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© Copyright 2000 Rogers Media. The following article first appeared in the April 2000 edition of
BENEFITS CANADA magazine.
Easing the pain
Three countries-- the U.S., England and Australia. All are similar culturally, and all are dealing
with baby booms of varying degrees. How are employers managing their drug formularies?
By Celia Milne
One of the quaintest symbolsin healthcare is a fatherly doctor bending over a child with a spoonful of
medicine, saying 'this won't hurt a bit.' But these days, with that child and that doctor likely to be part
of a huge managed care machine, there is nothing quaint about providing medicine--especially if you are the
one picking up the cost of drugs. The first word out of the mouths of payers, when they see the bill, is
more likely to be 'Ouch!'
Take General Motors Ltd. in Detroit Mich., for example. In 1998, the company spent US$676 million on
prescription drugs for its 1.2 million employees, their dependents and retirees. Company management fully
expects that cost to continue the upward trend it has been following over the last few years, and rise
between 16% and 18% this year.
"It is our greatest healthcare cost concern right now. That's the bottom line," says Leah Haran,
spokesperson for GM.
Demographics play a part in GM's rising costs, says Haran. The average age of GM employees is 48 years old.
In addition, the company has a retiree population of 40,000. Another factor contributing to high drug costs
is inappropriate prescribing--"overuse, underuse and misuse of drugs, as well as insufficient attention by
physicians to cost-effectiveness," says Haran.
In looking for ways to manage costs, GM takes a traditional tack, focusing on proper use of drugs and using
generics where possible, rather than actually restricting access to medications. The automaker works with
drug companies such as Pfizer and Eli Lilly in disease management programs. GM also uses a pharmacy benefit
manager (PBM) to manage costs, and went a step further last year in hiring an in-house pharmacist to manage
prescription drugs.
"If drugs are being abused or misused, we try to educate people on appropriate drug use," says Haran. "We
believe if we provide good quality healthcare, our costs will go down."
The sting of high, and growing, pharmaceutical costs is being felt worldwide. Drug purchases at retail
pharmacies alone added up to $86 billion in the U.S. in 1999, up 16% from 1998. In both Canada, Australia
and New Zealand, drug purchases were up 12% in 1999 from the previous year for a total of US$4.7 billion
and US$2.9 billion, respectively. A more modest rise of 10% was felt in the U.K., where purchases amounted
to US$9 billion. (These figures are available on the IMS Health global Web site, at www.imshealth.com.)
DEMOGRAPHICS
Though rising drug costs is a global phenomenon, the experience of GM in Detroit is unique in several ways.
In some parts of the world, such as the U.K. and Australia, employers have little to do with the cost of
drugs, as the government covers most of the population. And even in its own country, GM may stand out for
two reasons. First, the demographic bulge in its employee population, as the average employee age
approaches 50 years old, is not felt nearly as keenly in most other U.S. companies (other companies say
they are experiencing high drug costs, but for other reasons). Secondly, GM's philosophy to maintain an
open formulary is quite rare these days, as most employers' plans scramble to close their formularies or
hike up employee co-payments.
The good news for U.S. employers is that the phenomenon of the aging workforce, which we in Canada are so
familiar with, is not nearly as dramatic there.
"The baby boom is much bigger in Canada compared with the United States," says David Foot, professor of
economics at the University of Toronto and author of the best-selling book Boom, Bust & Echo
2000.
In Canada, we have produced 6.5 million echo boomers to replace the 10 million aging boomers in the
workforce. In the U.S., the spread between the two groups is much smaller so there are plenty of young (and
healthy) workers.
"It is very different in the United States, where the number of boomers and echo boomers is closer because
there is a higher fertility rate in the U.S.," says Foot.
In both the U.K. and Australia, the baby boom is also less dramatic than in Canada. "I often joke that in
the U.K. they think they have a baby boom but it's really a baby pimple," says Foot. "In Australia," he
adds, "it's spread out over 30 years because the [birth control] pill didn't get there until the late
'60s."
Demographics are also of secondary importance to drug costs, says Joanne Sica, assistant vice-president
with Aon Consulting in Conshohocken, Penn., because 80% of the healthcare dollar is typically spent on only
20% of the people.
If demographics are not an important engine driving pharmaceutical costs sky-high, then what is? One factor
is the booming economy, which is strong enough to support higher spending on drugs. Pharmaceutical prices
are also on the rise, partly because patent laws allow manufacturers little time to make back the money
spent on research and development.
