The Growth of Pharmacy Benefit Plan Alternatives

While there are many "alternative" pharmacy benefit plans discussed in the marketplace today, some of the newest ideas under discussion include:

• Reference based pricing
• Reverse copays
• Coinsurance
• Consumer directed health care (aka, Consumer-driven health care)

Reference Based Pricing

Reference based pricing (RBP) is a reimbursement mechanism in which payers set a ceiling price for medications that exhibit similar therapeutic benefits. While utilization of RBP in the United States is low, it has become one of the more popular pricing mechanisms for government and private-sponsored plans in Europe and over the past few years has gained considerable attention in the United States.

Under a reference based pricing program, managed care organizations (MCOs) and PBMs do not directly regulate drug pricing; rather, they attempt to constrain costs by setting a reimbursement threshold for individual drug classes.

Essentially, the payer determines a "reference price" or maximum reimbursement amount it will pay for drugs within specific therapeutic classes. The reference price is derived by analyzing cost and outcomes data and determining which drug in a class offers a reasonable clinical value among its peers at the lowest possible cost. The drug selected should have the ability to provide expected clinical outcomes to the greatest number of plan beneficiaries. The cost negotiated by the PBM becomes the reference price.

Typically, RBP is used for formulary or preferred medications. There is one therapeutic agent per category, which is priced based on RBP methodology. While employees or plan members have a choice of medications, if they select a medication that is priced higher than the reference drug, they are responsible for the price difference.

Advantages/Disadvantages.  In general, RBP programs have shown the most success in countries that offer a national health care system, under which price setting, drug classification, and other policy decisions are highly centralized and administrative costs are lower.

However, U.S.-based proponents argue that despite differences in governance, RBP is still more effective than current cost-sharing methods at: (1) helping patients understand the true cost of their prescription drugs and therefore, becoming better health care consumers, and (2) creating competition among manufacturers. RBP proponents argue that this structure encourages pharmaceutical manufacturers to offer lower prices to PBMs and health plans in an effort to secure a position on formularies as the reference drug in a particular therapeutic or drug class.

Opponents argue that RBP creates an economic barrier to medically necessary drugs for lower income beneficiaries—the greater the price difference between the reference drug and the most expensive drugs in the class, the more likely that a beneficiary will decide to forgo the prescribed treatment or settle for a less costly treatment that may be clinically inappropriate for their condition. If the reference drug is a lower-priced generic, the difference between it and a new branded drug can be substantial, placing a potentially valuable drug therapy out of reach for many plan members.

Another issue influencing the potential viability of RBP is that unlike Europe, where reference based pricing is more prevalent, the U.S. has a free market system—where drug manufacturers are free to negotiate prices with various purchasers. Other challenges include the analysis of drug categories, selection of the right drug to be used as the therapeutic reference, and the determination of which agent provides the net lowest cost option. For example, payers may not benefit from RBP in all therapeutic areas. RBP is most appropriate for classes where there are significant differences in cost and outcomes for various branded and generic alternatives. The reference drug must also be the most appropriate choice available to treat the highest percentage of patients possible.

Within the current free market health system, RBP can present major pricing and administrative challenges that can dilute the cost savings generated. Determining the RBP involves careful analysis of cost, negotiation with manufacturers and several other steps. If that effort is spent on drugs that only benefit a small percentage of patients, particularly if those patients are also subject to prior authorization, or other administrative processes, the resulting cost-savings could be offset. However, despite concerns, some plan sponsors have opted to explore RBP. For employers who are considering or using RBP, it is important to note that patient education is critical to the potential success of the program. The plan sponsor's PBM must work closely with the employer to ensure that members understand the details of their pharmacy benefit and cost implications of RBP. The PBM must also work to help ensure members make health care decisions based not only on the cost of the drug, but on outcomes. In addition, the program must be carefully implemented by a PBM with expertise in negotiating pricing, understanding pricing trends, and working with physicians to provide necessary education.

While RBP could be viable for very large payers, and theoretically can result in significant cost-savings for the payer, there are many uncertainties. RBP should not be adopted without careful analysis of advantages and potential problems.

