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Fiscally responsible Featured

9:33am EDT July 22, 2002

When it comes to providing health care benefits, quality is always the most important consideration, but costs are never very far from the minds of employers. Managed care has been successful in containing medical inflation but most businesses still face yearly increases in health outlays.

The rising cost of health care is fueled largely by soaring prescription drug benefit expenditures. Prescription drug costs are rising 15 percent to 20 percent a year, with double digit annual increases likely to continue. Large companies expect the cost of their prescription drug benefits to jump 22 percent in 2001, according to a recent survey. Prescription drugs now typically account for about 15 percent of an employer's health care costs, up from roughly 5 percent in the mid-1980s.

There are several reasons why employers are paying more today for drug coverage:

  • Increased use of prescription drugs, particularly by seniors.

  • The replacement of older, less expensive drugs with newer, costlier ones.

  • Increased consumer demand driven partly by aggressive drug company advertising efforts.

  • Yearly price increases for many medications.

  • Introduction of new lifestyle drugs such as Viagra.

Of course, the appropriate use of new medications can go a long way in helping employees live healthier and more productive lives, while also helping to reduce costs in other parts of the health care system. For example, using the correct medication under a doctor's care may, in some instances,enable treatment of serious illnesses outside the hospital setting.

Employ proactive strategies to reduce costs

Employers and health insurers who pay most of the pharmacy bills are concerned about how to control pharmacy expenditures.

Increasingly, Ohio employers and insurers are implementing an array of cost management measures that include sharing costs with employees, encouraging the use of generic substitutes for brand name drugs, promoting mail-order pharmacies and working with physicians to improve prescribing patterns.

The goal of these strategies is not to restrict employee choice in obtaining medications, but rather to offer access to clinically safe and appropriate medications through cost-effective benefit plans. Plan design changes that encourage cost-conscious consumer behavior are an effective way to curb pharmacy costs.

Surprisingly, employee co-payments have remained relatively flat while drug costs have surged in recent years. In fact, over the past decade, employees' share of the pharmacy benefit has declined to just 17 percent.

Consider new systems of co-payment

Traditionally, many Ohio employers have used a two-tier pharmacy co-payment plan: Employees pay $5 when ordering generic prescription drugs and $10 for brand-name drugs.

But more businesses are moving to three-tier co-payment plans that give workers a greater incentive to ask for generic drugs. Generics, on average, are about one-fifth the cost of brand-name medications.

Under a three-tier system, patients pay the lowest co-payment for generic drugs, a higher co-payment for "preferred" brand-name drugs, and the highest price for "nonpreferred" brand-name drugs. Health insurers typically classify as "preferred" those medications shown by clinical studies to be safe and effective. Thus, an employee with a three-tier plan might pay $5 for a generic drug, $15 for a preferred brand-name drug, and $35 for nonpreferred brand-name drugs.

Another cost-effective plan design is the closed formulary. Unlike three-tier plans, in which virtually all drugs are available, closed formulary plans offer a limited set of medications in each class of drugs.

Economies of scale can also be achieved by encouraging employees to fill long-term prescriptions via mail order programs. Increasingly, employees can conveniently order these medications over the Internet. Jannifer Harper, M.D., is Midwest Regional Medical Director of CIGNA HealthCare. She is based in Cleveland. Contact CIGNA at (800) 541-7526.

Tackling rising expenditures

As health care costs skyrocket for employers, what's behind the increases? And, more important, what can employers do to stave off future increases?

Here are some answers:

  • Soaring prescription drug costs are fueling recent increases in employers' health care benefit expenditures.

  • Working with health insurers, employers are making benefit design changes to hold down costs.

  • Cost-saving strategies include promoting the use of generic drugs, increasing employee co-payments for nongenerics and using mail order pharmacy services.

  • Consider a three-tier co-payment system for prescription drugs.