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Benefits and Pensions Monitor
Managing Pharmacy Benefits
By: John Herbert
Employers wrestling with rising costs for group health benefits may be overlooking some of the tools already at their disposal. John Herbert, of ESI, examines this issue.
Canadian plan sponsors have seen costly premium increases for group health benefits in the last few years. The major driving force of these increases has been the cost of prescription drugs, which has increased almost 60 per cent since the beginning of this decade and is expected to continue increasing at a rate of 10 per cent to 15 per cent each year.1 This growth has been fueled by rising consumer demand for prescription drugs, increased use of high-cost medications, the entry of new drugs to the market, and, most recently, price increases by pharmaceutical manufacturers.
 Starting in 19992, however, plan sponsors started to take greater measures to mitigate the rising cost of premiums trend by turning to several easy-to-use tools to manage the pharmacy benefit.
While the best trend management strategy includes using a combination of tools in order to address the various factors driving the increasing cost of the prescription drug benefit, an ESI Canada study has found the majority are still not optimizing the value of the drug benefit.
The study weighted groups by the number of eligible cardholders (employees) and focused on cardholders residing outside Quebec since plans in Quebec are bound by a unique set of legislative requirements. It examined the plan tools – adjudication, administration, plan design, and member payment – to assess how they are being used to manage costs.
Adjudication
- Virtually all pay-direct groups use adjudication tools including drug pricing, usual and customary fee and mark-up limits, days supply limits, drug utilization review, and audits. Previous studies have looked at the impact that several of these tools can have on managing trend. Together, these features can help control drug costs. However, plan sponsors need to use additional tools to optimize the value of the drug benefit.
Administration
- 59.7 per cent of groups use positive enrollment (cardholders must enroll dependents prior to claiming) which reduces the likelihood of paying claims for ineligible dependents. The other 40.3 per cent of groups allow dependents to be added at the time of their first claim. Little has changed in the use of positive enrollment in the last few years.
- 72.6 per cent of groups collect co-ordination of benefits (COB) information for their eligible dependents. COB ensures that claims are first sent to the appropriate primary payor before they are considered for reimbursement by the plan. A greater number of plan sponsors have been collecting COB information since 1999 when only 42.5 per cent of groups had COB information on file.
The increase in drug plan costs that we have seen over the past four years could have been higher if it weren’t for greater use of this highly effective tool. COB information must be kept up to date – and that’s the challenge for plan sponsors. Marilee Mark, vice-president of marketing, group benefits, at Manulife Financial says, “Periodically re-enrolling members is necessary since the coverage status of spouses and dependents may change over time.”
Using both positive enrollment and COB together can help manage trend, especially since these tools can help address the utilization component of trend.
Plan Design
- 76.9 per cent of groups use prescription-requiring plans and 11.8 per cent use comprehensive plans that cover all prescribed drugs (including over-the-counter items prescribed by a physician). Table 1 shows the percentage of groups using prescriptionrequiring plans has increased since 1999 and that comprehensive plans have become less popular. Plans that mimic a provincial formulary have decreased to 2.5 per cent. In addition, only 8.8 per cent of groups use other types of managed formularies even though, Ellen Chin, ESI Canada’s director of health management services, says that “a welldesigned formulary can help address increasing drug costs while continuing to be clinically sound.”
- 49.4 per cent of groups have a generic substitution component in their drug plans and an additional 5.2 per cent use mandatory generic plans. A standard generic substitution plan pays for the lowest cost interchangeable drug unless the physician indicates “no substitution” or “dispense as written.” Mandatory generic plans pay for the generic regardless of physician indication. The use of both types of generic plans has increased since 1999 from 43.2 per cent and 2.6 per cent, respectively. Generic substitution can be effective in controlling costs as generic items are typically 30 per cent to 40 per cent less expensive than their brand equivalents.
- 61.7 per cent of groups have a prior authorization requirement on several medications, up from 34.2 per cent of groups in 1999. Prior authorization programs can help reduce drug costs as long as the savings generated outweigh the cost to administer the program. These programs can also provide plan sponsors with the reassurance that plan members are receiving the most appropriate and cost effective treatment. The popularity of prior authorization has likely increased due to the introduction of new high cost drugs which may have multiple indications, may be prescribed for “off label” use, and may have the potential to be administered in a hospital setting.
- 31.5 per cent of groups use professional fee caps to encourage the use of low fee pharmacies. The two most common fee caps are $6.50 and $8. Use of fee caps has decreased slightly since 1999.
Using a managed formulary that includes a mandatory generic component plus a prior authorization program may help a plan sponsor manage future drug costs since these tools can address the utilization, therapeutic mix, and new drug components of trend. Professional fee caps may also be introduced to help control inflation and can help make plan members more conscientious shoppers.
Member Payment
- 76.9 per cent of groups have a member payment requirement. This has remained relatively constant since 1999; however, the mix of member payment types has changed slightly.
- 9.3 per cent of groups have a deductible which is typically $25 per year. This amount has remained relatively constant since 1999 and is typically satisfied with the first claim of the year since the average prescription is now more than $503.
- 20.4 per cent of groups require a member co-payment per prescription as seen in Table 2. The member portion typically varies from 20 cents to $15 but is rarely more than $5. The most common copayment is a fixed $2 per prescription. For the majority of groups, this dollar amount has remained unchanged since 1999 even though drug costs have been rising each year. As a result, a $2 co-payment now represents less than four per cent of the cost of a typical prescription3.
- 55.5 per cent of groups use co-insurance (members pay a percentage of each prescription) as seen in Table 3. The member portion is typically from 10 per cent to 30 per cent, with 20 per cent being the most common. Co-insurance can be effective since it ensures that the member portion keeps pace with increasing drug costs and dispensing fees and it can encourage members to be conscientious shoppers. The survey found 7.8 per cent of groups use tiering to further encourage conscientious shopping and 7.9 per cent use sliding co-insurance in order to cap the member’s out-of-pocket payment. Overall, use of this effective cost containment tool has increased since 1999. However, plan sponsors using deductibles or co-payments should consider periodically increasing the dollar amounts or should consider moving to a percentage based coinsurance.
Having plan members pay a portion of their prescription costs is an important aspect of managing drug trend. The most effective strategy includes using co-insurance which keeps pace with changes in drug costs and dispensing fees more effectively than an annual deductible or fixed dollar co-payment per prescription.
It appears that plan sponsors have taken greater measures in an attempt to manage the pharmacy benefit. However, the majority are still not optimizing the value of the drug benefit.
To mitigate future trend, plan sponsors should use several tools in conjunction with one another since each tool has its own attributes. Plan sponsors should also periodically review their plan design choices in order to ensure they remain effective including re-enrollment of COB and updating of member payment tools as required. Furthermore, there are other, more advanced strategies such as managed formularies and tiering that plan sponsors should consider using to preserve the pharmacy benefit in an era of rising drug costs and increasing consumer demand for prescription drugs.
 John Herbert is director of business development with ESI Canada.
1. Percentage increase in average annual cost per ESI Canada claimant 2000-2003
2. Number of ESI Canada cardholders has increased threefold during this period
3. Based on ESI Canada average cost allowable per prescription outside Quebec in 2003 of $51.83
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