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An Employer’s Guide to

Pharmaceutical Benefits

his project was conceived during the September, 2001 meeting of WRGH,
as we wrestled with the challenges of the “pharmaceutical conundrum”.
The complexity and promise of this explosive industry places
unprecedented demands on providers and payers of healthcare, as well
as on consumers.

However, this guide focuses on the role of employer-purchasers in providing

pharmaceutical benefits for employees, as they struggle to balance economic
pressures with a need to support their workforce. Rather than a research paper,
our intent is to provide practical tools to assist employers in meeting these

The guide is the result of a great deal of teamwork. Helen Lippman, our writer,
researched this complex topic and was the principal content architect. She should
be especially recognized for her patience and perseverance through numerous
modifications of direction and rewrites. John Malley and Ron Bachman of
PricewaterhouseCoopers tackled the controversial issue of the “Pharmaceutical
Food Chain” and are the authors of Chapter IV. Our graphics artist, Sooki Moon is
to be commended for her creativity. We are indebted to Mercer Human Resource
Consulting for providing the worksheets in the Appendix.

We assembled a cross-section of healthcare stakeholders to review and edit the

guide. Several of our committee members spent considerable time on the project
and made important contributions including John Malley, Ron Bachman, Phil
Hutchison, Jeff Warren, Brian Mefford, Gary Persinger, and Kate Sullivan.

We want to thank those visionary organizations that have financially supported

Wye River Group on Healthcare and our many initiatives.

To access the Employers Guide to Pharmaceutical Benefits on the web, please

select one of the following links:

For more information, to arrange a presentation on our work, or if you are

interested in receiving updates about this document, please contact Jon Comola
at 512.472.2005 or email

We believe you will find this document an important asset in understanding

pharmaceutical trends and market dynamics and in navigating the options for
crafting pharmaceutical benefits.

Jon R. Comola, Chairman, CEO

Marcia L. Comstock, MD MPH, COO
Wye River Group on Healthcare
March, 2003

EXECUTIVE SUMMARY ................................................................................ 1

CH I CHOOSING AND USING THE RIGHT TOOLS .......................................... 4

CH II ENGAGING EMPLOYEES.................................................................. 14

CH III CHOOSING AND MANAGING A PBM ................................................ 17


CH V EVALUATING OUTCOMES ................................................................ 29

CH VI RX AND THE WORKFORCE .............................................................. 30

CH VII DRUG COSTS IN CONTEXT .............................................................. 35

CH VIII TOWARD PATIENT-DIRECTED HEALTHCARE ........................................ 39

CH IX LOOKING TO THE FUTURE.............................................................. 41

REFERENCES .......................................................................................... 43

A.Reviewing Coverage for Retirees ................................................ 47

B. Worksheets ............................................................................ 48
Member cost-sharing ................................................................ 49
Prior authorization .................................................................. 52
Drug utilization ...................................................................... 53
Disease management ................................................................ 55
Pharmacy benefits request for information .................................. 56

C. Other Tools ............................................................................ 60

D.Disease Management Resources.................................................. 61

E. Defining the Terms .................................................................. 63

BIBLIOGRAPHY ...................................................................................... 67

Background health benefit plans, drug benefits and

the techniques for managing them,
have evolved rapidly in recent years. As

n aging workforce, a
weakened economy, new new benefit design techniques are tried
therapeutic trends, and and tested, we learn more about their
double-digit health plan rate relative effectiveness, their acceptability
increases have all converged, putting to employees, and their downsides.
enormous pressure on employers
struggling to meet their employees’ The elements of a prescription drug
healthcare needs with limited financial plan can be simply divided into three
resources. These challenges and categories: design incentives;
changes have pushed prescription formulary-based strategies; and clinical
drugs—or what some industry interventions. This guide describes the
observers call “the pharmaceutical following specific options: generic
conundrum”—onto center stage. As substitution, tiered co-payments,
one of the fastest growing segments of incentives or requirements (such as use
healthcare benefits, prescription drugs of mail order drugs), therapeutic
are a main target for employers’ efforts substitution, formularies, and prior
to rein in healthcare costs. authorization. Disease management,
though not directly encompassed in
drug benefit design, is a clinical
Challenges intervention increasingly being
incorporated into overall health plan
The challenge is to build a broad-based designs to contain total healthcare costs.
prescription plan that ensures access to In addition, the guide describes how
the right medication at the right time health plans or PBMs can negotiate
and discourages inappropriate drug reimbursement rebates to save money
use, without imposing a financial on ingredient costs.
hardship on either employer or
employee. To meet it, benefit managers In evaluating which design features to
must keep their employees’ interests include, employers should assess the
and an array of cost and quality control potential impact of each approach on
strategies in mind. An effective health their overall human resource and
benefit package is one in which drug health plan goals. Some design
coverage decisions are made in the features carry a price tag. Some result
context of their impact on total in savings to the plan and the
healthcare costs, productivity costs, employer at the expense of access or
employee health outcomes and clinical cost to the beneficiaries. Some are
quality. No two companies have the effective at aligning incentives and
same employee profile or precisely the savings potential to both employers
same set of concerns, and there’s no and beneficiaries. Some approaches are
single formula to follow. invisible to the beneficiaries, and some
clearly improve quality of care.

Options Education of employees about their

benefits is essential to optimize the
As a relatively new component of effectiveness of the incentives created
and ensure employees know how to containment efforts do not result
obtain the pharmaceutical products in greater total healthcare costs or
that will restore or maintain health productivity loss.
and promote productivity. Disclosure
about plan options and drug
formularies prior to open enrollment, The Guide
notices about appeal rights, and
education regarding use of incentives This guide is designed to highlight key
to the best advantage, are important areas to address, present prominent
components of employee education. In studies to consider, and explore
addition, employers should be certain primary sources of the data benefit
that a fair and clinically sound appeals managers need to make well-reasoned
process is available. These consumer decisions about Rx coverage. Perhaps
protections will help assure that more importantly, throughout An
pharmaceutical-related cost Employer’s Guide to Pharmaceutical
Benefits we emphasize the facts and
figures needed to make optimal
choices, often by highlighting key
questions to ask.

