The Concept of the "Customized" Pharmacy Benefit

One challenge employers face with tiered benefits is that they are often based upon the drug cost and may penalize some members with the most serious needs. For example, consider the situation of a patient with osteoarthritis. For 85 percent of patients, generic NSAIDs will provide adequate and appropriate therapeutic outcomes. Those members can secure such drugs under the average pharmacy benefit plan at a first or second tier copay level—typically $10 to $25 per prescription.

The challenge is with patients who have drug sensitivities, and who may be at risk for upper gastrointestinal (GI) bleed. Such patients are clinically suited for COX II (cyclooxygenase) inhibitors, an enzyme associated with pain and inflammation. If Cox IIs are the highest tier, they could cost patients $100/month; a price those on fixed incomes cannot afford. A far better approach is to have certain categories of drugs available at an affordable tier price through prior authorization, a formal process instituted by some PBMs to ensure appropriate utilization. Another reason to consider prior authorization for COX IIs is that these drugs have the potential to cause heart disease, kidney and liver failure as well as other serious illnesses. In late 2004, a popular COX II was voluntarily removed from the market by its manufacturer due to concerns over increased risk for cardiovascular events, such as heart attack and stroke.

The challenges of balancing costs and access are best addressed by recognizing that the goal of an effective pharmacy benefit program must be to encourage appropriate utilization, not to limit access to necessary prescription medications. By incorporating a customized approach to their pharmacy program, plan sponsors can develop a benefit focused on achieving the best outcomes at the most affordable costs.

An effective customized approach to pharmacy benefits includes:

• Careful analysis of pharmacy and medical claims data;
• A strong therapeutic formulary;
• Programs to promote prior authorization for restricted and non-formulary drugs; and
• Targeted disease interventions.

Claims Analysis.  By analyzing medical and laboratory data, PBMs can help to identify utilization rates, average length of therapy, physician prescribing patterns, and other information that can provide a more complete picture of the organization's overall utilization patterns. Once this information is gathered and analyzed, it will be easier to identify areas of need as well as potential problems. From this information, the PBM can develop a "customized" approach to the pharmacy benefit. This approach also helps to ensure that pharmacy benefits do not operate in a silo. Medical and pharmacy benefits are closely intertwined. To secure optimal clinical and financial results, medical, pharmacy, lab and other available claims data should be integrated, compared and adjusted based on each benefit's impact on the other.

Formularies.  Formularies have become an important benefit design feature for many employers today. The need for some type of approach to manage utilization among plan members today is clear. Consumers (e.g., employees and plan members) are encouraged to request high-cost newer drugs through pharmaceutical marketing tactics. One study showed that more than 39 percent of the time, physicians will prescribe medications patients see advertised. Employers want to offer their employees a competitive drug benefit in an effort to attract and retain valuable employees. However, offering, an "anything you want" strategy may have a negative financial impact on the plan sponsor.

In addition, a key issue with many employers' current formulary program is that they are often driven by a quest to secure the most rebate dollars. There are two fundamental flaws with this approach: (1) as the number of available generics increases, rebates will decrease; and (2) formularies not based on safety and efficacy can put the plan sponsor at risk for higher costs in terms of increased visits to physicians and the ER, as well as higher utilization of other prescription products.

The key to an effective managed care approach to pharmacy benefits is to align employer and employee incentives. Experienced PBMs can use pharmacy data to identify popular drug therapies and with that data, they can negotiate lower purchasing rates and rebates with pharmaceutical manufacturers for the most therapeutically appropriate and popular medications, and ensure those medications are on formulary.

The same claims analysis can also highlight the overall value a drug therapy choice may have for the plan sponsor. For example, a prescription drug may be more costly, but analysis might show that members will be more compliant, have fewer side effects and be more satisfied with the benefit if it is a formulary option.

A strong clinically focused Pharmacy and Therapeutic (P&T) Committee is a key component of an effective formulary program. P&T decisions must be based on recognized clinical literature, research and the latest outcomes data. When intensive review is combined with strong education of physicians and plan members, it can better highlight the optimal clinical value of the formulary. Strong and frequent education of physicians and employees is also important to ensure ongoing support and acceptance of the formulary.