Reverse Copay

Under reverse copay, the payer/plan sponsor has a fixed allocation for pharmacy benefits for employees. Under a traditional copay benefit structure, the plan member would pay a set amount—typically ranging from $5 to $50—for each prescription. Under reverse copay, the plan sponsor would pay the copay—an amount established by the benefit design—and the member would pay the remaining amount. Some employers favor reverse copays because they are insulated from drug price inflation as their unit costs are fixed.

Reverse copay works particularly well for some high-cost categories of drugs. This strategy puts the onus on plan members to understand their pharmacy benefit and to work with their physician to carefully choose which drug can provide the greatest value based on their individual need. Furthermore, unlike some benefit plans today, reverse copay is relatively simple for the majority of plan members to understand. Employers with strong benefit communication programs and those who work with experienced PBMs may find some value with a reverse copay approach. However, as with other benefit design options, it requires monitoring to ensure the program does not penalize the sickest plan members as well as those with a limited income.

Coinsurance

Twenty to 30 years ago, most major medical health plans used coinsurance as opposed to copays. However, until recently this benefit design option had fallen out of favor because copays are simpler to implement, more predictable in price, and often more affordable for plan members. Recently, some health plans have begun to revisit the tactic of replacing or augmenting drug benefit copayments with coinsurance.

With coinsurance, employees/plan members pay a percentage of the cost of each prescription dispensed, often after meeting a deductible. When structured properly, coinsurance can help the plan sponsor to save their benefit dollars. Some plans, particularly those with traditional benefit designs, have realized savings of up to 20 percent upon implementation of prescription coinsurance.

There are many ways to structure coinsurance programs. One health plan, which offered $2 copays for generic drugs and $9 for brand-name drugs, switched to a coinsurance plan wherein employees paid 20 percent of a drug's cost, with a $50 out-of-pocket maximum for each prescription and an annual out-of-pocket maximum of $1,000 for single coverage and $1,500 for a family. While this structure shifts the responsibility of cost-saving to the plan member, it does protect against more catastrophic costs.

What Proponents Say About Coinsurance.  Coinsurance can be used for a variety of drug therapy categories. For example, a plan may institute coinsurance for lifestyle drugs only. This allows limited coverage for popular drugs, such as Viagra and Propecia, while ensuring that the plan member has a greater financial stake in the decision to use a lifestyle drug.

Plan sponsors like the fact that coinsurance is readily understood by members: "If a drug costs $100 and my coinsurance is 20 percent, I pay $20.00 and my health plan pays $80.00." Coinsurance also helps the plan sponsor adjust for the cost of inflation; if drug prices increase by 10 percent, coinsurance passes a proportional amount of the increase to the beneficiary.

As with many of the alternative plans under discussion, coinsurance also allows the employee to pay the commensurate share of the cost of drugs, ensuring they become more cognizant of the actual cost of the drug. In fact, many employers believe that one of the most important features of a coinsurance plan is that it helps plan members to better recognize and appreciate the true cost of their pharmacy benefit.

What Critics Say About Coinsurance.  One of the primary concerns many clinicians and consumer advocates have with coinsurance is that plan members never know what they are going to pay for a prescription. Copays are predictable ($10, 20, etc. per prescription). However, there are many variables affecting the price of prescription drugs under a coinsurance program, such as different prices by network pharmacies, time of year of purchase, price increases from the manufacturer, supply chain shortages, distribution, and so on. These constant changes in pricing can be especially challenging for members on a fixed income. In addition, members used to paying fixed copays may perceive coinsurance amounts as an indication that the medications are "not covered" thus creating confusion or resulting in under-utilization of the coinsured drugs.

Recognizing the impact of coinsurance and copays on members is perhaps one of the most important issues for plan sponsors considering this option. A recent study by the Rand Corporation noted that utilization of drugs decreases when out-of-pocket costs increase past a certain threshold.

Some analysts are concerned that if costly drugs have a high coin-surance rate, it may drive members to use less effective drugs to save money or to forgo treatment altogether, either of which could lead to higher overall health plan costs. Another key issue to consider is that many PBMs have found low satisfaction rates among members with coin-surance. While this may be due to uncertainty over cost, and may be attributed to poor benefit education, it is a factor that plan sponsors will want to consider.

