Behavioral Healthcare Benefit Plan Designs

Behavioral healthcare benefit plan designs are closely aligned with medical plan designs. As with medical plans, behavioral benefit plans are either network-based (HMO, POS or PPO), or non-network based (indemnity). A large employer or purchasing group often will customize a behavioral healthcare carve-out plan to provide a standard plan design to all members regardless of their medical coverage. This greatly facilitates plan administration, but insurance and utilization review laws, and third-party administrator licenses vary from state to state, complicating behavioral plan administration. To fully understand behavioral health-care benefit plan design, it is essential to first understand funding arrangements.

Fully Insured Arrangements

In a fully insured funding arrangement, often called "full risk" or "risk-based," MBHOs assume the financial risk for providing behavioral services paying the claims submitted by providers for behavioral services rendered. Financial risk falls on the MBHO. When service utilization and corresponding claims costs exceed expected levels, the MBHO absorbs those increased costs. Purchasers pay MBHOs a predetermined, fixed (usually monthly) premium for assuming financial risk for behavioral treatment costs. On average, a monthly premium for a fully insured, full-risk behavioral plan, excluding EAP, ranges between 3 and 6 percent of a medical plan's premium, although rates can vary depending upon a group's utilization experience, number of members, geographic location, benefit plan, and state parity laws. The two primary cost drivers for a fully insured funding arrangement are group utilization rates and unit costs for practitioner and facility care.

A variation of a fully insured funding arrangement is a shared-risk arrangement, in which purchasers agree to assume financial risk for claims payment up to a certain amount. Premiums are based on projected claims costs. If claims exceed a prespecified amount, the MBHO assumes those claims costs or a percentage of those costs. If claims come in below the targeted amount, the balance can be shared by the MBHO and client or refunded to the client. There are many iterations of these shared agreements.

Administrative Services Only

Under an administrative services only (ASO) arrangement, an MBHO, for a fee, will handle medical management, utilization review, benefit and other administrative functions, such as claims payment (although some ASO contracts do not include claims payment). Often called a "self-funded" or "self-insured" arrangement, the purchaser assumes the financial risk for the health care costs for its members. Self-funded plans may also be administered by independent organizations called third party administrators (TPAs), which often provide administrative and medical management services in addition to claims processing. The larger the group, the more likely it is to self-fund because the financial risk is spread across more employees and its budget is large enough to absorb the risk. Self-funded groups typically have stop-loss insurance, which protects them from catastrophic losses.

A key advantage of an ASO arrangement is that employers can offer the same benefit to employees working in different states. Because ERISA exempts self-funded health plans from compliance with state laws and regulations, employers that self-fund can avoid individual state regulations such as diverse state mental health parity laws. Self-funded employers may also be able to save money because they can limit the risk pool to their own employees, avoid state taxes on insurance company premium revenues, and have complete control over benefit packages. In addition, some employers may self-fund to access claims data, allowing them to understand the true costs of their health care plans and tailor their plans accordingly. Figure 1 outlines benefit plan design and funding arrangement options.

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Benefit Plan Design	Funding Arrangement
Network Providers (HMO, PPO, POS)	Fully Insured Shared-risk
Non-network Providers (Indemnity)	Administrative Services Only (ASO) Network Management Claims Payment

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Figure 1: Behavioral Health Care Benefit Plan Funding Arrangements

Sample Managed Behavioral Healthcare Benefit Plan Design

Figure  shows an example of a managed behavioral healthcare combined HMO/POS plan design that complies with California's mental health parity legislation.

