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When it comes to insuring employees, is there anything that feels as complex and out of the employer's control regarding cost as providing health care? It's hard to imagine that there could be. But in fact, the closely related prescription drug benefit is the only area where factors influencing steep inflation are nearly as varied and as many.

And yet because of its definability and sourcing usually through a pharmacy benefit manager, the prescription drug plan is a realm where employers have recently had success wading into the mix and helping to put some breaks on the acceleration of costs, while still providing an affordable and highly valued perk to their workers. Even as creative steps with drug programs are working, though, the industry has been roiled with the issues of rebates and more demands for transparency in PBM revenue.

"Everyone has to manage the price they pay for drugs," says Dana H. Felthouse, vice president of marketing for the Pharmacy Benefit Management Institute, an independent body in Tempe, Ariz., that analyzes the increasingly scrutinized PBM industry. "Steering patients to the lowest-cost drugs that are clinically appropriate has been one of the key steps."

DRUGS, DRUGS EVERYWHERE

The United States is awash in pharmaceuticals for several reasons. The U.S population is aging, and older people use more drugs. Our lifestyles may also dispose us to the kinds of chronic conditions that are on the rise and that require long-term drug therapy. The medical field, meanwhile, staves off disease and debilitation through greater use of drugs. And pharmaceutical companies are advertising expensive brand-name drugs directly to the public and aggressively marketing to physicians.

More and better drugs are simultaneously available, and those produced with the latest biotechnology come at high cost. All of these factors together push massive and continually rising national drug expenditures.

But there are bright spots among the developments, according to Mark Merritt, president of the Washington-based Pharmaceutical Care Management Association, the national association representing PBMs.

"Lots of drugs patents are lapsing in the next few years," Merritt says, "so more generics will be available. Also, the use of mail order for long-term maintenance drugs is increasing. And e-prescribing systems that permit better management of drugs clinically and in terms of costs are coming online."

TACTICS OF A PRIME PBM

The drug-benefit dollar follows a complicated path from the plan sponsor to PBMs and their suppliers (retail pharmacies, drug companies and clinical organizations). But savvy employers are working with their drug benefit managers, structuring contracts and administration to control expenditures, especially for the higher-cost therapies.

Experts say that managing the drug mix is essential. Changes in drug mix were responsible for 41 percent of the overall cost inflation for prescription drugs in 2003, according to a Mercer Human Resources Consulting Report. But getting a handle on this requires diligent work on the formulary. It also means establishing some types of limits.

Employers are partnering with their benefit managers to put in place a variety of strategies, such as:

- Step therapy, which involves choosing drugs that are often less powerful or specific and thus less expensive as first-line therapeutics.

- Incented formularies drive employees to generic, preferred or nonpreferred drugs, in that order, by tiering the cost-sharing for each category of drug. (However, whether the corresponding drug is actually dispensed or whether the PBM system is somehow overridden at the pharmacy level is another controversy unto itself.)

- Prior authorization gets the pharmacist involved as another gatekeeper on the use of an expensive drug.

- Quantity limits, maximum allowable costs, days' supply limits, dose consolidation and exclusion of drugs that become available over the counter all help keep individual utilization from spiraling.

- Doctor and pharmacist education can put all of the players on the same page.

"Drug trends have been a little more controlled recently than in the '90s," says Katie Mahoney, manager of health-care policy at the U.S. Chamber of Commerce. "The rate of acceleration of drug spending growth is trending down, and that's due in part to these tactics that PBMs have helped with. However, not everyone is aggressively implementing the steps, so there's still room to gain on costs."

BIGGER, BETTER, CHEAPER

The PBM industry has also seen consolidation in the last few years, with mergers and acquisitions creating large drug-benefit managers, each with tens of millions of enrollees who together make up most of the populace in the United States. Analysts believe these companies will use their size to return greater efficiencies and economies to sponsors.

"These PBMs are competing harder for larger blocks of business and they are also doing so on the basis of quality of services," says Felthouse.

Merritt agrees. "We are using our scale to negotiate against pharmaceutical manufacturers and pharmacy networks to get costs down," he says.

But consolidation in any industry can make a buyer nervous. And according to PBMI, plan sponsors are no longer providing the largest portion of PBM income, which includes rebates from manufacturers and fees from pharmacies. Employers are wrestling with this. As a result, transparency has become a big area of discussion, and now negotiation, in drug-benefit contracts.

Transparency is attained when a PBM communicates to the plan sponsor all revenue the PBM receives from any external organization for performing a service on behalf of the sponsor.

But PBMs have expressed concerns that releasing all such data to the marketplace will make it difficult to negotiate aggressive rebate agreements, reducing rebates collected and, generally, reducing competition among PBMs.

"Terms between manufacturers and PBMs have historically been confidential," notes Felthouse. "PBMs are saying that they can't compete if they disclose, but some employers want greater auditing power."

Mahoney explains that "while some companies don't feel this need to know everything, others would like to have a better handle on contract nuances. Our position at the chamber is that transparency should not be mandated--that it's a business-to-business contract that should be negotiated on an individual basis."

Speaking for PBMs, Merritt, not surprisingly, concurs. "No one wants a one-size-fits-all solution," he says. "Employers have helped defeat that kind of legislation. In an effort at something that looks consumer friendly, we would actually undercut our ability to get deep discounts."

Meanwhile, though, direct pharmaceutical rebate contracting may not just be for PBMs or managed-care organizations anymore. Large U.S. employers have announced their intentions to contract directly with pharmaceutical companies for drug rebates.

BAD PR FOR PBMS

The prescription benefit and the PBM industry remain a jumble of trends and issues. But innovative steps have helped to attack costs. And employer satisfaction with PBMs in general remains high according to PBMI's latest survey. (Currently, the industry estimates that it saves sponsors about 25 percent in drug costs compared with not using a benefit manager.)

However, consolidation, transparency and other issues have the industry under the magnifying glass, creating a cautious public relations environment. The National Business Coalition on Health did not return calls for this story, but in a report last year, its president, Andrew Webber, stated: "It is difficult to avoid what is starting to look like a pharmacy battleground, pitting purchasers and payers against PBMs. Although the PBM industry has earned praise for saving money, increasing compliance and improving quality, and deservedly so, its reputation is taking a beating. The federal government, various states and a number of private parties are suing PBMs about drug-switching practices, fiduciary matters and a variety of pricing issues."

The rebate question has created the impression that PBMs are serving competing interests. Some companies want an open view of the PBM arrangement, while others acknowledge that some negotiations deserve to remain between manufacturer and PBM. In the latter case, sponsors are satisfied to just get the best deal the market can offer and don't care how it's structured. Going forward, though, employers can expect competition between products offering different levels of transparency.

"We don't know yet what the transparency issue will do to cost for employers," says PBMI's Felthouse. "It will take another year or two before there are enough new transparent contracts out there to tell."

The Chamber's Mahoney concludes, "Drug costs, like health care in general, make employers anxious--how to control costs but continue to do what's fair to employees. And PBMs are an evolving intermediary. You find people all over the place in terms of their comfort level with all this."

RUSS ALLEN, a Pennsylvania-based freelance writer, is a frequent contributor of health care stories to Risk & Insurance®.

October 1, 2005

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