The American Healthcare Pie Outpatient drugs Not all of the sections of the Guide will
Health care be of interest to all employers. To some
The final tally on overall health spending for 2001 is projected $1,423
extent it depends on how involved a
at over $1.4 trillion, or 14% of the Gross Domestic company is in working directly with
Product. That represents a slight increase for the 2nd its health plan and pharmacy benefit
year in healthcare’s share of the GDP, after remaining manager (PBM) to shape benefit
relatively flat for most of the ’90s. But the slowed design. Some of the information is
economy, coupled with inflation in health plan premiums provided as a reference.
and wages for healthcare workers, suggests that healthcare’s Total GDP $10,201.5
In billions of dollars Chapter I, Choosing and Using the
share will continue to grow, the government reports. A graphic
Right Tools, is the foundation of the
look at expenditures helps put pharmaceutical spending in its proper perspective.
Guide. It provides an overview and
(Ref examples of design incentives,
formulary-based strategies, and
EXPENDITURE % OF TOTAL clinical interventions that support the
management of pharmaceutical
Hospital care 32
benefits. Chapter II, Engaging
Physician and clinical services 22 Employees, emphasizes the fact that
Prescription drugs 9 the best benefit design and programs
Nursing home care 7 will fall short if employees are not
Program administration/net cost 6 aware and engaged. Chapter III,
Other spending * 24 Choosing and Managing a PBM,
provides pointers on working
*Includes dental and other professional services, home health, durable medical products, OTC products, public effectively with health plans, PBMs,
health, research, and construction.
and other vendors. Chapter IV,
Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, Understanding the Pharmaceutical “Food Chain” covers in detail the
critical, confusing, and controversial and a glossary of common terms and
subject of prescription drug pricing. definitions.
Chapter V, Evaluating Outcomes,
looks briefly at measures that can be Employers are at the center of one of
used to determine the value of benefit our greatest healthcare challenges—
programs. Proactive employers who managing their employees’ demands
wish to delve deeper will want to for each new advance in medical
carefully review Chapter VI, Rx and technology—including innovative
the Workforce, which provides drugs—with the reality of its cost. This
information for benefit managers is not a comfortable position for any
seeking to evaluate direct and indirect employer. This guide is designed to
healthcare costs in the context of help pharmaceutical benefits manager
workforce productivity. Chapter VII, build a foundation for decision-
Drug Costs in Context, explores the making. Make no mistake, this is one
cost of pharmaceuticals relative to of the most difficult issues for
total healthcare spending and looks employee benefit managers to “get
at the drivers of drug expenditures. their arms around”. The guide is
Chapter VIII, Toward Patient- organized so each employer can target
Directed Healthcare, provides an those sections that are most relevant.
overview of newer financing models The document was developed to
for health benefits. Finally, Chapter enlighten those new to the game,
IX, Looking to the Future, provides a support those wishing to take a
glimpse of what is on the horizon. more active role in design and
The Guide also contains appendices administration and challenge the
with worksheets for employers, seasoned professional to explore
information on additional tools, new possibilities.
disease management resources

specifically request brand-name

emographic drivers of the
continued surge in products despite the availability of
healthcare and drug costs lower-cost generic medications.
are unavoidable. Our Incremental changes in the design of
nation’s rapidly aging population cost-sharing strategies can encourage
makes the proliferation of chronic and greater accountability, particularly
complex conditions and the need for when they go hand in hand with
more drugs and more effective employee education.
treatments inevitable. In this context,
the increasing use of Rx therapy in Such education can help employees
place of more traditional medical have better discussions with their
services is a key factor. The genomics doctors about which drug is most
revolution and the development of appropriate for a particular condition.
medicines, tests, and drug response Benefit incentives—a tiered plan in
markers that could not even be which the choice of a generic
envisioned just a decade ago will only equivalent over a branded drug results
make the challenge that much greater. in a significantly lower copay, for
example—and a number of other
Given the inevitability of cost-sharing formulas and design
demographics, science, and strategies offer employers greater
technology, it is vitally important that room to maneuver. In considering
employers take appropriate steps to which ones meet a company’s needs,
manage the current situation. The however, it is vital to keep the role
same reports that highlight high Rx pharmaceuticals play in maintaining a
costs reveal areas where benefit healthy workforce in mind.
managers can effect change and exert
at least some management of the
pharmacy budget. Section B of the Selecting the Strategies
Appendices provides specific
worksheets prepared by Mercer While all employers can benefit from
Human Resource Consulting that are understanding the array of options
designed to help employers make that are available to influence the cost
better informed decisions about their and quality of a pharmaceutical
plan designs. benefit program, some of the tools
described here are likely to be most
Just as the overall design of medical feasible for mid-size or large,
benefits in the past has shielded sophisticated “value” purchasers, and
consumers from the true cost of small companies in coalitions.
healthcare, so too there is a growing
recognition that prescription drug In designing or revising a pharmacy
plans with minimal (and fixed) benefit plan, there are two key
copayments provide little or no questions to keep in mind:
incentive to consumers to discuss • How can the company maximize
treatment options with their its health benefit investment by
physicians. While consumers do not maintaining or improving the
directly determine what drugs their health status of its employees and
physicians prescribe, many patients attracting and retaining workers?

• Which strategies will contribute to Cost sharing
better management of spending What cost-sharing formula is right for
on prescription drugs? a given company? The answers to this
and other questions about pharmacy
The elements of an Rx plan can be benefit design depend on corporate
simply divided into three categories: goals, the level of understanding of
• Design incentives the factors driving up drug spending,
• Formulary-based strategies and recognition of the implications
• Clinical interventions and tradeoffs.