Critical Coinsurance Issues to Consider.  While there are concerns associated with this option, some plan sponsors may still want to proceed with exploring a coinsurance approach for their benefit. If so, there are some important steps that should be taken with the PBM or a consultant:

• Examine what the plan sponsor and plan members are currently paying for copays.
• Conduct a full analysis of historical claims. For example, if a $100 prescription has a $25 copay, switching to a 20 percent coinsurance may not provide the savings or value for either the plan sponsor or plan members' needs.
• Analyze current claims data to better identify which therapeutic categories have the highest utilization, for what condition and by which plan members. A plan sponsor may want to forgo coin-surance if the price of the identified categories will increase costs significantly for chronic drugs.
• Factor in rebates. A straight coinsurance program may reduce rebate income if the coinsurance is calculated on the net price of the drug (less estimated rebates). Plan sponsors that depend on rebates to offset PBM costs would have to give notice to their members that rebates would not be figured into the net price used for calculation of the coinsurance amount, thus potentially increasing out-of-pocket costs for members.
• Talk to legal counsel if the plan decides to move to coinsurance. If the actual coinsurance amount is higher than what the price would be if discounts were added in, the plan could be subjecting itself to legal action. This occurs when there is a large rebate on a drug, reducing cost to the plan by an amount greater than the payer's coinsurance obligation. In effect, the health plan would make money at the expense of reducing costs for the member. While rare, this instance would result in perceived inequity and might precipitate a legal challenge.

One of the more important aspects to analyze when considering coinsurance is its potential impact on mail service. Mail service programs provide cost efficiencies for members as they can receive a 90-day drug supply for a 30-day copay. However, with coinsurance, there is no financial incentive to use the mail service and members who rely on mail service for drugs to treat chronic illnesses, or who prefer mail service for its convenience, will be penalized if a plan sponsor moves to a coinsurance design if the design extended to the use of mail service prescription drugs.

Mail service enables PBMs to offer pharmacy programs to employers for a lower cost as they can negotiate better rates with manufacturers and pass those savings along to clients. Additional issues involving mail service and coinsurance are that members may not have a clear idea of what their coinsurance is when they mail in a prescription every three months. This can reduce the efficiencies of mail service since a fixed copay is easily understood by members and there are few expenses, such as those associated with complicated member billings and bad debt (more likely to happen with coinsurance). These issues can be addressed, however, through education, mailings to members, online websites and a knowledgeable and strong customer service department within the PBM.

It is critical that payers work with a PBM experienced in developing pricing strategies to ensure that coinsurance amounts meet the goals of the employer without negatively influencing the plan member in terms of financial burden and potential negative outcomes.

Consumer Directed Health Care

While the pharmacy benefit designs discussed have generated considerable attention over the past few years, consumer directed healthcare (CDH) is currently creating the most excitement and debate within the pharmacy benefits marketplace. CDH has been a benefit option, albeit under a different name, since the 1980s in the form of high deductible plans. CDH plans include flexible spending accounts (FSAs), medical savings accounts (MSAs), health reimbursement accounts (HRAs), and most recently, health savings accounts (HSAs). The common thread among this profusion of acronyms is consumer control over dollars deposited in a tax-favored health care spending account.

Until very recently, the most prevalent form of CDH has been FSAs. Also known as IRS Section 125 Cafeteria plans, FSAs have allowed individuals to redirect a portion of their salary—generally between $2,000 to $5,000—into a tax-favored account. Recent CDH-friendly legislation has given rise to newer forms of CDH plans, namely, HRAs and HSAs. HRAs are emerging as the most popular type of CDH plan among employers and employees. HRAs differ from FSAs in that the employer (not the employee) funds the account and any unused funds may be rolled over from year to year (the use-it-or-lose-it rule does not apply). The employer funds the account as claims are submitted, and the funds are not considered a taxable benefit. 

Many employers are also beginning to explore HSAs–part of the landmark Medicare drug bill passed in December of 2003. While the majority of consumers assume this legislation dealt with Medicare only, in reality, it also included several provisions for employer-sponsored health care benefits—HSAs among them. HSAs combine inexpensive, but high-deductible health insurance plans, with a tax-advantaged savings account. The concept behind HSAs is to encourage people to be more prudent in their management of medical expenses.

