With reports that pharmacy benefit costs sometimes exceed the cost of hospitalization, more employers are carving out the pharmacy benefit from their health insurance program and assigning it to a pharmacy benefit manager.
"Large employers have been using drug benefit carveouts since about 1985," says Catherine Kunkle, executive director of the National Business Coalition on Health. "Now, many more companies are looking into them." Kunkle's group is in the fourth year of a program it sponsors using National Prescription Administrators, a Newark, N.J.-based pharmacy benefit administrator. She has 24 business coalitions around the country participating, with more than 100,000 enrollees.
A recent report by the coalition, involving approximately 70,000 employees covered in carveouts, found that for 1999 the total undiscounted retail prescription spending would have been $82 million. However, after discounts, co-pays and deductibles, members paid $49 million. Kunkle says savings will vary based on the age and sex of the employees covered and the plan design the employer has chosen.
Under a traditional health plan, drug coverage typically is part of the major medical package with a deductible. As employers' costs increased, it was apparent that the deductibles paid by employees weren't making a dent in overall spending, so many companies sought ways to cover workers' prescription drugs at a discounted price.
With a carveout, the pharmacy benefit manager receives an administrative fee for each prescription processed, while the pharmacist receives a dispensing fee.
Pharmacies that belong to the administrator's network benefit from the increased volume of prescriptions. Kunkle says all participants of the program benefit, although she notes there is a loss of business to the insurance company that has the rest of the coverage and to community pharmacies that are not part of a benefit manager's network.
The PBMs offer a number of benefits to encourage employers to choose carveouts.
"The employer gets a provider of pharmaceutical benefits, management and pharmaceutical care that has an enriched focus," says Allan Zimmerman, senior executive vice president and general manager of National Prescription Administrators. "There can be a significant dilution of focus in a traditional health insurance company because they tend to spend a lot more effort on doctors and hospitals. Also, the philosophy of a carveout provider usually is more congruent with a payer's philosophy than is an insurance carrier's philosophy on pharmaceutical benefit management."
Zimmerman says he spent 20 years working on "carveins" for insurers but now has become convinced of the advantages to carveouts. He says PBMs are able to attract better talent to work on their customers' accounts because of their specialization. "And a compelling argument can be made for the increased ability of a PBM to handle reporting and other responsibilities." Finally, Zimmerman says, when companies carve out the pharmaceutical benefit there is added flexibility in managing pharmaceutical benefit design.
While all of those benefits are important to an employer, the bottom line issue is cost. "Our experience," Zimmerman says, "is that if an employer is able to carve out the benefit, there will be a substantial improvement in control and cost. That does not mean that the benefit does not need to be integrated with the rest of the healthcare coverage. In the best of all worlds, an employer will carve out the pharmaceutical benefit and then reintegrate it in the health coverage structure in a meaningful way."
He says such reintegration can be accomplished through the PBM and health insurer working together on formulary management, PBM membership on the insurer's pharmacy and therapeutics committee, joint development of appropriate step therapy protocols, working together on disease management, and coordination with hospital discharge planners. Such efforts, of course, may involve more paperwork, meetings and phone coordination, making such integration tough in the real world.
The Pittsburgh Business Group on Health started its first major group purchasing effort, a pharmaceutical benefit carveout, on Jan. 1. Executive director Chris Whipple says her members wanted the carveout because of continually increasing drug costs and the fact that the benefit lends itself to pooling by providers.
The group's contract with Eckerd Health Services allows each member employer to develop its own specific benefit design. Whipple said the group contract includes negotiated performance guarantees and the vendor selection was based on price, customer service and management of the benefit. "We want to have an impact on the trend as we move forward," she says, noting the members' desire to control prescription drug costs.
Eight companies signed on with Eckerd through the business group in the first six weeks of operation, an illustration of employer support for the program, she believes.
Whipple says sophisticated reporting capabilities were built into the contract that allows participating members to review their statistics monthly. The coalition will get aggregate reports starting at the end of the first quarter of the year.
"It's hard to say broadly that companies will experience a specific savings," Whipple says. "It depends on a company's prior claims experience and new plan design. We gave our members the opportunity to run their past experience through an algorithm so they could see what their cost would have been under the carveout.
"When you move into this kind of arrangement, you're going to see a significant bang for your dollar, especially in the first year. The important thing is what happens after that, how well you can manage the program and try to stabilize or even decrease the double-digit cost increases we've been seeing.
"We did a 'market basket' analysis and look for our members to save 20% overall. That's a nebulous, generic number because so much depends on the plan design and how restrictive the company wants to be," Whipple reasons.
Employers Health Purchasing of Canton, Ohio, a for-profit subsidiary of Community Healthcare Coalition, has offered a pharmaceutical carveout since 1995, says executive director Christopher Goff. The plan now has 48 participating groups and covers more than 300,000 people. Goff says the coalition first offered the benefit because members wanted to achieve economies of scale and reduce insurance costs.
"We've had excellent feedback from our members. They appear happy with the clinical interventions, are reasonably satisfied with the account management from our contractor (Caremark) and are very satisfied with the negotiated pricing mechanism," he says.
Goff says the latest contract with Northbrook, Ill.-based Caremark included some pricing concessions to lower the cost to members as well as provisions for educational programs to supplement the disease management that already was in the agreement.
One important element of the program's success, according to Goff, is the coalition's efforts to work with doctors so as not to alienate them from the process.
"We wanted to impress on them that this is not some out-of-state pharmacy benefit manager asking that they comply with drug changes, but it's local money that has been paid by employers in our community," he says.
"When the physicians understand where the dollars flow, they are more receptive to changes. We offer physician education along with the drug companies and give them materials on new drugs. We've tried to stay on the physicians' radar screen so we have credibility with them and have an ongoing dialogue so they know what our interests are."
As pharmacy carveout programs evolve, they may need to address the patient's role in efforts to significantly decrease the cost of prescription drugs. With the rise of heavily promoted drugs such as Claritin or hair loss prevention prescriptions, the opportunity for savings couldn't be more timely.
Having had four years of experience with the carveout, Kunkle says she thinks the members of the National Business Coalition on Health will be working in the future to help their employees become more cost-sensitive, especially regarding lifestyle drugs, such as Viagra, Propecia and perhaps prescription acne products.
She recognizes it's difficult to draw a line between lifestyle and health and also knows that in a good economy businesses are more likely to accept the cost to keep their employees happy. She says they may also add a provision requiring a physician to certify medical necessity for some drugs.
NPA's Zimmerman believes the future will bring new use of the Internet to help in the reintegration of the pharmacy benefit. He looks for enhanced connectivity with physicians so they can receive clinical information, drug interaction data and benefit design information electronically before writing a prescription.
Lack of such information can lead to a prescription being rejected when it is presented at the pharmacy, increasing the time until a patient is able to benefit from medication.
"With greater connectivity we'll be able to preadjudicate a claim before the physician writes the prescription and gives it to the patient," Zimmerman says.
He says there also will be greater use of the Internet for disease management programs developed by PBMs for classes of patients such as asthmatics, diabetics and those with AIDS. He says NPA currently has 10 disease management programs that are carried out through the mail.
"There will be a significant advancement when we can gather information from patients over the Internet and then transmit it to their primary-care physician," Zimmerman says.
Other than the increased Internet connectivity and greater flow of information to physicians, Zimmerman says he doesn't think there is any impact on physicians in a pharmaceutical carveout.
"Things like physician education and pharmacy peer review may be coordinated by individuals who are not on site," he says, "but that doesn't effectively mean anything."
John G. Hope is based in Harrisburg, Pa., and is a frequent contributor to Modern Physician.