These three elements should be In deciding on a cost-sharing formula,

designed to balance cost effectiveness there are two major features to focus
and clinical efficacy. The various on. One is structure:
pharmacy benefit design tools • Two tiers, three, or more?
should be evaluated based on their • Fixed copay or coinsurance?
ability to promote health, boost
productivity, maintain employee The other is price:
satisfaction, and yield the best return • How large or small should out-of-
on investment. pocket fees be?
• How big a differential between
Maximize design incentives
The vast majority of employers have
Choosing and using the right abandoned the single copay strategy in
incentives is one of the most difficult favor of a two-tier plan or, increasingly,
aspects of pharmacy benefit design. a three-tier design, currently used by
Money, of course, is a powerful human about 40% of large employers. 1 Research
motivator. The challenge lies in suggests that employee satisfaction with
finding a formula that will encourage both designs is roughly equivalent—if
employees to make cost-effective the differential between the second tier
choices without imposing so heavy a (reserved for brand drugs on formulary)
burden that they end up foregoing and the third tier (for non-formulary
needed treatment. branded products) is no more than $10. 2

Recognizing that approximately 30 % But is $10 enough of a difference to

to 40% of patients that are taking influence employee choice? Many
medication are partially non-compliant, employers would say it isn’t. Benefit
any benefit design that might worsen managers generally acknowledge
compliance should be monitored for that replacing copayments with
unintended consequences that impact coinsurance, a percentage-based
quality and cost-effectiveness. Here contribution strategy, would foster
are the main design incentives and greater consumer responsibility
factors to consider for each. Pairing because it exposes people to the
incentives with employee education true cost of pharmaceuticals.
will yield optimal results.
(See the cost-sharing worksheet in Section To date, however, few companies
B of the Appendices.) have made the switch, in part because

coinsurance is believed to be company open to discrimination
unpopular with employees. Many claims.
consumers dislike the uncertainty of
not knowing in advance how much Generic substitution
they will have to pay for a prescription. Fostering the use of generic drugs,
A more pressing problem is the whenever appropriate, is key to a
possibility that the contribution for a cost-effective benefit design. Pairing a
high-priced but necessary drug would voluntary generic substitution policy
discourage an employee from filling the based on a financial incentive with an
script at all. educational campaign may encourage
employees to request that their
physicians prescribe generics—or to
Higher copays and agree to a pharmacist’s suggestion of a
differentials have a generic substitute. The size of the
disproportionate effect on differential is a factor here, too, of course.
sicker and/or low-wage The $8 1 or so that separates the generic
workers, but there are creative copay from the copay for branded
ways to address this, as a strategy products in a typical two-tier plan may
recently adopted by a large health plan not be enough to convince an employee
illustrates: Introduce disease management to forsake a trusted name-brand drug.
or educational programs targeting your But the $22 between the average generic
most costly conditions, then waive copays copay ($9) 1 and the copay ($31) 1 for the
or coinsurance charges for those who brand version of the same product in a
participate. 3 three-tier plan may be substantial
enough to make the difference.

Low-wage workers as well as older A mandatory generic substitution

employees with chronic health policy is another option as well.
problems may respond well to such Requiring a plan participant who opts
an incentive. The design could be for the brand-name version of a drug
expanded to encompass a variety of available in generic form to pay the
self-care measures: Regular attendance full differential can lower average
at classes or support groups related drug expenditures by $35 to $50 per
to a particular condition, ongoing member per year, researchers who
participation in an exercise program, studied claims data from some 700,000
or evidence of strict compliance with beneficiaries estimate. 4 To avoid a
a treatment regimen could all be negative effect on employee health
accepted as reasons to waive or and morale, however, a campaign to
reduce out-of-pocket fees. educate employees about generics and
explain that the generic equivalent has
Any incentive programs must be the same active ingredients as the
based on actions or efforts, however, brand drug should precede a switch to
rather than on physiological changes. a mandatory substitution policy.
Bestowing rewards for actual weight
loss, decline in blood pressure, or Therapeutic substitution
other measures that are not entirely Generic substitution is not to be
within people’s control leaves a confused with therapeutic substitution,

which with physicians concurrence companies may find opportunities to
authorizes the pharmacist to dispense offer their employees mail order
an alternate chemical entity from the pharmacy and other programs through
same therapeutic class instead of the membership in local or regional
drug the doctor originally prescribed. healthcare purchasing cooperatives.
The practice is highly controversial and
opposed by medical societies. It is Mail order programs are not designed
important for an employer to to be used by all enrollees, however, or
understand the process the PBM uses to supply any and all drugs; typically,
for making changes to the original they only provide medication that is
prescription when dispensing drugs. needed on a long-term basis. Thus, it is
important that enrollees understand
Not only could a switch to a drug in the difference between a maintenance
the same therapeutic class be harmful medication (taken for a chronic
to a patient being maintained on a condition) and a drug taken sporadically
particular medication for a chronic (for an acute flare-up) or seasonally, such
condition, it may be that the as an antihistamine needed only when
replacement is a higher priced drug the pollen count is high. Employee
with a larger rebate for the PBM. To education should highlight the potential
avoid such problems, an employer for cost savings as well. The average
should consider requiring the PBM to mail order copayment for 2001, $22 1 for
demonstrate a clearcut clinical rationale a brand drug on formulary, for instance,
for any such change—or prohibiting Rx saves a participant close to $10 a month.
switches unless evidence that the At a retail pharmacy, the same 90-day
previously used drug is unsafe supply—which would be dispensed in
emerges. Any provision for a switch to three separate 30-day quantities and
a preferred drug that is not the generic thus require three separate copays—
equivalent of the previously used would cost the participant $51, based
medication should call for the approval on the $17 average copayment for a
of the prescribing physician. preferred drug in a three-tier plan.
Thus, what may seem like a large
Mail order pharmacy copay initially actually represents a
Education is crucial to the success of significant savings.
mail order programs, which double as
a design incentive and patient In addition, enrollees with chronic
satisfaction tool. These programs also conditions that require long-term
tend to boost patient compliance and drug therapy often welcome the
bolster an employer’s ability to opportunity to get a 90-day Rx
manage the care of the chronically supply and, in some cases, to receive
ill—if they’re used, that is. Because automatic refills without having to
they rely on bulk purchasing make frequent trips to the local
discounts, mail order programs can be pharmacy. Compliance with treatment
an effective cost-control strategy and a is enhanced by eliminating or
way for the chronically ill to mitigate diminishing lapses in treatment, and a
the effects of higher retail co-pays. readily available supply of medication
More than half the nation’s large helps prevent acute flare-ups and
employers offer them. Smaller costly medical emergencies.

