Formulary vs. Preferred List The terms formulary and preferred list tend to be used interchangeably and are often confused.
Although precise definitions are not possible due to the variety of settings where formularies are used and where they have different implications, the following basic working definitions will be used in this paper. For purposes of this paper, we will typically refer to a preferred list. Formulary: A list of drugs for which coverage is provided. Products not on the formulary are typically not covered by the benefit design. This term is generally reserved for pharmacy benefit designs which have a closed formulary and coverage is very limited. Preferred List: A list of drugs that are considered to be either therapeutically superior to other products in the same therapeutic category or are very cost effective in their therapeutic category. With respect to pharmacy benefits, drugs in this category typically require the member to pay the middle copayment in a three tier pharmacy benefit. The preferred list may also contain drugs that are considered to be therapeutically important to treat certain diseases where a large number of treatment options need to be available; these drugs may not be therapeutically superior or cost effective but are considered vital to the treatment of certain diseases. Typically the disease categories which include such drugs are: asthma, cancer, diabetes, HIV, and hypertension. Increased generic utilization provides the largest savings to an employer Generic Equivalents or generic Drug products that are chemically identical to their brand name counterparts. Generic drugs can be substituted (in most states and under most conditions) for their brand name counterparts without contacting the prescriber. Many state laws mandate that pharmacists must dispense a generic product when one is available unless the prescriber or patient has specifically requested that the brand name product be dispensed. The purity and content of generics is controlled by the U.S. Food and Drug Administration (FDA). Only generics that have an A rating by the FDA require mandatory substitution. Mandatory Generic Enforcement A process requiring members to pay the difference in cost between a generic product and the brand name product when a member receives a brand name version of a generically available drug. Therapeutic Category and Therapeutic Equivalents - All drugs fall into one or more therapeutic categories which define the primary indication or effect of the drug. Drugs in the same therapeutic category can be expected to exert similar (not necessarily identical) clinical responses. Therapeutic categories can be very broadly or narrowly defined. A familiar broadly defined therapeutic category is antibiotics. This broad category is more narrowly defined into many other sub-categories such as penicillins, cephalosporins, tetracyclines, etc. Products in the same therapeutic category are considered to be therapeutic equivalents. Therapeutically equivalent products are not chemically equivalent and cannot be substituted without the express consent of the prescriber. Tiered Copayments A pharmacy benefit design option whereby the member s copayment varies with the type of drug received. Typically a low ($5-$10) copayment is required for generic drugs; a medium ($20-$30) copayment for preferred brand drugs; and the highest ($50 or more) copayment for non-preferred brand drugs. 2
Pharmacy Benefit Managers (PBMs) Pharmacy Benefit Management Companies (PBMs) administer pharmacy (prescription) benefit programs for the provision of pharmaceuticals to their client s members. Typically eligible members are able to obtain prescriptions from a geographically dispersed network of participating retail pharmacies. PBMs work with their clients to determine which products will be covered for eligible members. Coverage can include any prescription or over-the-counter drug product and complimentary supplies that the client wants to offer to their eligible members. Similarly, the client and the PBM will also work together to determine which products will not be covered or will only be covered under certain defined circumstances. The combination of covered, excluded and conditionally covered products, copayments to be paid by eligible members, upfront deductibles and other variables is called the pharmacy benefit design. The actual pharmacy benefit design can be based on many factors including negotiated agreements with collective bargaining groups or simple economic factors that dictate how much an employer or health plan is willing to spend on pharmaceuticals. PBMs establish and maintain contractual relationships with retail pharmacies that define how the pharmacies will be reimbursed by the PBMs for prescriptions dispensed to their client s members. Similarly PBMs maintain contractual relationships with their clients that define the pharmacy benefit to be provided to the client s members and how the PBMs will be compensated by their clients for prescriptions dispensed to eligible members through the PBMs network of affiliated pharmacies. In addition to maintaining contractual relationships with pharmacies, PBMs also maintain contractual relationships with drug manufacturers. The purpose of the PBMs contracts with pharmaceutical manufactures is to promote the manufacturers drugs to members and physicians through a Preferred List or Formulary. In return for this promotion, PBMs receive a Rebate. The concept of rebates will be covered in greater detail later. The Pharmacy Benefit Design The pharmacy benefit design details which drugs and supplies are covered, how much of any covered product can be received at any one time, how often the covered products can be received and how much members will pay for each prescription received. The components of the pharmacy benefit design can be broadly categorized into four areas; these components will tend to overlap and will interact to impact cost and accessibility. Component 1 - Defines the basic aspects of any pharmacy benefit design The products that will be covered The products that will not be covered The products that need prior approval (conditional coverage) The copayments that members will pay when they receive a prescription; also may include up-front deductibles and maximum benefits Mail Service benefits, if any Limitations on the quantity of medication members can receive at one time and at what frequency Component 2 - Encourages members to utilize low cost alternatives Generics whenever possible Preferred products Over the Counter Products 3