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Services	HMO	POS[*]
		In-Network	Out-of-Network
Mental Health
Inpatient deductible	None	None	N/A
Inpatient per admission fee	None	None	N/A
Inpatient treatment annual maximum benefit including partial and day treatment	Unlimited days at 100% based on medical necessity	Maximum of 30 days (combined with chemical dependency)	Not covered
Outpatient treatment	30 visits at $0 copayment	40 visits (combined with out-of network) at $0 copayment	40 visits (combined with in-network) per calendar year 50% of UCR up to $40 per visit
Chemical Dependency/Substance Abuse
Inpatient and outpatient (includes detox)	$25,000 per calendar year	Maximum of 30 days (combined with mental health)	$200 deductible per calendar year 50% of UCR up to a maximum of $1,000 per calendar year
Severe Mental Illness Benefit[**]
Inpatient deductible	None	None	N/A
Inpatient per admission fee	None	None	N/A
Inpatient, partial and day treatment	Unlimited days covered at 100%	Unlimited days covered at 100%	N/A
Outpatient mental health visits	Unlimited visits at $0 copayment	Unlimited visits covered at $0 copayment	N/A
[*] Pre-authorization required for all in-network and in-patient services both in and out of network. Chemical dependency and substance abuse combined in- and out-of-network maximum of $35,000 per calendar year. Chemical dependency and substance abuse combined in- and out-of-network maximum of $50,000 per lifetime. [**] Severe mental illness diagnoses include: anorexia nervosa, bipolar disorder, bulimia nervosa, major depressive disorder, obsessive-compulsive disorder, panic disorder, pervasive developmental disorder or autism, schizoaffective disorder, schizophrenia. In addition, the Severe Mental Illness Benefit includes coverage of serious emotional disturbance of children (SED).

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Figure 2: Sample Managed Behavioral Healthcare Combined HMO/POS Plan Design With A Typical Mental Health Parity Benefit

An employee assistance program is a confidential, short-term counseling service to assist employees and their family members with personal problems that negatively affect their job performance. These programs vary considerably in design and scope, and are offered by MBHOs, stand-alone EAP companies, and work/life companies. EAPs originally focused on substance abuse problems, but most today take a comprehensive approach to support members with a range of employee and family issues. Some include proactive prevention and health and wellness programs, and may even be linked to the health plan and MBHO benefit structure. While most EAPs offer a wide range of services, they generally refer members to other professionals or agencies that can offer more, or extended, help in particular areas. EAPs also provide human resource support through management consultation, on-site employee and employer seminars and critical incident stress management after catastrophic workplace events. The average utilization rate for an EAP ranges between six to seven percent, but it jumps to between seven and 10 percent when adding work/life programs. 

Figure 3 shows the benefits offered by a typical EAP.

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24-hour toll-free access to the EAP

Confidential services

Available to all household and dependent family members

Unlimited calls

Five face-to-face counseling sessions (per incident) with EAP provider

Child and elder care referral services

Legal assistance and referral

Financial counseling and debt management

Alternative medicine referral

Concierge services

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Figure 3: Typical Employee Assistance Program Benefit Summary

Behavioral Healthcare Benefit Plans

Typical Plan Features

According to the Substance Abuse Mental Health Services Administration (SAMHSA), the vast majority of employer-sponsored plans cover inpatient and outpatient mental health treatment services. Roughly half of all employers cover intermediate mental health treatment services such as residential treatment and partial (or day) hospitalization. Approximately 60 percent cover intensive outpatient services, which can include psychosocial rehabilitation, case management, and wraparound services for children (developing treatment plans for children that involve their families). Many plans also include a parity benefit—often called a "severe mental illness" benefit—that specifies which disorders are covered under their state parity law. A well-designed benefit package should cover a wide range of clinically effective services and treatments while incorporating financial incentives to substitute lower cost alternatives for higher cost alternatives when it is clinically appropriate to do so.

Benefit Plan Variables

As previously discussed, mental health and substance abuse coverage has long been characterized by limits that do not apply to healthcare coverage in general. The typical employee healthcare benefit plan offers 30 annual inpatient mental health treatment days and 20 annual outpatient mental health visits. Industry studies show that approximately 80 percent of employees have less generous limits, copayments, and coinsurance deductibles for inpatient mental health treatment than for medical treatment. Although nearly 20 percent of all employer-sponsored health plans have no day or visit limits on inpatient and outpatient health care, more than 50 percent of the plans covered just 20 outpatient mental health treatment visits, and nearly 60 percent covered just 30 or fewer inpatient days. While approximately 80 percent of all covered employees have copayments for medical treatment of less than $20 per visit, only 40 percent have copayments of less than $20 for outpatient mental health treatment visits.

ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) regulates the majority of private pension and welfare group benefit plans in the United States. The provisions of ERISA prevent states from regulating multistate employers on the provisions of their health benefits. Most notably, this affects the 9.5 million federal employees enrolled in the Federal Employee Health Benefit Plan (FEHBP). It also affects many large, self-insured employers and union trust groups.