Building the Right Formulary and, often, design techniques to
discourage use of high cost non-
(See formulary “must haves” and “maybes” formulary medications.
on page 9.)
The formulary, or preferred list, has Innovative cost sharing strategies
been called the cornerstone of the Rx In addition to the standard two- and
plan and the key to employee access. It three-tier cost-sharing strategies, some
is also the basis for a range of pharmacy benefit plans and plan
strategies that aim to balance cost sponsors have begun experimenting
effectiveness and clinical efficacy. with a range of other financial
The key consideration here: incentives. For example, many PBMs
• How open or restrictive a model have developed a four-tier model that
should it be? combines copays—used for the first
three tiers—and coinsurance for the
To answer the question, it is necessary fourth. Set at a rate as high as 50%,
to consider the ramifications: An open the top tier would be reserved for
formulary, in which the vast majority so-called lifestyle or life-enhancing
of FDA-approved prescription drugs drugs and previously excluded
are covered, generates the highest medications. 5
level of employee satisfaction but the
least control on Rx spending. New models based on clinical efficacy
Conversely, a closed, or mandatory are being studied as well. One tiered
formulary, does the best job of limiting design would reserve the lowest
Rx costs, but it restricts enrollees’ level for “core therapies” for acute
access and has been found to be conditions and serious illness, require
associated with a drop in worker somewhat higher out-of-pocket costs
satisfaction and on-the-job for prescription drugs that have viable
performance. over-the-counter options, and impose
the highest fees for lifestyle drugs.
A selective, or restrictive, model, Benefit consultants have also raised
like a closed formulary, provides the possibility of a benefit-based
automatic reimbursement only for copay in which the beneficial quality
drugs on the preferred list, but covers of the drug rather than its value to
others under specified circumstances. the individual patient would be the
It, too, can have a dampening effect determinant. Under such a system,
on productivity and employee an antihistamine might have a
morale without the cost savings to lower copay during allergy season,
offset it. for example, than at other times of
the year. 5-7
But choices are rarely clearcut, and the
success of the formulary design Forms of prior authorization
depends not only on the model but Physician confirmation of medical
also on the modifications. Most appropriateness of a particular
employers use some sort of hybrid, drug, plan approval of a medical
providing coverage for almost all exception—authorizing the use of a
drugs but using cost differentials to non-formulary product for a patient
encourage use of preferred products who might otherwise be at risk for an

adverse interaction with a medication The formulary Rx
he’s taking for another condition, for What is the basis for decisions about
example—and step therapy are all which drugs are placed on the
forms of prior authorization. All are formulary?
intended to balance cost effectiveness
and clinical efficacy. Because they Choices are generally based on safety,
limit employee access to certain drugs efficacy, and cost per dosage. Because of
and annoy both physicians and the difficulty in quantifying overall
pharmacists, however, these strategies value, the broader picture—a drug’s
require careful consideration. ability to improve health and wellbeing
and reduce other medical costs related
The answer to the question of whether to a particular condition—tends to be
employees generally support or left out. What’s more, the number of
oppose provisions requiring approval drugs in a particular therapeutic
of a medical exception or a physician’s category is often limited. This common
confirmation of medical appropriateness practice operates on the assumption
is unclear. But both can contribute that similar products, such as all
to productivity loss because the selective serotonin reuptake inhibitors
inconvenience involved in complying (SSRIs) for depression, are essentially
with such requirements may intrude equal and interchangeable.
on the workday.

Step therapy is a provision that calls FORMULARY “MUST HAVES” AND MAYBES
for evidence of an unsuccessful trial
with one, typically older and lower- Although companies do not determine what drugs are placed on the formulary, it
priced, medication or therapeutic class is important for employers to ensure that plans and PBMs have a solid process in
of drugs before authorizing coverage place to select preferred drugs and to keep members informed about which
of a newer, generally higher-priced medications are on the preferred list.
treatment. It can be effective in
controlling widespread use, for Must haves:
example, of a more expensive drug • Drugs recommended in clinical guidelines issued by government agencies and
that affords protection against a medical societies for prevention and treatment;
potentially serious but relatively rare • Evidence-based decisions on drug placement;
side effect. But here, too, drug cost • A sufficient selection of drugs in each therapeutic class;
should not be the sole concern. • Productivity concerns considered in decisions on drug placement;
Productivity loss is a possible side • A process for appeals and patient/clinician notification of denial;
effect of step care if it results in repeat • Clinicians making formulary decisions.
doctor visits or phone calls to the
health plan to seek approval of a Maybes:
particular drug. • A policy based on CDC recommendations for the appropriate use of antibiotics;
• Out-of-pocket payments covering the full cost differential for branded drugs with
Is prior authorization worth it? Used generic equivalents;
judiciously, it can be. The key is to • A step therapy approach for products whose main benefit is relief from relatively
limit the number of products that rare side effects;
require it, base decisions on evidence- • A tiered copay or reference pricing system that places new products with minimal
based clinical guidelines, and keep an differences from older drugs on the top tier.
eye on the cost/benefit ratio. 8-10

