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.

Factors Affecting The Cost Of The Dental Plan

A number of factors, including design of the plan, characteristics of the covered group, the employer's approach to plan implementation, and plan administration affect the cost of the dental plan.

Plan Design

Many issues must be addressed before a particular design that is sound and reflects the needs of the plan sponsor can be established. Included in this list are the type of plan, deductibles, coinsurance, plan maximums, treatment of preexisting conditions, whether covered services should be limited, and orthodontic coverage.

An employer's choice between scheduled and nonscheduled benefits requires a look at the employer's objectives. The advantages and disadvantages of scheduled versus nonscheduled plans, combination plans, and others have been described earlier in this chapter.

Deductibles may or may not be included as an integral part of the design of the plan. Deductibles usually are written on a lifetime or calendar-year basis, with the calendar-year approach by far the more common.

Numerous dental procedures involve very little expense. Therefore, the deductible eliminates frequent payments for small claims that can be readily budgeted. For example, a $50 deductible can eliminate as much as 10 percent of the number of claims. A deductible can effectively control the cost of claim administration.

However, evidence exists that early detection and treatment of dental problems will produce a lower level of claims over the long term. Many insurers feel the best way to promote early detection is to pay virtually all the cost of preventive and diagnostic services. Therefore, these services often are not subject to a deductible.

A few insurance companies are advocates of a lifetime deductible, designed to lessen the impact of accumulated dental neglect. It is particularly effective when the employer is confronted with a choice of (1) not covering preexisting conditions at all, (2) covering these conditions but being forced otherwise to cut back on the design of the plan, or (3) offering a lifetime deductible, the theory being, "If you'll spend X dollars to get your mouth into shape once and for all, we'll take care of a large part of your future dental needs."

Opponents of the lifetime deductible concept claim the following disadvantages:

• A lifetime deductible promotes early overutilization by those anxious to take advantage of the benefits of the plan.
• Once satisfied, lifetime deductibles are of no further value for the presently covered group.
• The lifetime deductible introduces employee turnover as an important cost consideration of the plan.
• If established at a level that will have a significant impact on claim costs and premium rates, a lifetime deductible may result in adverse employee reaction to the plan.

Most dental plans are being designed, either through construction of the schedule or the use of coinsurance, so that the patient pays a portion of the costs for all but preventive and diagnostic services. The intent is to reduce spending on optional dental care and to provide cost-effective dental practice. In addition, many believe that employees that participate financially in the plan make better use of it. Preventive and diagnostic expenses generally are reimbursed at 80 percent to 100 percent of the usual and customary charges. Full reimbursement is quite common.

The reimbursement level for restorative and replacement procedures generally is lower than that for preventive and diagnostic procedures. Restorations, and in some cases replacements, may be reimbursed at 70 percent to 85 percent. In other cases, the reimbursement level for replacements is lower than for restorative treatment.

Orthodontics, implantology (where covered), and occasionally major replacements, have the lowest reimbursement levels of all. In most instances, the plans reimburse no more than 50 percent to 60 percent of the usual and customary charges for these procedures.

Most dental plans include a plan maximum, written on a calendar-year basis, which is applicable to nonorthodontic expenses. Orthodontic and implantology expenses generally are subject to separate lifetime maximums. Also, in some instances, a separate lifetime maximum may apply to nonorthodontic expenses.

Unless established at a fairly low level, a lifetime maximum will have little or no impact on claim liability and serves only to further complicate design of the plan. Calendar-year maximums, though, encourage participants to seek less costly care and may help to spread out the impact of accumulated dental neglect over the early years of the plan. The typical calendar-year maximum is somewhere between $1,000 and $1,500. To put things in perspective: In 2003, only about 33 percent of people visiting a dentist spent from $300 to $999 annually, including insurance company payments, and just 23 percent spent $1,000 or more, including insurance company payments. Most claims are small (34 percent spent $100 or less), and therefore the maximum's impact on plan costs is minor.

Another major consideration is the treatment of preexisting conditions. The major concern is the expense associated with the replacement of teeth extracted prior to the date of coverage. Preexisting conditions are treated in a number of ways:

• They may be excluded.
• They may be treated as any other condition.
• They may be covered on a limited basis (perhaps one-half of the normal reimbursement level) or subject to a lifetime maximum.