CREATING DEMAND
But one of the most important factors--and one that separates the U.S. from many of its fellow countries in
the developed world--is advertising.
"The manufacturers are creating demand in a population that has no idea how much these things cost,"
laments Michael Dillon, vice-president of pharmacy services with Corporate Health Dimensions in Latham,
N.Y.
Corporate Health Dimensions is a provider of workplace health services, including pharmaceutical products,
for about 200,000 employees across the U.S. One of Dillon's challenges is keeping drug costs down for his
clients while consumers ask for high-cost drugs. He remembers August, 1997 as a watershed time when the
U.S. Food and Drug Administration lightened restrictions on direct-to-consumer advertising (DTCA) and, as
Dillon puts it, "the dam broke."
"It's hell living with DTCA," he says. "These ads are not always fair and in balance. The No. 1 advertised
drug to lower cholesterol may not be the best."
During an interview with BENEFITS CANADA in February, the subject of flu drugs was on Dillon's mind.
"Tamiflu is advertised a lot in print, radio and television. Employers are saying, 'geez, we're spending a
lot of money on Tamiflu' and I say 'what you need is the vaccine.' A flu shot is $3, whereas Tamiflu is
$50." But, of course, consumers want Tamiflu because they have seen it advertised.
The inevitable result of this financial pressure on employers is that they cannot continue to provide full
drug coverage as they used to. The challenge, then, is to figure out how to re-vamp their prescription
benefits without causing mutiny.
FORMULARIES
Formularies are lists of medications which have been selected by physicians and other experts to discourage
use of marginally effective drugs and encourage cost-effective prescribing.
In 1997, 93% of U.S. health maintenance organizations (HMOs) used formularies, so they are firmly in the
mainstream of medicine. There are many variations on the formulary theme. One method used by managed care
companies is the preferred formulary. This system guides physicians to drugs that have been found to be
clinically and economically effective (often generic drugs), but does not prevent the pharmacist from
dispensing drugs that are not on the list. According to a recent article in U.S.-based Managed Care
magazine, the preferred formulary can save employers about 5% on healthcare costs.
Another type of formulary is the closed formulary, used by about one-third of HMOs. With a closed
formulary, physicians are only able to prescribe outside the list in proven cases of medical necessity.
These formularies can save employers a further 5%, reports Managed Care. A plan may also choose not
to close the entire formulary, but rather certain therapeutic classes.
Formulary managers often negotiate discounts from the manufacturers whose drugs they include. Manufacturers
can bundle their expensive products with others, and thereby guarantee deep discounts to managed care
companies.
CO-PAYMENTS
Traditionally, a co-payment system meant that employees paid a flat rate, such as $2, each time they got a
prescription filled. This system is no longer financially viable for many U.S. employers.
"The bigger trend now," says Aon Consulting's Joanne Sica, "is toward two, three and four tiers to the
co-pay structure. For example, you might have a $5 co-pay for a generic on the formulary (and some
companies have made that list smaller), more for generics not on the formulary, a third tier for branded
drugs on the formulary and a fourth for branded drugs not on the formulary."
Another new trend in the world of managed care is covering non-prescription products on benefits plans.
"Larger employer groups are trying limited coverage of non-prescription products such as Pepcid AC or
Motrin AB to reduce costs on the prescription side," says Sica. "Where there are non-prescription
counterparts, formularies are dropping the prescription drug or setting up step therapy."
One company in the U.S., says Sica, is reporting huge savings using this method. With many interested
observers looking on, this company will now take its experiment one step further to see if costs have
increased in other areas. "This is something to watch," says Sica. "It's going to be a trend."
QUALITY-OF-LIFE DRUGS
Quality-of-life drugs are ones that are considered either lifestyle-enhancing or are used for cosmetic
reasons. They include anabolic steroids, anti-bedwetting drugs, cognition-enhancing drugs, erectile
dysfunction agents, growth hormones, infertility drugs, oral contraceptives, smoking cessation aids and
weight-loss medications. The issue gets sticky when certain drugs may be medically necessary for some
patients but not for others.
For instance, a drug to combat toenail fungus may be considered a cosmetic enhancer in otherwise healthy
patients, but could prevent serious illness in a patient with brittle diabetes, points out Mary Sevon in a
recent issue of the Journal of Managed Care Pharmacy. Sevon is the president and founder of Sevon
Associates, a pharmacy benefit consulting firm in Fairless Hills, Penn.