It is not necessary to include every Programs designed to ensure that the
drug on the formulary, but it is chronically ill receive proper care,
important to recognize that even drugs education, and support and comply
in the same class have different with a safe and effective treatment
mechanisms of action and side effect and self-care regimen should be a
profiles. There are differences in crucial part of any corporate health
individual response, sometimes benefit package.
related to racial or genetic differences,
that today are rarely predictable. It’s Health plans, PBMs, and specialty
not unusual for a depressed patient, vendors are the primary providers of
for example, to respond to one SSRI disease management programs, but
after being unresponsive or unable to pharmaceutical firms, local healthcare
tolerate a number of others. facilities, and the staff of in-house
corporate health departments
sometimes offer programs as well.
Regardless of what model It’s not the source that’s crucial,
formulary is selected, however, but the focus. Because
employers should insist that disease management programs can
the health plan or PBM: drive up drug use through enhanced
• Use evidence-based compliance, for example, a vendor
prescribing principles in making that promises or is expected to lower
formulary decisions. Rx costs will be hampered in its
• Focus on a medication’s ability to ability to be effective. The corporate
improve health, (rather than on price objective and the goal of the program
and rebate). administrator—which should be to
• Ensure that therapies called for in maintain health, boost productivity,
clinical guidelines issued by and drive down overall medical
government agencies and medical costs—must be in alignment.
societies (both for prevention and
treatment of serious illness) are covered. The Disease Management Association
• Ensure that productivity concerns, of America (DMAA) provides the
including a drug’s impact on employees’ following definition of a full-fledged
ability to get to work and function program: “Disease management is a
effectively, are addressed. system of coordinated healthcare
interventions and communications
for populations with conditions in
Clinical Interventions which patient self-care efforts are
Disease management
(See disease management worksheet in Any disorder with high prevalence
Section B of Appendices.) and high direct and/or indirect costs
Less than optimal use of is an obvious target for a disease
pharmaceuticals, primarily among management program. But there are
those with chronic disease, costs additional criteria to consider. The
an estimated $76 billion a year, and ideal candidate is a condition with
is believed to be the cause of widely accepted clinical guidelines
nearly 30% of all hospitalizations. 2 that define appropriate treatment, yet

one where there is considerable The DMAA offers tips for employers
variation in practice patterns and poor to consider in settling on a disease
patient compliance with treatment. management program and selecting a
Acute flare-ups, which adherence to vendor. The patient education features
therapy can avert, are also part of the should be carefully evaluated.
clinical picture. The potential for Programs with strong behavior change
relatively short-term savings also components, for example, are more
makes a disease attractive for disease effective than those that provide
management strategies. 11 educational materials alone. The extent
and frequency of data reporting are
also crucial. Programs that do not
Key features of a provide timely access to information
comprehensive disease such as nurse support line utilization
management program and Rx claims data, according to
include: the DMAA, are unlikely to yield the
• A process of population best results.
identification and collection of
baseline health status data; The association also suggests
• Patient-specific assessment and considering a disease management
recommendations; program that focuses not just on one
• Evidence-based guidelines that are disease but on multiple conditions, a
provided to physicians; new approach that’s well-suited to
• Collaborative practice models that the needs of an older and sicker
include doctors and other providers; population. This is similar to the case
• Patient education in self-management management services that some
and support, e.g., a nurse line; PBMs offer as part of their utilization
• Ongoing case management and management, although the pharmacy-
coordination with doctors and patients; based programs typically focus on
• Process and outcomes measurement, medication compliance alone.
evaluation and management;
• Routine reporting/feedback to patient, Outsourced or in-house
physician, health plan, and other Which disease management services
providers; or programs are best suited to an
• Tracking and guaranteeing cost in-house program? Which should be
savings/quality improvement. outsourced?

Again, the DMAA weighs in: An

The association classifies less outside vendor is likely to be a better
comprehensive programs as disease choice than an in-house program
management “services,” but in some for a company with no previous
cases, a more limited program is well experience in disease management, it
suited to a company’s needs. Even suggests. For companies with more
programs that do not include every experience, however, there are other
component should provide regular considerations. 12
reports with measurable outcomes—a
reduction in ER visits among asthmatics One is staffing. Does the organization
who participate, for example. have an occupational health

department with the resources to enacted their own privacy regulations
conduct a full-fledged disease as well; some are stricter than those
management program or the ability issued under HIPAA (the Health
to determine which services would Insurance Portability and
yield the biggest payoff? Accountability Act), and should be
reviewed to ensure compliance. 13
Another is the nature of the illness
being targeted. Employees may be Predictive modeling
reluctant to participate in an on-site Technology is at the heart of predictive
program involving a disorder that modeling, a newer and broader
has a perceived stigma, such as approach to disease management
depression or bipolar disease. 12 It whose aim is to prospectively identify
should be recognized that employee at-risk individuals and intervene
assistance programs have effectively before a catastrophic illness strikes
dealt with these issues in many or chronic disease fully develops.
organizations. Also known as population health
management or care enhancement,
Many employers have had success it involves the use of mathematical
in conducting in-house health models to comb myriad sources of
management programs, a variation data—pharmacy claims, reports
on the disease management theme. from primary care providers and
Features may include Health Risk specialists, input from employee
Appraisals and follow-up reports, self-appraisals, for example—in
on-site screening, smoking cessation search of opportunities for timely
classes, stress relief, exercise, and intervention. Predictive modeling
nutrition and weight management, vendors use historical claims data
with participation often boosted with to generate relative risk scores for
a reward or incentive. With studies beneficiaries, providing employers
repeatedly showing that the vast with forecasts of future cost drivers
majority of healthcare costs are as well as the opportunity to develop
incurred by a small fraction of the programs to mitigate the risk. 14, 15
population, programs that help
employees get healthy—or stay Here, as with a more traditional
healthy—are a sensible and profitable disease management service, the
investment. program providers are in touch with
physicians. But in this newer model,
Any internal health-related program the focus is likely to be on the
requires strict adherence to measures to application of the latest research
ensure employee confidentiality, with findings and on pointing out patients
personal health information accessible who are potential candidates. While
only to those with a legitimate need to some doctors may resent the intrusion,
know in keeping with new federal others appreciate the opportunity to
privacy rules. Companies that conduct speed the time it takes to put newly
HRAs, for example, typically use an proven applications into practice.
outside vendor to tally the results and
issue a report revealing findings only in While the verdict is still out on the
the aggregate. Many states have return on investment, there are signs