If treated as any other condition, the cost of the plan in the early years (nonorthodontic only) will be increased by about 5 percent to 7 percent.

Another plan design consideration is the range of procedures to be covered. In addition to orthodontics and implantology, other procedures occasionally excluded are surgical periodontics and temporomandibular joint (TMJ) dysfunction therapy. It is difficult to diagnose TMJ disorders, and many consider them a medical and not a dental condition. Claims are large, and the potential for abuse is significant.

Although rare, some plans cover only preventive and maintenance expenses. These plans are becoming more common in flexible benefit plans where employees often may pick either a preventive plan or one that is more comprehensive.

Orthodontic expenses, as noted, may be excluded. However, where these are covered, the plan design may include a separate deductible to discourage "shoppers." The cost of orthodontic diagnosis and models is about $300, whether or not treatment is undertaken. The inclusion of a separate orthodontic deductible eliminates reimbursement for these expenses. Also, orthodontic plan design typically includes both heavy coinsurance and limited maximums to guarantee patient involvement.

An indication of the sensitivity of dental plan costs to some of the plan design features discussed can be seen in the following illustration. Assume a nonscheduled base model plan with a $50 calendar-year deductible applicable to all expenses other than orthodontics. The reimbursement, or employer coinsurance, levels are as follows:

• Diagnostic and preventive services (Type I): 100 percent.
• Basic services, including anesthesia and basic restoration (Type II): 75 percent.
• Major restoration, including oral surgery, endodontics, periodontics, and prosthodontics (Type III): 50 percent.
• Orthodontics (Type IV): 50 percent.

There also is an annual benefit maximum of $1,500 for Types I, II, and III services and a lifetime maximum of $1,500 for orthodontics. Based on this base model plan, Table 1 shows the approximate premium sensitivity to changes in plan design. If two or more of the design changes shown in this table are considered together, an approximation of the resulting value may be obtained by multiplying the relative values of the respective changes.

Table 1: Model Dental Plan

Relative Value (in percent)
Base model plan	100%
Design Changes
Deductible
Remove $50 deductible	116
Lower to $25	108
Raise to $100	90
Benefit maximum (annual)
Lower from $1,500 to $1,000	95
Raise to $2,000	101
Coinsurance
Liberalize percent to:100—80—60—60[*]	109
Tighten percent to:80—70—50—50[*]	90
Orthodontics
Exclude	89
[*] For Types I, II, III, and IV services, respectively.

The change in deductibles has a significant impact on cost, as much as a 10 percent reduction in cost to increase the deductible from $50 to $100. The change in benefit maximums has some impact, but it is minor. Coinsurance has a definite effect, especially changes in restoration, replacement, and orthodontic portions of the plan, all of which represent about 80 percent to 85 percent of the typical claim costs. Finally, the inclusion of orthodontics in the base plan is another item of fairly high cost.

Factors Affecting Claims | Group Insurance Rate Making

Factors Affecting Claims

As previously mentioned, equity requires that rates reflect those factors that result in different claims experience for different groups. Although there are variations among insurance companies, the following factors are used by most insurance companies to determine rates for life, disability income, medical expense, and dental insurance: the sex, age, geographic location, occupation, and income of group members; the size of the group; and the length of time that rates will be used.

Sex. The sex of insured persons is taken into account for determining rates for life, disability income, medical expense, and dental insurance.

Age. Age is also used as a rating factor for life, disability income, and medical expense insurance. Dental insurance rates usually do not take age into consideration.

Geographic Location. At one time, geographic location was a rating factor for medical expense and dental insurance only. However, an increasing number of insurance companies are using geographic variations for determining life and disability income insurance rates. For these latter types of insurance, rates may not be determined separately for a wide variety of locations. Rather, the insurance company may have only two or three rate schedules, with each schedule applying to several different geographic locations on the basis of past claims experience.

Occupation. Occupation is virtually always reflected in both group term life and accidental death and dismemberment insurance rates. It may also be reflected in disability income, medical expense, and dental insurance rates, but the number of groups for which it is of concern is relatively small. Consequently, some companies ignore it as a rating factor but may not write such coverages when certain occupations are involved.