HIPAA

HIPAA applies to all health insurance plans, including MBHOs. HIPAA allows employees to continue their health insurance coverage from one group to another. HIPAA's nondiscrimination provisions prohibit a group health plan or insurance company from denying an individual eligibility for benefits or from charging an individual a higher premium based on a health factor, including health status, medical condition (both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. HIPAA also may serve to reduce health care fraud and abuse and protect privacy and is projected to significantly reduce the 29 cents of every health care dollar spent today on administration. The HIPAA Administration Simplification component consists of three areas:

• Data Standards. Enforce standards for the electronic transmission of health care information.
• Security. Protects confidential and private information through sound and uniform security practices.
• Privacy. Maintains confidentiality of member information.

Because behavioral stigma still prevails, HIPAA plays a particularly important part in protecting sensitive patient information gathered during behavioral treatment.

Other Factors Driving Plan Costs | Alternative Prescription Drug Plans

While all the factors discussed in this chapter impact the cost of pharmacy benefits, no analysis of today's PBM marketplace is complete without an examination of some ofthe external factors driving plan costs.

High-Cost Injectable Drugs

One of the most significant trends affecting employers is the growth of biogenetic drugs, also known as injectables or specialty pharmaceuticals. The primary goal of an employers' specialty pharmacy program must be to improve the organizations' health and economic outcomes and most importantly, the medical outcomes and quality of life ofplan members. Specialty pharmacy programs are currently evolving to assure appropriate use and positive outcomes for millions of employees today who need these powerful and very expensive pharmaceuticals.

However, as utilization of specialty pharmaceuticals increases, so too do the challenges and costs for employers. Injectable medications are now a $35 billion a year market and are projected to double within the next decade. Often these drugs cost more than $1,000 per dose, up to 100 times the cost of many oral agents. In most plans, members taking specialty pharmacy drugs will represent one to five percent of a health plan's population, yet account for up to 50 percent of medical costs. Early studies indicate that specialty pharmaceuticals have tremendous potential to improve productivity and quality of life for millions of Americans. Therefore, employers who do not cover specialty pharmaceuticals or who limit coverage may be diminishing the ability of the pharmacy program to provide real value to their organization and plan members.

However, while promising, specialty pharmacy drugs are not clinically indicated for all plan members. Because of their high cost, the utilization of specialty pharmaceuticals must be tightly managed. Some of the more widely used specialty pharmacy medications include those to treat multiple sclerosis (MS), rheumatoid arthritis (RA), infertility, cancer and hepatitis. A review of pharmacy and medical data can identify the current drug utilization patterns for plan members and indicate the percent of the plan population with specific diseases that are candidates and can best be treated with specialty pharmacy drugs.

To ensure that members who will secure the most value from specialty pharmaceuticals can access those drugs, plan sponsors need a multifaceted and multidisciplined approach to the development of guidelines that will help to validate these drugs' use for appropriate members. One important component of a comprehensive specialty pharmacyprogram is the use of guidelines, which are typically developed by pharmacy & therapeutic, and/or guideline committees. These committees consist of practicing physicians, pharmacists and other professionals who use the expertise of consultants and health outcomes researchers. The guidelines developed should be provider-oriented, member-focused and condition specific. For example, guidelines for initiation of therapy for rheumatoid arthritis might include age, severity of disability, non-response to previous therapies and physician recommendation. Guidelines also play a key role in ensuring appropriate duration of therapy, dosage, titration and that the desired results of the drug therapy are being achieved.

As more high-cost specialty pharmacy drugs are introduced, there will be more evidence as to which drugs work best with which patients (e.g., genetic testing to identify individuals for whom the drug is most likely to be successful). Comprehensive programs that are integrated with the pharmacy and medical benefit, and that include managed care principles, such as prior authorization, formulary development and case management will more effectively ensure that employers and their employees get the maximum value from these promising new drug therapies.

Role of Pharmaceutical Marketing

Pharmaceutical manufacturer marketing efforts to both consumers and physicians has garnered widespread attention over the past few years. While there are issues to explore with regard to direct-to-consumer (DTC) advertising, an equally important concern for employers should be the products being advertised. For example, a growing trend among pharmaceutical manufacturers is "niche" marketing for products, such as over-active-bladder, nail fungus, dry mouth, and so on. While certainly there are instances where these ailments require medical intervention, the key goal of advertising appears to be to create demand where there has historically been little interest.

Of course, pharmaceutical manufacturers also spend significant sums of money directly marketing to physicians. While product marketing in itself is certainly an appropriate tactic within a free market, employers must be aware of the tremendous influence such advertising has on physicians and ultimately consumers.