that many organizations view this as a Utilization management
valuable and cost-effective approach. (See drug utilization worksheet in Section
An outcomes verification project is B of the Appendices.)
underway at Johns Hopkins University. On a broader level, drug utilization
The Federal Employee Health Benefits review (DUR) is an assessment of the
Program and Medicaid both have pilot appropriateness of Rx drug use and
predictive modeling programs with one prescribing patterns that can occur at
vendor. A Boston-based vendor cites various points in the process.
such giants as Aetna, Cigna, Pfizer
Health Solutions, and Pitney Bowes as Concurrent review, for instance,
users of its predictive modeling takes place at the time the drug is
software products as well. 15, 16 dispensed: The electronic system that
connects all the pharmacies in the
Case management and network flags the pharmacist if a
compliance newly prescribed medication has the
Typically offered by PBMs and health potential to interact dangerously with
plans as part of their efforts to manage another product the patient is taking.
drug utilization, case management/ Retrospective review may include
compliance programs include some drug edits to verify that physician
but not all of the components of prescribing patterns are appropriate.
disease management. Such services
generally target enrollees with one or Assuring that the proper dosage is
more chronic conditions and feature prescribed and screening for
refill reminders, identification of therapeutic duplication occurs at the
patients who are underutilizing point of sale as well. Some prior
medication or have stopped taking it authorization measures—utilization
entirely, and intervention, as needed, management strategies that aim to
with patient and physician. balance cost effectiveness and clinical
efficacy are discussed below—are
Here, too, matching the service to the applied at this point as well.
needs of those covered is key.
An older, sicker workforce or group Not all of the tools described in this
of retirees will benefit from a case chapter will be applicable to or
management approach focused on appropriate for all employers. In the
age-related conditions and treatments, appendix several other tools and
for instance. For a young, healthier disease management resources are
population, a compliance campaign highlighted. There is also a list of
might target childhood immunization commonly used terms and definitions.
instead. Three out of 10 children It is important to remember that
enrolled in commercial HMOs do not whatever tools are chosen will only
receive the recommended chicken pox be useful and effective in the context
vaccine. 17 In addition to the health of a solid program of employee
risk that poses, productivity suffers education.
when parents miss work to stay home
with kids who contract the disease.


plan’s preferred list before enrolling

n the quest to effectively manage
a prescription drug benefit, it is in it. Nearly nine out of 10 wanted
important not to lose sight of to know what was preferred before
the fact that it is not just about their doctor selects a particular drug
benefit design. It’s no secret that and more than nine out of 10 wanted to
education can play a crucial role know what was preferred before going
in helping workers become more to the pharmacy to fill the prescription.
cost-conscious healthcare consumers
or that ensuring that those with
chronic conditions receive the proper The most obvious
treatment and follow a daily self-care lapse: Nearly two out
regimen—the premise of disease of three of those polled
management—can bring a reduction were unfamiliar with the
in acute episodes. Similarly, a clear word “formulary.” After
explanation of what their health and hearing an explanation, however, six
pharmacy benefits cover, how to file respondents in 10 said they thought that
appeals, if necessary, and other related their pharmaceutical plan uses one. While
details can help employees better most believed that reliance on preferred
negotiate the system. Yet this is one drugs is a money-saving measure, nearly
component of employee education half feared that formulary medications are
that benefit managers tend to less effective.

A Harris Interactive poll of more than Information about the appeals process
4,000 adults, conducted in 2000 for the is in even greater demand: Fully 97%
National Pharmaceutical Council, wanted to be told what steps to take
highlights Americans’ understanding if they received notification that a
of and attitudes about employer- particular drug had been denied, and
sponsored drug coverage—and 98% sought assurance that any appeal
provides glaring evidence of a they filed would be decided on by
communication gap. 1 independent reviewers.

Respondents were not at all confused On a more positive note, roughly nine
about their need for more information: out of 10 respondents agreed that
Eight in 10 said they wanted details medication had improved their own
about which drugs were on a health lives or the life of someone close to
them and had helped prevent the
development or worsening of a serious
illness. Close to nine out of 10 expect
• ~2/3 are unfamiliar with the term “formulary; prescription drugs to extend their own
• Almost half suspect that formulary drugs are less effective; life or the life of someone they care
• 8/10 want information on “preferred” list prior to plan enrollment: about as well.
• Almost 9/10 want to know what is “preferred” before their physician selects a drug;
• >9/10 want to know which drugs are “preferred” before going to the pharmacy; Notably for employers, eight
respondents in 10 recalled a time when
• Nearly all want information on the appeals process.
a prescription drug helped them or
Source: Harris Survey
someone close to them get back to work

nearly two out of three said drugs had
helped them or a loved one hold on to a • 87% would not settle for a less expensive drug
job. No wonder consumers have strong • 90% would not reduce the dosage or take the drug less frequently to make it last longer
feelings about their ability to get the • 92% would not stop taking the drug
medication they need when they need it • 73% would not be amenable to a lower priced, less convenient drug
at an affordable price.

Six in 10 said they would certainly or ENGAGING EMPLOYEES

very likely complain to their health
plan if their out-of-pocket costs for • Provide a list of “preferred” drugs for each plan.
prescription drugs were significantly • Describe features of the company Rx benefit plan and the rationale.
increased. But that doesn’t let plan • Provide access to HEDIS data.
sponsors entirely off the hook: More • Ensure that plan documents are comprehensible to all employees.
than half would also take their
complaints to their employers
and look to switch to another practice of requiring enrollees to pay
employer-sponsored plan. more for non-formulary medications,
which at least 40% of firms with 500
What most would not do is jeopardize or more employees now do.
their health by tampering with their
medication. However, with Rx spending
continuing to surge, that finding is
Higher out-of-pocket Rx costs would not likely to deter employers bent
prompt nearly one in 10 to consider a on switching to a multi-tier benefit
change in jobs, a factor that employers design. But other opinions expressed
planning an increase in copays by those surveyed can and should be
would be wise to take into account. heeded, particularly the plea for being
Nonetheless, recent findings suggest kept better informed. Their responses
that would-be job seekers in search are vivid reminders that in crafting
of a more generous drug benefit are brochures, comparison charts, or other
not likely to find it. Nationwide, Rx written material and in planning the
copays are increasing. content to cover at employee meetings,
nothing should be taken for granted.
Not surprisingly, the Harris poll found
that consumers feel strongly about In addition to defining the
other strategies aimed at cost control components of the formulary (the
as well. While respondents were about drugs on the “preferred list”), it is
as likely to favor as to oppose a important for employers to clearly
strategy calling for the pharmacist to describe each feature of the Rx benefit
contact the patient’s doctor before plan, providing the rationale for
filling a prescription for a non- including it as well as the definition
formulary drug, they plainly objected whenever possible. Enrollees who
to the use of financial incentives to understand, for instance, that a brand
encourage doctors to use preferred drug and its generic equivalent have
products. Some seven in 10 also the same chemical structure and safety
opposed the increasingly prevalent profile are more likely to opt for