Prior Authorization.  The use of a formulary and P&T committee can also help to build a strong and effective prior authorization program. As noted, prior authorization is the process used by PBMs to approve formulary and nonformulary prescription drug choices where the plan needs to exert control or restrictions on the drug in question. Formulary programs should be developed, and their rationale communicated to physicians and plan members in an effort to ensure that while available, prior authorization is rarely needed. When it is necessary, it must be highly responsive—physicians should be able to speak immediately with pharmacists if needed and their request must be promptly answered—preferably while on the phone with the pharmacist. In the event a request for a drug is denied, specific clinical and outcomes data should be available to support the plan's decision and access to a plan medical director provided to the physician whose request is being denied.

Targeted Disease Interventions

While formularies and prior authorization are the cornerstones of a customized pharmacy benefit, the next step for employers is to take that foundation and use it to develop more targeted disease interventions (TDIs). TDIs use an integration of pharmacy and medical claims data to identify areas within the pharmacy benefit that involve high cost, highly utilized drugs. TDIs provide value to plan sponsors as they can help to improve outcomes and manage costs. In addition, a targeted approach to disease management can help large self-funded plans better meet requirements for Health Plan Employer Data and Information Set (HEDIS^®) standards and Medication Therapy Management Programs as required under the Medicare Modernization Act. For example, the financial impact of migraines on American business is close to $18 billion a year in lost wages and decreased productivity. Yet, less than one-half of the 35 million Americans afflicted with migraines are treated. Recognizing the need to address the impact of migraines, a West Coast PBM developed a Migraine Prophylaxis Management program. The TDI focused on three key areas:

1. Helping physicians recognize patients that needed migraine medications, and providing information on available pharmacologic treatment options for those patients;
2. Educating plan members through their physicians on the causes and symptoms of migraines; and
3. The utilization of first-line over-the-counter therapy, which has been clinically proven to provide effective pain relief for many migraine sufferers.

The plan sponsor reported significant results from the program, including:

• Increasing the targeted number of patients on prophylactic migraine medications from 31 percent to 69 percent;
• Achieving a $16.57 PMPM savings in medical costs (migraine related) among members targeted for the intervention.
• Decreasing migraine-related ER/hospital visits and physician visits by 63 percent and 29 percent respectively in members targeted for the intervention.

Most significantly for the plan sponsor, while appropriate utilization of medications increased, overall medical costs (migraine related) decreased from $42 to $25 PMPM. Another high-cost, high-impact drug utilization category for employers is antidepressants. The financial cost of depression to society in missed days at work and school, medical expenses and premature death are more than $43 billion annually. Close to 20 million people each year develop depression, yet it remains one of the most under-diagnosed and treated diseases in the nation. A depression TDI for a Midwest health plan helped to increase medication compliance and persistence by 8 percent and 14 percent respectively for the acute phase of therapy, and by 12 percent and 16 percent, respectively, for the continuation phase of therapy. The health plan viewed this as a highly successful and worthwhile program. In addition, this TDI also resulted in improvement of the health plan's HEDIS scores.

Fundamental Concepts | Reward Management

Fundamental Concepts

The following fundamental concepts influence the aims of reward management, reward strategy and how people are valued.

The Resource-Based View

This is the view that it is the range of resources in an organization, including its human resources, that produces its unique character and creates competitive advantage. HRM delivers added value and helps to achieve sustainable competitive advantage through the strategic development of the organization's rare, hard to imitate and hard to substitute human resources. The situation in which people are employed with competitively valuable knowledge and skills, as one that confers ‘human capital advantage’.

The role of reward management is to contribute to the acquisition and retention of such people.

Human Capital Management

The concept of human capital is often associated with the resource-based view. ‘it is human capital that is the differentiator for organizations and the actual basis for competitive advantage’. Human capital management (HCM) is often described as being about measurement in the sense of obtaining, analysing and reporting on data relating to employees that inform HRM decisions. But it is sometimes defined more broadly without the emphasis on measurement. Chatzkel states that ‘Human capital management is an integrated effort to manage and develop human capabilities to achieve significantly higher levels of performance.’ HCM as ‘The total development of human potential expressed as organizational value’. He believes that ‘HCM is about creating value through people’ and this is a prime purpose of reward management.

Human Process Advantage

A distinction should be made between ‘human process advantage’ and ‘human capital advantage’. The former results from the establishment of ‘difficult to imitate, highly evolved processes within the firm’, while the latter follows from employing people with competitively valuable knowledge and skills. This suggests that one of the roles of reward management is to differentiate from rather than imitate the ‘best practices’ of other firms.