"The primary concern," writes Sevon, "should be to cover patients appropriately, while limiting usage that
is not medically necessary."
Companies that want to pay for these so-called quality-of-life drugs will have tough choices to make. Going
the formulary route will require restrictions to manage utilization, such as ensuring doctors provide prior
authorization. A tiered co-payment system can also control costs for the employer, where employees pay the
highest fee for these medications.
PULLING IT ALL TOGETHER
U.S.-based Federated Department Stores is a good example of how a plan sponsor can use these various
techniques to its advantage.
Jon Hautz, benefits manager for Federated in Cincinnati, Ohio, says her company has not adopted a benefits
philosophy per se, but simply uses the best managed care plans available for each area. Federated, which
owns the department stores Macy's and Bloomingdale's, covers 45,000 active employees, 5,000 retirees and
their dependents.
Lately, Hautz says, pharmaceutical costs have gone up "precipitously," growing at a rate of about 12% a
year ago and 16% this year. Reasons for the steep rise in costs, she says, are four-fold: faster delivery
of drugs to the marketplace; a healthy economy in which consumers can absorb the rising cost of drugs;
technological advances giving rise to newer, more expensive therapies; and DTCA.
Hautz says Federated's strategy in dealing with these cost increases is to "contract with plans that have
been shown to be effective managers in the use of prescription drugs." The company is also looking at the
possibility of using PBMs in the future to further manage costs.
In some areas of the country, Federated employees have access to a very open formulary and in other areas,
the formulary is tight, says Hautz. "It depends on the characteristics of each individual managed care
plan," she says.
This year, most Federated plans will use a three-tier co-pay with the lowest co-pay for drugs on the
generic formulary, a higher co-pay for drugs on the brand formulary and the highest co-pay for
non-formulary drugs. In general, quality-of-life drugs are not covered by Federated plans.
STATE-RUN PHARMACARE
Unlike the circus created by a robust economy and aggressive advertising in the U.S., Australia and the
U.K. have state-run, and therefore tightly controlled, drug benefits systems.
Rob Paton, a consultant with Towers Perrin in Sydney, Australia, explains that the Australian government
runs the Pharmaceutical Benefits Scheme (PBS) which covers almost all Australians.
Australians covered under the PBS pay no more than A$20.60 ($18) towards the cost of each medicine per
prescription, plus the cost of a nominal dispensing fee. Where an individual's or a family's cost of PBS
medicines exceeds A$631.20 ($552), indexed annually, in a calendar year, the cost of subsequent
prescriptions is reduced from A$20.60 to A$3.30 ($2.88) per prescription.
"The effect of PBS is that employers do not need to provide pharmaceutical benefits for their employees in
Australia," says Paton. "In fact, even registered health insurers seldom provide significant pharmaceutical
benefits, because PBS coverage is substantial."
In Australia, non-PBS drugs are paid for by consumers, and this expense can be claimed on private health
insurance. Drug information pharmacist Graeme Vernon from the Austin & Repatriation Medical Centre in
Melbourne estimates that about 40% of Australians have private health insurance. "This is generally
arranged directly rather than through an employer," he says.
CONCERNS OVER PBS
Like in Canada, prescription-only drugs cannot be advertised directly to the public in Australia. But,
according to Vernon, there has been an increase in indirect advertising where the disease and the drug
company are highlighted without mentioning a specific product.
Black clouds are forming over the PBS system, however, says Towers Perrin's Paton. "There may well be
changes in this area because the Australian government is concerned about the increasing costs of the PBS.
The pharmaceutical industry is concerned that new pharmaceuticals aren't being included quickly on the PBS,
and that prices paid to the industry by the PBS are too low."
In the U.K., the system of pharmaceutical coverage is similar to Australia's. Steve Besborough, a
consultant with Aon Consulting in London, England, explains that the National Health Service covers the
cost of medication, and individuals pay about £4.85 ($11.13) for each prescription. "This is probably
going to rise to £6 ($13.76), which a lot of people don't like," says Besborough.
It seems that when it comes to providing drug coverage in a world of escalating costs--whether it is in the
private or the public sector--there is no painless way to keep matters under control.
Celia Milne is a freelance writer in Toronto.
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