CDH and Prescription Benefits.  Currently, even among employers offering a CDH benefit, most prescription costs are covered through a traditional, pharmacy benefit. However, fueled by employer demand for CDH, insurance plans and pharmacy benefit providers are looking to expand their CDH offerings by integrating a pharmacy component.

When considering a CDH plan, there are some important issues to explore. The ability to acquire outcomes and utilization data under a CDH plan has been virtually nonexistent to date, meaning employers have little idea as to where employees are spending their prescription benefit dollars. In addition, most CDH plans provide few opportunities to target programs to meet specific needs of employees.

However, one of the most important issues for plan sponsors to consider is whether the CDH plan has the ability to promote quality care and provide fair and affordable coverage for all plan members. According to a 2004 report entitled, "Rhetoric vs. Reality: Employer Views on Consumer-Driven Health Care," issued by the Centers for Studying Health Systems Change, a nonpartisan research group based in Washington, D.C., CDH plans could negatively impact outcomes by limiting the ability of patients with chronic conditions to secure preventive care. In addition, some health care advocates have significant concerns over selection issues. It is believed that healthier members will choose the CDH plan, leaving the more costly, sicker members in the insured plan.A survey conducted with employers by The Centers for Studying Health System Change reported that the majority of employees—more than 70 percent—had health care costs of less than $1,000 a year. Therefore, employers were concerned that by providing a $1,000 spending account, workers would spend more, thus increasing their total costs. Another recent employer survey reported that nearly one-third of the workforce secured health care coverage through a spouse; therefore offering coverage to those employees could increase costs without adding real value to the plan member and with the potential to waste the dollars of the plan sponsor.

Implementation of CDH plans can also be more expensive for the plan sponsor. Depending on the plan sponsor's existing capabilities, a significant investment (capital or outsourced) may be required in terms of increased customer services, systems integration, investment in interactive voice response (IVR) systems, online technology, as well as educational materials. While the vendor may offer these services, the plan sponsor will have to pay for them one way or another.

CDH plans must also provide comprehensive, rapid, and easy-to-access account information for employees and plan members. It is important for members to know what they have spent and how much remains for pharmacy coverage, inclusive of fees and discounts, so they do not spend in excess of the funds they have available.

In addition, it must be recognized that some plan members may not be ready to assume responsibility for health care purchase decisions. Without proper guidance, education, communication, and support, some might be tempted to discontinue their medications or make unwise decisions. This could lead to poorer outcomes requiring more expensive medical care, such as surgery or hospitalization.

Unfortunately, there is minimal data to help consultants and plan sponsors understand the implications of CDH. Preliminary results from a University of Minnesota study comparing the health care utilization and costs of CDH enrollees to traditional plan enrollees indicate that patient expenses, including pharmaceutical costs, were similar for each population. However, CDH enrollees showed an increase in demand for services. In fact, 65 percent of CDH enrollees were more likely to call customer service compared with 40 percent in the traditional plan.

While there are uncertainties surrounding this model, there are also some potentially positive attributes of such plans. CDH plans designed, managed, and implemented by experienced managed care organizations appear to have a better chance of addressing areas of concern while meeting the needs of employers and employees. Some of the benefits of CDH plans that should be considered by employers include:

• Plan members with a deductible benefit design will appreciate first-dollar coverage and the ability to obtain some level of coverage for all drugs including those that are nonformulary. However, as plan members bear the full cost of their prescription drugs, and as they become accustomed to discussing drug pricing and alternative therapies with their providers, the rate of generic substitution will likely increase.
• The tax savings achieved through CDH can be significant for employers. For every $1,000 deposited into a CDH account, the employer will save 7.65 percent, or $76.50 in payroll taxes.^[8] Furthermore, if CDH enrollees become more savvy health care consumers, plan sponsors can also expect to save in terms of lower claims costs and, ultimately, lower health care premiums.

The movement towards consumer-directed health care is part of a bigger picture in which individuals have more responsibility for their overall financial and physical health. However, until more data is available, employers will need to fully explore the pros and cons of CDH plans, and ensure they have examined other pharmacy benefit strategies proven to help lower outcomes and improve quality.