Motivation Theory

Motivation is the force that energizes, directs and sustains behaviour. Motivation theory explains how motivation works and the factors that determine its strength. It deals with how money and other types of rewards affect the motivation to work and levels of performance, what creates job satisfaction, and the link between job satisfaction and performance. It therefore influences decisions on how people should be valued, the choice and design of financial rewards and the use of non-financial rewards.

A distinction is made between extrinsic and intrinsic motivation. Extrinsic motivation occurs when things are done to or for people to motivate them. These include rewards, such as incentives, increased pay, praise, or promotion, and punishments, such as disciplinary action, withholding pay, or criticism. Intrinsic motivation is provided by the work itself.

There are four main categories of motivation theories as described below.

Instrumentality Theory

‘Instrumentality’ is the belief that if we do one thing it will lead to another. In its crudest form, instrumentality theory states that people only work for money. It assumes that people will be motivated to work if rewards and penalties are tied directly to their performance; thus the awards are contingent upon effective performance. Instrumentality theory has its roots in the scientific management methods ‘It is impossible, through any long period of time, to get workmen to work much harder than the average men around them unless they are assured a large and permanent increase in their pay.’

Content (Needs) Theory

This theory focuses on the content of motivation in the shape of needs. It provides guidance on what needs should be satisfied by the reward system if motivation is to occur. The basis of content theory is the belief that an unsatisfied need creates tension and a state of disequilibrium. To restore the balance a goal is identified that will satisfy the need, and a behaviour pathway is selected that will lead to the achievement of the goal and the satisfaction of the need. All behaviour is therefore motivated by unsatisfied needs. 

The main needs identified by these and other writers are those for achievement, recognition, responsibility, autonomy and the opportunity to develop and use skills. These have to be taken into account in deciding how people should be rewarded and also in achieving motivation through job design. But a note of caution is necessary. Content theories propose that to a large extent all people strive for the same fundamental goals. In fact, people are more varied and complex than this. Theories stating that there are strong similarities between people lead to the conclusion that there is ‘one best way’ to motivate and reward them, which is simply not true. Process theory as described below is based on more realistic, albeit more complex ideas.

Process Theory

In process theory, the focus is on the psychological processes or forces that affect motivation, as well as on basic needs. The three main theories are:

• Expectancy theory which states that motivation will be high when people know what they have to do to get a reward, expect that they will be able to get the reward and expect that the reward will be worthwhile.
• Goal theory which states that motivation and performance are higher when individuals are set specific goals, when goals are difficult but accepted, and when there is feedback on performance.
• Equity theory which states that people will be better motivated if they are treated equitably, and demotivated if they are treated inequitably. There are two forms of equity: distributive equity or distributive justice, which is concerned with the fairness with which people feel they are rewarded in accordance with their contribution and in comparison with others; and procedural equity or procedural justice, which is concerned with the perceptions employees have about the fairness with which company procedures in such areas as performance management, promotion and discipline are being operated.

The main distinction between content and process theory is that the former provides guidance on what needs should be satisfied by a reward system while the latter indicates how they should be satisfied, especially in pay schemes that are contingent on performance, contribution or skill. In their case, process theory is the most important.

Cognitive Evaluation Theory

Cognitive evaluation theory (CET) argues that placing strong emphasis on monetary rewards decreases people's interest in the work itself, thus dampening a powerful alternative source of motivation. In other words, extrinsic rewards erode intrinsic interest.

Principal Agent Theory

Principal agent theory, sometimes known as agency theory, is based on the supposition that the separation between the owners (the principals) and the agents (the managers) means that the principals may not have complete control over their agents. The latter may therefore act in ways which conflict with what the principals want. So it is desirable to provide for ‘incentive alignment’, which means paying for measurable results deemed to be in the best interests of the owners.

The Psychological Contract

A psychological contract is a set of unwritten expectations that exist between individual employees and their employers. It is concerned with: ‘The perceptions of both parties to the employment relationship of the reciprocal promises and obligations implied in that relationship’. A psychological contract is a system of beliefs that encompasses the actions employees think are expected of them and what response they expect in return from their employer, and, reciprocally, the actions employers believe are expected of them and what response they expect in return from their employees.

The concept of the psychological contract highlights the fact that employee/employer expectations take the form of unarticulated assumptions. Disappointments on the part of management as well as employees may therefore be inevitable. These disappointments can, however, be alleviated if managements appreciate that one of their key roles is to manage expectations, which means clarifying what they believe employees should achieve, the competencies they should possess and the values they should uphold. All this can be done through reward and performance management.