generic substitution than those who drugs on formulary, for starters—to
aren’t sure exactly what generic make an informed selection. That
means. Recognizing that cost is the includes access to HEDIS (Health Plan
only major difference between the two Employer Data Information Set)
products should make employees reports, whenever possible, and details
more amenable to a financial incentive on how to compare plans’ scores on a
program that requires a substantial range of clinical and service-related
copay—or the full differential—for a performance measures. (See Quality
brand drug with a generic equivalent Metrics in Chapter III.)
as well.
Benefit managers charged with
If employees have a choice of health preparing written material about
plan, it is incumbent on the employer health and drug coverage would also
to provide the details they need—the do well to heed a warning issued by
the Employee Benefit Research
Institute. For the estimated 42 to 90
NAIC MODEL LEGISLATION million Americans who function at
Consumer concerns about managed care and increasingly about pharmacy benefit low literacy levels and for those for
management practices often draw the attention of insurance regulators. Many of these whom English is a second language,
concerns are addressed in a new model regulation soon to be released by the National plan documents and other explanation
Association of Insurance Commissioners. This model, which at least some states expect of benefits—which even sophisticated
to adopt, can be found on the web-site of by clicking on the link for readers tend to find confusing—are
“Draft Model Acts” on the bottom of the home page and then selecting “Health Carrier apt to be incomprehensible. 19
Prescription Drug Benefit Management Model Act.” Various cogent provisions of the
model are referenced throughout this paper. The model certainly establishes a number The move to a consumer-driven,
of the standards relative to disclosure of information to employees, including disclosure patient-centered healthcare
in member handbooks about the use and design of formularies, prior authorization, marketplace depends on employers’
step therapy, and other pharmacy benefit management practices. In addition, there are ability to present vital information
requirements to make information available to current and prospective members, about about employee benefits in terms that
the drugs subject to formulary restrictions or other benefit limitations. Last, plans and all workers can understand. That
PBMs are required to notify members and physicians 60 days in advance of deleting a translates into plain language,
drug from a formulary or imposing a new benefit requirement or limitation, in order to relatively short words, and a lack of
give the member time to appeal.
jargon and employer purchasers’
willingness to engage employees in
The federal Dept of Labor has also recently issued regulations, which outline requirements
the quest for quality.
to notify beneficiaries, whenever a claim is denied, of the basis for the denial and their
rights to appeal. It also establishes standards and timelines for appeal processes. As
part of the ERISA requirements, this regulation affects all employer-sponsored health (See cost-sharing and prior authorization
plans, whether self-insured or fully insured. worksheets in Section B of the


hether an Rx benefit plan Formulary decisions
is administered by a Queries should reveal whether
pharmacy benefit clinical measures or manufacturer
manager or health plan, discounts and rebates are the key
a thorough evaluation of the program determinants of which drugs are
and the features offered is in order. added to the preferred list. It is
Regardless of whether a benefit manager crucial to find out how decisions
is investigating a new vendor or are made and who makes them.
assessing the performance of one with Benefit managers should review
whom there is an ongoing relationship, the credentials of the clinicians who
the question is the same: What determine both the formulary
evaluation criteria should be used? make-up and the outcome of
appeals. These decision makers
So is the answer: Clinical analysis, typically have an advanced degree,
data collection and reporting, access to such as a PharmD, a background in
pharmaceutical products, member drug evaluation, and experience on
services, and purchasing strategies all Pharmacy & Therapeutics committees.
require close scrutiny.

Quality metrics NAIC Model Act

When dealing with a health plan, it’s The National Association
important to look beyond its experience of Insurance
in managing prescription drugs, seeking Commissioners’ (NAIC)
evidence of its ability to manage model act on pharmacy benefits
health and overall health costs. requires that a P&T committee must
include physicians and pharmacists with
HEDIS (Health Plan Employer current knowledge of clinically appropriate
Data and Information Set) report prescribing, and must base their clinical
cards provide standardized measures decisions about formularies and the use of
that score managed care plans on their other benefit limitations on scientific and
compliance in dozens of clinical and medical evidence.
non-clinical areas. They range from
cesarean delivery rate to follow-up
care after heart attack, access to Benefit managers should ask
primary and preventive care, specifically how new drugs are
immunization rates, and breast handled and how soon they’re
cancer screening. Accreditation by considered for formulary placement.
NCQA, the organization that issues Decisions regarding non-formulary
the report cards and conducts patient status or prior authorization should be
satisfaction surveys, is a mark of made before a drug goes on the market;
quality as well. if no such limits are implemented at
that point and the new medication is
Employers should take these metrics readily accessible, limits imposed at a
into account and employees should later date may create clinical problems
have the opportunity to review and cause personal distress.
HEDIS scores and NCQA accreditation A checklist of prior authorization
during open enrollment. provisions is also a worthwhile

evaluation tool, in part to ensure are those numbers included in
that the plan administrator does not quarterly reports? Are comparison
make the processes so onerous that data provided to help assess whether
they become a virtual guarantee of or not a compliance program is
denied access. yielding results?

