Traditional Pharmacy Benefit Cost Management Practices

While many plan sponsors are exploring alternative benefit designs, it is also important to recognize that existing cost management strategies may continue to play a role, either in support of an alternative plan or as an ongoing component of the benefit program. Plans and PBMs may wish to refocus their vision to use traditional benefit designs in more tailored, aggressive and innovative ways, thus achieving their goals without the need to move to more radical alternatives. Poorly managed traditional benefit designs are often to blame for runaway cost trends.

Generics

Generic drugs now make up more than 50 percent of all prescriptions filled but represent only a fifth of dollars spent. By 2010, patents will expire for 15 blockbuster drugs (those with sales exceeding $1 billion annually), including the hyper-cholesterol drug Zocor^®, the antidepressant Zoloft^®, and the "mega-blockbuster" ulcer medication Prevacid^®, a prescription drug with current sales of $3 billion.

Generic drugs save consumers an estimated $8–10 billion dollars annually at retail pharmacies. However, plans sponsors should not simply automatically switch from branded to generic drugs. Any savings from generics should be balanced against the clinical value of the branded drug, as well as the potential cost implications (e.g., loss of rebate revenue, which may make the net cost difference negligible).

Another factor to consider is the effect of the initial six-month exclusivity period on generic drug pricing. While brand-name drugs typically receive between nine and 12 years of market protection after the Food and Drug Administration (FDA) approval, the period of exclusivity granted to the first company to file and receive FDA approval for a generic drug is only six months. To capitalize on their exclusivity, many generic drug manufacturers will actually set the price of the generic to within 15–20 percent of the brand-name price. Thereafter, prices may drop more dramatically, as other manufacturers are free to enter the market.

When deciding what, if any, changes should be made to their current generic drug programs, plan sponsors should take the following steps:

• Conduct a thorough analysis of current pharmacy claims data;
• Determine the current utilization rate for brand name drugs that have generic alternatives; and
• Conduct a prospective analysis using current utilization rates compared to branded drugs scheduled to become generics to help predict costs in the short- and long-term.

The last step is to determine the impact of moving to generics on the branded drug rebates and other cost factors. In some cases, lack of generic competition keeps the generic prices near that of the brand they are competing against. In some cases brand rebates will allow for parity with the generic price. Be sure to fully understand the net cost analysis before deciding on a generic strategy.

Copays

One of most common PBM cost management strategies is a copay model. Such programs are simple to implement and understand. However, challenges include its propensity to insulate plan members from actual costs and the inability to drive members to preferred drugs that may be less expensive and perhaps more effective.

Tiered Benefits.  Tiered benefits provide another way for plan sponsors to offer coverage for popular, high-cost drugs, while promoting cost-sharing for the most expensive medications, or those not on the formulary. Tiered benefits have grown considerably over the past five years. While in the past most plans offered one or two tiers, today some plans offer up to five tiers on their benefit plan. While tiered benefits are growing in popularity, often plan sponsors do not recognize that they can be combined with managed care techniques such as prior authorization—allowing the plan sponsor to secure even greater savings and further ensuring patients can access appropriate medications when needed. Toward that end, some plan sponsors are developing closed benefits in conjunction with their tiered programs. Such a strategy works well as defined therapeutic classes, including ACE Inhibitors for the treatment of hypertension, NSAIDs for allergies, and Selective Serotonin Reuptake Inhibitors (SSRIs) for depression, often require prior authorization.

Copays for tiered benefits have increased steadily over the past few years. According to the 2003 edition of A Guide to Drug Cost Management Strategies, between 2000 to 2003, copays increased from $7.51 to $8.14 for first tier drugs (often generics) to $31.30 from $25.71 for third tier drugs (typically the highest cost medications).