A 2003 report from Tufts University noted that prescribing newer, more expensive drugs, rather than older, generics contributed to an estimated 24 percent increase in drug spending over a one-year period. A 2003 FDA report noted that patients who are subject to DTC advertising are more likely to request and secure a prescription for a specific drug. A primary concern for employers should not only be the excess costs such marketing can generate because of increased demand, but also the potential for side effects and medication errors from consumers demanding unnecessary medications that could further increase costs.

The message for the employer is to work carefully with its PBM to implement benefit design features that ensure that the most cost-effective, and not the most heavily promoted drugs, are used by their plan members.

Formularies, prior authorization, and strong member and physician education programs are excellent tools to address the issue of DTC advertising.

Impact of an Aging Population

There are now an estimated 76 million "Baby Boomers" approaching retirement age. However, many show no real signs of wanting to slow down or retire. As this generation surges ahead, steadfast in its belief that age is little more than a number, employers and plan sponsors will find themselves needing to provide health care benefits to an increasingly aging workforce. But the Boomers are not your average employees.

According to the Alliance for Aging Research, Baby Boomers refuse to believe that "aches and pains" are the price to pay for getting older. They tend to be less sedentary than past aging generations. To help accomplish their many life goals, Boomers are looking to health care, including prescription drugs, to help them stay active. From lifestyle drugs to those that help them manage chronic illnesses, Boomers look to health care services and products to help them successfully defy the aging process.

Boomers are also much better informed than their parents were about a variety of health care topics, and they expect to be given all the necessary information with which to make medical decisions. Unlike their parents, Boomers do not always take the word of medical "authority figures" who try to tell them what is best—they want to decide for themselves. According to the book Selling to the Generations by Robert Brenner, overall, Boomers are more likely to question authority and expect instant gratification. Atthe same time, particularly as they age, they are "brand loyal" and are strongly influenced by the brand building efforts of pharmaceutical companies to create this loyalty.

What does this mean for plan sponsors? First, the health care needs of an aging workforce will have a long-term and significant impact on the utilization of prescription drugs and on health care services. Many of today's workers will continue to work beyond the traditional retirement age and will want (and expect) to remain healthy and productive as they age. They are likely to expect to have these services and products available to them, including the brands that they have come to know and trust.

In addition, they are not likely to be automatically accepting of substitutions and especially, the unavailability of the goods and services that they perceive are necessary for them to remain healthy. According to the AARP study, Baby Boomers Envision Retirement II—Key Findings, about half of all Boomers expect their insurance to cover healthcare expenses. They will be well informed and will expect to be participants in their own health care. They will welcome options, but will resist ultimatums.

All these factors must be taken into consideration as plan sponsors seek to balance costs and access in their pharmacy benefit programs.

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.

DESIGNING AND IMPLEMENTING A PLAN | Flexible Benefits

Like any other major initiative, the design and implementation of a flexible benefits project needs appropriate and professional project management. Specific points to note include:

§  the need to liaise with interested third parties such as the pension plan trustees;

§  realistic deadlines - as a guide, the time to implementation is normally around 9–18 months;

§  the need for a high-level sponsor;

§  the need, if possible, to involve staff in the process - this implies skilled facilitation to avoid raising expectations too far.

Depending on the size of the organization and the size, make-up and capability of the HR function, it is often useful to set up one or more flexible benefits working parties. These might include representatives from functions such as finance, IT, payroll, communications, pensions, purchasing and line management as well as trade union or staff association representatives.

Approaches to projects vary between organizations. Although some firms design and implement their own plans with minimal outside assistance, others rely extensively on outside advisers on the basis that the development of flexible benefit plans is a complex process with many financial and tax considerations to be taken into account. Outside advisers might include one or more of the following:

§  Consultants: May offer a start-to-finish service or may specialize in certain areas such as design and communication.

§  Benefits providers and brokers: Some of the largest firms have the capability to offer a start-to-finish service including administration while others may be weak in elements outside their main areas of expertise, for example the link from reward strategy to design. Several offer off-the-shelf voluntary benefits products.

§  Administration providers: Some providers offer a start-to-finish service while others concentrate on administration. Some offer an IT solution only while others offer full outsourcing.

§  Tax accountants and lawyers: May be focused on tax/NI issues or offer a full design service.

An outline work plan for developing a flexible benefits plan is shown in Figure 1

Figure 1: A work plan for developing flexible benefits