Effective strategies for managing pharmacy benefits

Increased drug utilization and more expensive drugs have contributed to rising drug costs that challenge health plan pharmacy benefit budgets. For employer plan sponsors, the median increase in prescription costs from 1998 to 1999 was 15.9 percent.a Almost two-thirds of the cost increase in recent years is due to higher utilization, that is, more people using more drugs for a longer period.b

A structured approach to pharmacy benefit program management is needed to manage drug expenses and cost-effectively incorporate new drugs and drug-therapy regimens into a pharmacy benefit strategy. Such an approach combines the elements of plan design and benefit management and uses innovative formulary administration, utilization management, and mail-service programs to manage prescription drug use while achieving cost, choice, and quality objectives.

Plan Design

Plan design specifies a member's coverage and is primarily finance-oriented. Plan design techniques include cost sharing, generic utilization, integrated pharmacy networks, inclusions and exclusions, formulary administration, and quantity limitation.

Cost sharing. The plan's copayment structure affects how drug costs are shared between payers and members. Benefit plan designs now increasingly include higher copayment amounts, coinsurance percentages (a variable percentage paid by a member based on prescription cost), and copayment levels that are lower for generic or preferred versus nonpreferred drugs. Three-tier designs are an effective way to offer choice while still managing cost. Three-tier designs have three levels: generic (the lowest drug cost and copayment amount), preferred (brand-name drugs that are on the formulary and have a favorable cost and medium copayment amount), and nonpreferred or nonformulary (highest copayment amount, or member pays the difference between the cost of the preferred and nonpreferred drug). Typically, the difference between tiers should be between $10 and $15.

Generic utilization. On average, for drugs dispensed at a retail pharmacy, multisource brand drugs (those with a generic equivalent) cost two and one-half times more than generic drugs. This amount varies by drug and maximum allowable cost pricing (prices for generic drugs that are agreed upon by the pharmacy benefit manager or payer and the dispensing pharmacy). Options to encourage the utilization of generic drugs instead of brand-name drugs range from setting lower copayment amounts for generic drugs to mandatory generic requirements or a three-tier feature for nongeneric choices.

Integrated pharmacy networks. The use of pharmacy networks determines how and where prescriptions can be filled. Two options are retail network and mail service. The design of the retail pharmacy network affects discounts. For example, a network with fewer pharmacies may offer larger discounts because its pharmacies will receive increased market share. Mail service is the most cost-effective alternative for maintenance medications. Because the pharmacy benefit manager has direct oversight over the mail service, lower costs are obtained by achieving higher generic substitution, greater formulary compliance, and lower administrative costs. Mail service offers members convenience, savings, and high dispensing accuracy.

Inclusions and exclusions. The plan can exclude certain drugs or categories of drugs from coverage. Common exclusions are cosmetic, experimental, and "lifestyle" drugs.

Formulary administration. A formulary can be administered as open, closed, or incentive. Open formularies offer the widest choice of covered drugs, but are more expensive. Closed formularies pay only for drugs that appear on the formulary. Although a closed formulary can encourage the use of lower-cost drugs, it can increase administrative costs needed to process increased member complaints and appeals and physician inquiries. Incentive formularies with tiered copayments can lower drug costs, offer enhanced drug choice, and increase members' awareness of savings opportunities.

Quantity. limitation. Traditionally, plan designs specify the prescription quantity a member can receive per copayment or period. Cost management can be improved and quality maintained by reducing the quantity limit per copayment for drugs that are likely to be prescribed or used inappropriately Targeted drugs normally are used by a small percentage of patients but represent a relatively large percentage of utilization. For example, most patients who are prescribed expensive serotonin antagonist drugs to treat migraine headaches suffer no more than four migraines per month.c Thus, a quantity limit can be set based on the maximum episodes of treatment expected in a 30-day period.

Benefit Management

Benefit management uses a clinical orientation to achieve compliance with the plan guidelines and influence the selection of drugs. Benefit management techniques include formulary management, utilization review programs, and coverage programs.

Formulary management.

Although formularies are developed to ensure access to necessary drugs, they also can be used to lower costs. A formulary can be combined with intervention techniques to encourage the choice of lower-cost drugs and produce savings from increased manufacturer rebates. Selecting a formulary is a complicated decision, however. Incentive formularies with multitier structures are an attractive option because they provide members more choice, produce an incentive to choose the lower-cost drug, and offset increased costs to the payer of more expensive alternative drugs.

Utilization review programs. Concurrent drug utilization review programs consist of alerts sent to the dispensing pharmacy through the claims administration system that give eligibility and plan compliance information and warn of potential drug-related problems. Distinguishing between "soft" and "hard" alerts can streamline administrative functions and achieve incremental cost savings. Soft alerts allow the pharmacist to respond according to his or her professional judgment, and hard alerts require administrative resolution before a prescription can be reimbursed.

Retrospective utilization review programs and physician profiling can support appropriate drug selection and dosing, as well as prescribing patterns. Often, 1 percent of physicians account for approximately 50 percent of potential savings.d

Coverage programs. Coverage programs target coverage restrictions more precisely, which can minimize member dissatisfaction and lessen the number of unnecessary denials and appeals. Coverage programs include managed prior authorization, review of dose and duration rules, and step-- therapy protocols, which employ the lower level of drug necessary to treat a disease and use higher levels of drug therapy as the stage or severity of a disease progresses. The use of dose, duration, and step-therapy programs is more effective than prior authorization in some cases because these programs are less disruptive, allowing members to fill prescriptions without prior authorization.

Proper development and implementation of a pharmacy benefit strategy requires leading-edge benefit management capabilities, including: Strong clinical expertise among staff who determine plan design and benefit management or who handle appeals, such as the pharmacy director, medical director, case manager, or benefit manager;

Well-developed management processes to ensure complicated benefit guidelines are administered efficiently and accurately for members, physicians, and the plan; and

Advanced technological systems that can implement a sophisticated pharmacy strategy, effectively support member services, and provide oversight management reporting.

These core capabilities can be developed within the organization or strategically outsourced to a pharmacy benefit management organization.

Drug costs are likely to continue to rise at a faster rate than most other medical costs. Fortunately, significant savings are possible with a sophisticated pharmacy benefit strategy that includes the right mix of plan design and benefit management techniques. These techniques can ensure quality care and targeted financial results while keeping customers satisfied.