The Prescription Drug Puzzle | Plante Moran
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The Prescription Drug Puzzle: How the Pieces Fit Together

Prescription drug benefits for today’s employee benefit plan sponsors typically account for 15 to 25 percent of an organization’s total medical plan spending. Unfortunately, we only expect these increases to continue, even outpacing the rate of inflation as measured by the Consumer Price Index.

This leads to an obvious question: how can organizations combat these cost increases while still providing quality pharmacy benefits to employees? Generally the most effective way is to focus on funding, consider formulary management, shift to increased generic drug use, and strive for optimal utilization. 

What’s Driving Cost Increases?

Three things: the rapid development of biotech drugs, more second-generation drugs, and the aging of America. Today, there are approximately 200 drugs in the biotech developmental pipeline. Each year more and more are released, which is good for the consumer, except that the price of such drugs is not a matter of $20, $50, or even $200 per prescription. Rather, biotech drugs can frequently cost between $1,000 and $3,000 for a typical month’s supply.

Second generation drugs are improved versions of initial prescriptions. While the efficacy of the drug is enhanced, so, too, is the price. Finally, perhaps the single most important cause of continued pharmacy cost escalation has to do with the aging of America. Right now, almost 25 percent of the population is 65 or older. Additionally, baby boomers continue to turn 65 at a rate of one every eight seconds. As this trend continues for another 10 or more years, so, too, will the consumption rate of all drugs.

Focus on Funding

Funding can be a key driver of cost in a prescription drug plan. There are two options: fully or self-insured. Within each option, there are different opportunities. You need to ensure that these factors align as best possible with the cost objectives of your plan. For example, with a self-insured plan, you have a high degree of flexibility, but you’re also the primary risk holder. How you fund your prescription plan depends on the risk tolerance of the overall organization.

Formulary & Generic Alternatives

Another element to consider is the formulary. In essence, a formulary is a list of drugs that are preferred. It’s most important with prescription plans that have at least a three-tier drug copay structure. For example, your employees would pay a copay of $10 for generic, $20 for brand preferred, and $40 for brand non-preferred or non-formulary drugs.

If you decide to manage your own formulary, consider generic equivalents of brand name drugs, as they’re significantly less costly and provide the same therapeutic equivalent as the brand drug.Also, consider offering coverage for certain over-the-counter (OTC) drugs. For instance, Prilosec OTC and Aciphex both treat heartburn. However, Prilosec costs $20, whereas Aciphex is $215 for an equivalent supply. With the recent changes due to health care reform, a prescription is needed to allow a plan to pay for any OTC drug. While it expands the list of what’s covered, it does so by including drugs that are much less expensive.

Strive for Optimal Utilization

Optimal utilization occurs when the majority of your employees are filling scripts with the most cost-effective drug. To increase your optimal utilization rate:

  • Aim to have the most cost-effective generic drugs on your formulary. One of the key ways to accelerate your optimal utilization rate is to generate awareness of OTC alternatives and generic counterparts. Be aware that about 80 percent of prescription drugs have a generic equivalent. Many pharmacy benefit managers, health insurance carriers, and independent sites offer online tools that explain the differences between generic and brand drugs and detail the efficacy of prescription drugs. These tools can reinforce the fact that generic equivalents have the same therapeutic value as brand name drugs. is an independent site that lists alternatives for brand name drugs. Additionally, it provides a list of stores that carry that particular drug and the cost at each location.
  • Provide clear information on prescription drugs for your employees. Consumers make better choices when they’re better prepared; therefore, it’s essential to share these tools with your employees. They need to know there’s flexibility in these pricing structures, even in this highly competitive marketplace. Companies and employees are happier when cheaper, yet equally effective, drugs are available.
  • Create a copay structure that encourages a high use of generic cost-effective drugs. To reach an optimal utilization rate, consider at least a $30 difference between copay tiers. Some employees might not be persuaded to try generic drugs for a price difference less than that. Another option is to use a percentage-based system where the employee pays, for example, 25 percent of the cost of a tier 1 drug and 30 percent for a tier 2 drug, as opposed to a flat copay. With this structure, the plan sponsor will see savings in regards to brand formulary and brand non-formulary drugs. Over time you’ll also see behavior modification as employees start choosing generic drugs over the higher cost brand name drugs.

How to Begin

Begin by requesting details of your pharmacy benefit manager contract. You should evaluate each contract with respect to: administrative and dispensing fees, formulary, discounts, rebates, spread pricing, and network. Once evaluated, you can review your plan’s own utilization statistics to determine how to improve plan operations and costs.

The prescription drug puzzle doesn’t have to be complicated. Solving it requires due diligence on your part along with clear communication with your employees.

Contact Us

Scott McLellan

877-622-2257 x57281

Ed Murphy