One of the main concerns in healthcare today is the rising cost of prescription drugs.  This is especially true for public entities in New Jersey as prescription drug programs are becoming a larger percentage of the overall budget.  Every public entity has opportunities available to them to help manage the cost of prescription plans more effectively.  As we look at some of these opportunities, keep in mind that the solutions discussed will positively impact public entity budgets for years to come. 

It’s obvious we need to pay attention to the increasing cost of prescription drugs.  According to the Henry J. Kaiser Family Foundation, “the number of prescriptions purchased in the U.S. increased 68% (from $2.1 billion to $3.5 billion) from 1994 to 2004, compared to a US population growth of only 12% for the same period.”  During this period, the average number of prescriptions per person increased from 7.9 to 12.0.  Additionally, “retail prescription drug prices increased an average of 8.3% a year from 1994, which is more than triple the average annual inflation rate of 2.5%.”

 

The Henry J. Kaiser Family Foundation report applies to prescription drug costs regardless of the type of employer.  However, New Jersey public entity prescription drug costs are significantly higher than the private sector employer, primarily due to utilization and product mix.  Let’s take a closer look at this and the reasons why.   

First, the vast majority of public entities in the State of New Jersey have prescription drug plans with a two tier open formulary copay structure (one copay for generic drugs and another, slightly higher copay for brand name drugs).  This type of two tiered open formulary dramatically increases the cost to the plan since all brand name drugs are available for the same copay and does not take into consideration the most cost-effective drug to treat a specific disease state.  Most private sector employers utilize a three tier copay plan.  In three tier copay open formulary drug plans, members can select any brand name drug, but members have a different copay based on preferred (most cost-effective) verses non-preferred drugs.  The most cost effective brand name drug comes with a lower copay to the member.  Three tier prescription drug plans have an estimated 7-10% plan cost saving due to the selection of more cost-effective drugs being utilized by members.   

Second, the member copays for public entity employees are typically low and represent a very modest percentage of the total overall prescription drug cost to the public entity.  Most copays represent between 5-10% of the total prescription drug cost.  Contrasting the public entity prescription plans to most private sector plans, you find that the private sector plans have member cost sharing of approximately 30% of the gross prescription cost by utilizing higher copays.   

Third, private sector plans have prior authorization and quantity limitation policies, step therapy policies and mandatory generic programs, which can lead to significant additional cost savings.  Prior authorization requires the drug to be approved for the patient prior to dispensing and can be based on quantity limits, dollar amounts, or type of drug.  Step therapy requires that the patient fill one product of an equivalent drug prior to filling a higher-priced alternative.  Mandatory generic programs require patients to pay an even higher copayment on brand name prescriptions than they would otherwise be required to pay if a generic is available, which reminds the patient of the cost advantages associated with generic drugs.  Public entity plans typically have none of these provisions. 

Fourth, public entity employers do not typically take advantage of creative pricing structures with their pharmacy benefit managers that are designed for significant price savings.  For example, Fixed Fee (capitated) rates allow plan sponsors to project their annual budget based on the number of contracts or members enrolled in the plan for the upcoming plan year, allowing them to know their prescription drug costs up-front.  This kind of strategy coupled with entering into a shared cost saving contract with the Pharmacy Benefit Manager creates a more cohesive partnership between the Pharmacy Benefit Manager and the public entity.  This results in the most cost effective, efficient, and beneficial program for the public entity and its employees.  In addition, transparent, or pass-through pricing, is becoming a well-liked option among self funded groups.  This kind of strategy reveals all costs associated with the plan and also leads to a more productive partnership.  

It’s also important to take a look at a few of the most significant reasons why prescription drug costs continue to dramatically rise. 

Changes in Types of Drugs Used - Biotech/Specialty Drugs: The Raymond James PBM Industry Report states that although only 1% of the population utilizes specialty drugs, the cost of specialty drugs represents 33% of total drug spend.  According to the 2006 Segal Health Plan Cost Trend Survey, while prescription drug rate trends are lower, the projected trend for biotechnology or specialty drugs is increasing at a rapid rate of 21.6%.  Carving specialty drugs to a specialty pharmacy can often contain the rising cost of specialty medications.

Research & Development and Marketing: Pharmaceutical manufacturers must cover their expenses for the research and development associated with creating new products, along with their efforts of gaining brand recognition among consumers and physicians.  With these associated costs, drugs still on patent often have tremendously inflated prices. 

One bit of good news is the increase in brand name drugs becoming available in generic form.  Patients are beginning to understand the benefit of utilizing generic drugs over brand name drugs; and Pharmacy Benefit Managers and plan sponsors are providing education materials to patients, explaining the benefit of generic cost/copay savings and the fact that generic drugs work as effectively as the brand name alternatives. Patients are also being made aware of the advantages associated with filling the “preferred brand name drugs” over the “non-preferred brand name drugs” as administered by their prescription benefit plan.  When a plan offers a three-tier copay structure, with the preferred brand name drug having a lower copayment than the non-preferred brand name drug, members are gaining more confidence in utilizing the more cost effective drug.  This, in turn, also provides savings for the plan sponsors. Additionally, in the last couple of years there have been a minimal number of new therapeutic classes introduced into the marketplace. 

In conclusion, public entities have an opportunity to save significant amounts of money by considering migrating their employees to more cost-effective plan design options, such as three tier open formularies.  Additionally, public entities can take a look at increasing the members’ cost sharing by increasing copays.  Prior authorization programs and quantity limitation policies, step therapy policies and mandatory generic programs should also be considered to properly manage the fast growing cost of prescription drugs.  Finally a shared cost saving capitated program or one with transparent or pass through pricing should be considered. 

Bio:    Steve Edwards is the Executive Vice President and a shareholder of Business & Governmental Insurance Agency.  BGIA is an employee benefit and property/casualty brokerage firm that specializes in providing insurance services to the NJ public entity market place.