Income. At one time, the income level of group members was commonly used as a factor in establishing disability income, medical expense, and dental insurance rates. Currently, income level is still a factor in determining dental insurance premiums, but it is more likely to be an underwriting consideration in disability income and medical expense insurance.

Size. The size of a group also affects rates because the proportion of the premium needed for expenses decreases as the size of a group increases. All manual premium rates are based on an assumption that the size of a group falls within a certain range. If the size of a group varies from this range, an appropriate rate adjustment is made to reflect this differential. In addition, many insurers reserve the right to rerate a group during the period of the contract if the group changes in size by a certain percentage. This is particularly important in an era of downsizing and mergers.

Time. A final factor considered in the calculation of rates is the length of time for which the rates will be used. This is a concern primarily for coverages that involve medical and dental claims, which over time will be expected to increase in severity because of inflation. In inflationary times, monthly rates that are guaranteed for three months can be lower than those guaranteed for one year.

Frequency of Premium Payment Period
Because group insurance premiums are usually paid monthly, this is the period for which rates are generally determined. When premiums can be paid less frequently (such as annually), they are usually slightly lower than the sum of the monthly premiums for the same period of coverage.

Calculation of Manual Rates
Manual rating involves the calculation of the manual premium rates (also called tabular rates) that are quoted in an insurance company's rate book. These manual rates are applied to a specific group insurance case to determine a final premium rate (sometimes called an average premium rate) that then will be multiplied by the number of benefit units to obtain a premium for the group.

There are three different manual rating methods. However, if identical assumptions are used, each method should result in approximately the same premium for any given group. The first method determines separate manual premium rates for groups with certain characteristics that an insurance company feels will affect claims experience. A second approach establishes a single standard manual rate that is adjusted in the premium-calculation process to compensate for any characteristics that deviate from those of the standard group. A third method merely combines the first two approaches and considers some factors in determining the manual premium rate and other factors in determining the final premium rate.

The first step in the calculation of manual premium rates is the determination of the net premium rate, which is the amount necessary to support the cost of expected claims. For any given classification, the net premium rate is calculated by multiplying the probability (frequency) of a claim's occurring by the expected amount (severity) of the claim. For example, if the probability that an employee aged 50 will die in the next month is .0005, then the monthly net premium for each $1,000 of coverage is .0005 × $1,000, or $.50. Because premiums are collected before claims are paid, the insurance company adjusts this figure downward for anticipated interest earnings on these funds.

In general, insurance companies that write a large volume of any given type of group insurance rely on their own experience in determining the frequency and severity of future claims. Insurance companies that do not have enough past data for reliable future projections can turn to many sources for useful statistics. Probably the major source is the Society of Actuaries, which regularly collects and publishes aggregate data on the group insurance business that is written by a number of large group insurance companies. Other sources of information are industry trade organizations and various agencies of the federal government.

The second and final step in the calculation of manual premium rates is the adjustment of the net premium rates for expenses, a risk charge, and a contribution to surplus. Expenses include commissions, premium taxes, claims settlement costs, and other costs associated with the acquisition and servicing of group insurance business. The risk charge represents a contribution to the insurance company's contingency reserve as a cushion against unanticipated and catastrophic amounts of claims. The contribution to surplus or net worth represents the profit margin of the insurance company. While mutual companies are legally nonprofit, they, like stock insurance companies, require a contribution to net worth that is a source of financing for future growth.

From the standpoint of equity, the adjustment of the net premium rate is complex. Some factors, such as premium taxes and commissions, vary with the premium charge; however, the premium tax rate is not affected by the size of a group, whereas the commission rate decreases as the size of a group increases. To a large degree, the expenses of settling claims vary with the number, and not the size, of claims. It costs just as much administratively to pay a $10,000 claim under a group life insurance plan as it does to pay a $100,000 claim. Certain other costs tend to be fixed regardless of the size of a group. For simplicity, some insurance companies adjust, or load, their net premium rates by a constant percentage. However, other insurance companies consider the different patterns of expenses by using a percentage plus a constant charge. For example, if the net premium rate is $.60, this might be increased by 20 percent plus $.10 to arrive at a manual premium rate of $.82 (that is, $.60 × 1.2 + $.10). Because neither approach adequately accounts for the difference in expenses as a result of a group's size, another adjustment based on the size of the group will be made in the calculation of the final premium rate.