The use of a tiered copayment structure and mandatory generic enforcement influences members to request generic and preferred medications of their health care professionals. It further impacts physicians prescribing decisions since physicians are more likely to prescribe generic drugs or preferred products when there is a direct financial benefit to their patients. Component 3 - Does not provide coverage for those products that do not improve or maintain the health of the members or have a tendency to be abused or overused Products used solely for cosmetic purposes Appetite suppressants Smoking cessation products This portion of the pharmacy benefit design is accomplished by clearly defining which drugs and/or therapeutic categories will not be covered; if members receive products in these categories they will be required to pay the full Usual and Customary price charged by the pharmacy for these products. Component 4 - Shifts a higher percentage of the cost of expensive alternatives to members When members receive a more costly alternative to a preferred product they are required to pay the higher (Tier 3) copayment (See Table 1 for a sample of cost differences) When members receive a branded product which has an available generic equivalent, they are required to pay the additional costs associated with the branded product (See Table 2 for a sample of cost differences) Cost shifting is accomplished primarily through the tiered (typically three) copayment structure. Another option is to not provide coverage for non-preferred products; this would be a modified closed formulary. Cost shifting is further accomplished through mandatory generic enforcement which should be incorporated into any pharmacy benefit design. Additional cost shifting strategies can be employed to help limit an employer s financial exposure when providing a pharmacy benefit to it employees by: Requiring an up-front deductible to be met before any benefits are provided. Deductibles can be set by member and/or family. Imposing a periodic (typically annual) benefit maximum which defines the maximum amount that will be paid by the employer for the member s prescriptions. Table 1 Therapeutic Alternatives Drug Cost* Class Alternative Cost* Nexium $152 PPI omeprazole $ 36 Lipitor $111 Statin simvastatin $ 49 Celebrex $150 NSAID naproxen $ 11 *Cost is for a 30 days supply of equivalent doses Table 2 Generic Equivalent Drugs Drug Cost* Class Alternative Cost* Mevacor $121 Statin lovastatin $ 28 Allegra $149 NSAH fexofenadine $ 51 Prozac $143 SSRI fluoxetine $ 8 * Cost is for a 30 days supply of equivalent doses The data in the tables is for illustrative purposes only and is not intended to represent the cost to any particular employer or payer. Pharmaceutical Rebates Pharmaceutical manufacturers offer rebates to PBMs in order to encourage them to promote their products to members and physicians. The amount of rebate paid by pharmaceutical manufacturers to PBMs is dependent on some or all of the following conditions: 4
Product achieves a certain market share of dispensed prescriptions in the pharmaceutical manufacturer defined therapeutic category; this category may not be identical to the real therapeutic category of the rebated product Product has preferred status on PBMs preferred list; this typically requires that the product enjoys a copayment advantage of $15-$25 over the non-preferred or non-formulary products in the same therapeutic category Product is one of a limited number of other products on the formulary or preferred list in the same therapeutic category Product is not disadvantaged against other products in the same therapeutic category If any of the prescribed conditions are not met, rebates may not be paid. Even if all conditions are met and the required market shares are not achieved, rebates may not be paid. There are two significant consequences of rebates to employers. The first consequence is that the rebate received by the PBM may not be shared with the employer. It is the employer that is the actual payer of the drug...not the PBM. The second consequence is that the employer has paid more for preferred or formulary drugs since in order to qualify for rebates the copayment must be at least $15-$25 lower then for non-preferred or non-formulary drugs. Since rebates are generally offered only on expensive heavily advertised drugs, by preferring such drugs the PBM is promoting expensive medications which often have no or very little therapeutic advantage over other products in the same therapeutic category. Almost without exception the most heavily advertised and rebated drugs have therapeutic alternatives which cost up to 90% less then the rebated products. Drugs that have a unique therapeutic profile are typically not rebated. The employer faces a double whammy on rebates: 1) rebates may be kept by the PBM and 2) rebates are offered only on expensive drugs. Even if the PBM shares a portion of the rebates it receives, the amount of rebate may not offset the lower copayment paid by the member (and thus higher amount paid by the employer) for a prescription. Additionally, if the employer s market share of the rebated product is not sufficient, no rebate is paid, yet the employer has subsidized the higher cost of the rebated product. And further, in order to achieve the required market share in the therapeutic category defined by the drug manufacturer, the PBM may choose to not encourage the use of generic alternatives which are always the most cost effective products in any therapeutic category. Drug manufacturers typically require the inclusion of generic products in market share calculations; the higher the use of generics, the lower the market shares of the rebated products and the lower the rebate that is actually paid [to the PBM]. Rebate Optimization vs. Rebate Maximization As stated above, in exchange for preferred listings, pharmaceutical manufacturers offer rebates on many of their heavily advertised products that have significant market competition from other branded products or generics in the same therapeutic category. Due to the economic incentives related to preferring heavily marketed, expensive products, they appear on many preferred lists and are the basis of various tactics to increase their market share. Typically higher market shares command higher rebates. In many cases all or 5
at least a portion of the rebates received from pharmaceutical manufacturers are retained by the PBM. Rebates thus create a conflict of interest between the PBM and the employer. The higher the rebates received, the higher the PBMs income. This, however, is at the expense of the drug costs paid by the employer on behalf of its members. When preferred lists and rebates are designed to generate the highest rebates possible, it is called rebate maximization since it maximizes the rebates obtained from pharmaceutical manufacturers for prescriptions dispensed under the employer s pharmacy benefit. It typically encourages the use of the most expensive drugs in their respective therapeutic categories. Although large rebates are generated through this process, it is typically at the expense of the employer who is paying for a larger share of more expensive drugs. Rarely is the rebate received by the employer sufficient to offset the higher cost of these drugs and the lower copayment paid by the member. Preferred lists that are created to encourage the use of cost-effective and therapeutically effective products provide the best balance of providing a valuable benefit to members while also controlling the employers costs for providing a pharmacy benefit. Preferred lists created using this philosophy will also generate rebates. Rebates are pursued on only those products which are added to the list based on therapeutics and cost. This process is called rebate optimization. Products are added to the preferred list based on their true costs (not net of rebates which may never be received) and therapeutic benefits. Therefore even if no rebates are received, the most cost-effective product has been dispensed to members and the employer has not paid for an unnecessarily expensive drug. The Right Pharmacy Benefit Design As with most decisions we make in our complex world, the decision of the right pharmacy benefit design involves many factors. There is no one size fits all pharmacy benefit plan. The most important factors when considering a pharmacy benefit are summarized below. Cost This is probably the single most important factor in deciding on a pharmacy benefit design or even determining if one will be offered. Many factors influencing cost have been described earlier. These factors should be considered regardless of how little (or how much) funding can be dedicated to the pharmacy benefit. The number one driver of cost is the list of products that will be covered. A pharmacy benefit that only provides coverage for generic drugs will likely be the most cost effective while a benefit that provides coverage for all prescription drugs will be the most expensive. Very few benefit plans ever provide coverage for all prescription drugs. The second most significant driver of cost to the employer is the amount of copayment that the member needs to pay for each prescription received. Additional factors related to copayment are up-front deductibles and benefit maximums. Level of Benefit The level of benefit that an employer provides to its employees may be dictated by outside factors such as collective bargaining agreements or benefits offered by similar companies in the employers market. 6
Alternately, the level of benefit provided may be totally within the control of the employer and may be determined by certain fiscal drivers. Due to the many facets of the pharmacy benefit, consultation with an experienced and knowledgeable pharmacy benefit manager or consultant is important to determine, implement and manage the best pharmacy benefit for the employer s situation. Not all pharmacy benefit managers or consultants are knowledgeable about pharmacy benefit design options and how they interact. Additionally, they may not have sufficient clinical background or expertise to provide advice regarding which therapeutic categories to include or exclude. While excluding all diabetic products from the pharmacy benefit may be cost effective for the pharmacy benefit, it would likely increase hospital and emergency room costs and increase worker absenteeism. Similarly, including products to treat acne or promote hair growth will help improve employee appearance but will not have any positive impact on hospital or emergency room costs and would be very unlikely to improve productivity. Pharmacy benefit managers or consultants who are focused on generating rebates for their clients (and themselves) may not be providing objective advice about what products should be covered in the pharmacy benefit or what drugs should be on the preferred list. Since generic products do not generate rebates, increasing generic utilization may not be the objective of such consultants or pharmacy benefits managers even though increased generic utilization provides the largest savings to an employer. SUMMARY In summary, a properly designed pharmacy benefit can help assure that members are able to obtain those drugs necessary for them to maintain and/or achieve the best possible health state while also focusing on providing cost-effective therapy and avoiding unnecessary and excessive costs to the employer. The benefit design can further help reduce inappropriate utilization. The proper design of copayments encourages members to use cost effective drugs and encourages them to discuss cost effective alternatives with their health care professionals. When, due to member s personal choices or physicians unwillingness to use cost-effective products, a higher cost drug is dispensed, a higher portion of the drug s cost is passed on to the member. Pharmacy Benefit < > High Cost Your pharmacy benefit does not have to equal high costs You can control the cost of the benefit you provide About the Author: Klaus A. Hieber, R. Ph. is the president of PBM Plus, Inc. a pharmacy benefit management company. Mr. Hieber graduated from the University of Michigan with a B.S. Pharmacy degree. Since his graduation he has attained extensive experience as a retail pharmacist, pharmacy director of a health plan, executive director of a large national pharmacy benefit management company and vice president of another national pharmacy benefit management company where he was in charge of negotiating rebates with pharmaceutical manufacturers. Mr. Hieber has written several papers on the many components of the pharmacy benefit including a paper published in the peer reviewed Journal of Managed Care Pharmacy. Mr. Hieber welcomes inquiries and can be reached at khieber@pbmplus.com. Copyright 2008, all rights reserved by PBM Plus 7