Customer service
Benefit managers may want A pharmacy benefit plan should also
to request: offer a wide range of member services,
• A list of drugs for which addressing such specifics as customer
step therapy applies; service support for enrollees who are
• The average turnaround hearing-impaired or don’t speak
time for authorization; English, the extent and capabilities of
• A systematic review of all denials; the retail pharmacy network, and the
• Provisions for emergency approvals or turnaround time for Rx orders placed
Rx supplies; by mail. Benefit managers should delve
• The previous year’s generic dispensing into the issue of member access with
rate; questions to determine which
• The top five drugs requiring prior formulary options and administrative
authorization in the previous year and procedures are used.
the approval rate for each.
In assessing any pharmacy benefit,
a direct line of questioning is the
Requiring a systematic assessment of best way to ensure that the plan
any prior authorization program administrator’s goals and those of the
included in the Rx plan design is an employer are aligned—that clinical
effective way to monitor its effects. The evidence takes priority over discounts
approval rate is a key criterion, and the and rebates in determining which
following rule of thumb has been medications are added to the
suggested as a guide: If it exceeds 80%, formulary. HMOs often outsource
chances are the administrative costs pharmacy management functions.
outweigh any potential benefits. 2 If that’s the case with the plan
being considered, it is important
Concurrent review, retrospective to request information about the
review, and compliance programs are subcontractor as well. Another
other utilization management means of measuring the effectiveness
functions that should be assessed, with of existing health and pharmacy
targeted questions to determine which benefit plans is to survey employees
features are offered and whether they to gauge their satisfaction with
can be tailored to specifications. Data member services.
reporting is crucial, too, so questions
about what information is available (See the pharmacy request for information
and how it’s reported are also in worksheet on page 56 and the drug
order. If the plan administrator tracks utilization review program checklist on
late refills and no refills, for instance, page 53 for additional details.)


At the onset we recognized that the nature the pharmacy industry. Included in this
of this section necessitated a level of user group are community pharmacies
expertise beyond that resident within our and Pharmacy Benefit Mangers (PBMs).
working advisory committee. We therefore These price distributor companies
requested that PricewaterhouseCoopers routinely survey wholesalers and
(PWC), as a core contributor to Wye River manufacturers to determine the most
Group on Healthcare, provide insight into current and accurate price for a given
the marketplace dynamics underlying the product.
cost of drugs. The information in this
chapter of the guide was authored by and The price assigned to the drug by the
reflects the sole experience of PWC. PWC drug manufacturer is compiled by
has referenced publicly available documents commercial organizations such as Red
wherever possible. We recognize that Book, First DataBank and Medi-Span
percentages and dollar amounts will likely for use by the pharmaceutical
vary from one part of the market to community 1. Information obtained
another. No funding was provided to PWC by these companies is date stamped
for this valuable contribution and we are and stored in a database, which is
grateful for their expertise. prepared for distribution to their
network of users. Users subscribe

nderstanding the pricing of to these pricing services and receive
prescription drugs is a current price information on
challenge to most corporate thousands of drug products. Users
benefit managers due to the also have an option to receive the
variety of ways a given drug price may pricing information daily, weekly
be represented from a manufacturer or or monthly. PBMs typically receive
distributor. Additionally, different electronic data feeds from these
health care entities measure drug companies on a daily basis.
purchase prices in a number of
different ways making it difficult for Drug purchase costs communicated
payers and consumers to pin point a from the pricing distributors to the
fixed value for a drug product. Unlike user groups are expressed as “Average
other industries, the pharmacy Wholesale Price” (AWP). The AWP is
industry doesn’t use terms such as the best known of the pricing terms.
“suggested retail cost” and “wholesale It is comparable to a sticker price on an
cost” in a way that is easy for most automobile where the manufacturer
consumers to understand. Instead suggests a certain price but almost
the pharmacy industry uses different everybody pays something different
terminologies derived from routine from that price.2 The AWP however
publications by “price distributors” is neither “average” nor “wholesale”;
that convey a purchase price that it is simply a number assigned by the
is not equal to the net price to the products manufacturer3. The AWP is
end user. often described as a “list price”,
“sticker price” or “suggested retail
A price distributor is a company in the price” reflecting that it is not necessarily
business of providing drug pricing the price paid by the purchaser or
information and other related clinical a consistently low or “wholesale”
data to a variety of users throughout price.4

Practically speaking, AWP is really pharmacy at the point of purchase.
nothing more than a standard or a Discount levels below AWP that are
baseline that is used in understanding achieved by pharmacies vary and
drug costs during the purchasing depend on a variety of factors, which
process. It really has nothing to do include size of purchase and speed
with the term “wholesale” as we of payment.
know it. To that end, pharmacies,
wholesalers and distributors do not Historically, pharmacists used AWP as
actually purchase drugs at AWP nor their basis for pricing. However, they
do they all purchase drugs for the would usually purchase drugs from
same price. Drug prices vary between wholesalers or manufacturers at some
industry channels and even between percentage discount from AWP and
pharmacies. Therefore, there really is could thus retain the difference
no reasonable way of actually between what they paid for the drug
determining a “true” drug cost and the cost basis for reimbursement
because of the variability in the as an additional profit.5
discounts offered to each delivery
channel purchasing the products. What do pharmacies actually end
Simply put, pharmacies purchase up paying for drugs?
drugs at some number below AWP. There are a variety of factors, which
In other words, AWP is discounted influence a pharmacy’s net purchase
by the wholesaler, distributor and price. These factors include purchase
manufacturer to the community volume and timeliness of payments. A
2000 report by the U.S. Department of
Health and Human Services estimates
that retail pharmacies purchase brand
minus 18%. A study conducted in 1999
MANUFACTURER by the Office of the Inspector General
(OIG) indicated that pharmacies
purchased brand name drugs at an
estimated average of AWP minus
WHOLESALER 21.8% for calendar year 1999.6 The OIG
reviewed thousands of invoices from
pharmacies participating in the
Retail Hospital Mail Order Medicaid Program and reported their
Food Stores
Pharmacies HMO’s Clinics Pharmacies
15% findings in a publication titled
49% 26% 10%
“Medicaid Pharmacy-Actual
Acquisition Cost of Brand Name
SOURCE: Congressional Budget Office based on Micky Smith, Pharmaceutical Marketing Strategy and Cases Prescription Drug Products” dated
(New York: Pharmaceutical Products Press, 1991), Chapter 3; Boston Consulting Group, The Changing
August 10, 2001.
Environment for U.S. Pharmaceuticals (Boston: Boston Consulting Group, April 1993); and Pharmaceutical
Research and Manufacturers of America, 1997 Industry Profile (Washington, D.C.: PhRMA, March 1997), p. 31.
NOTES: Figures in parentheses represent shares of the prescription drug market in 1996, calculated as a
A similar report on generic drugs
percentage of total U.S. sales at manufacturer prices. HMOs = health maintenance organizations. titled “Medicaid Pharmacy-Actual
a. Some chain-store pharmacies buy directly from the manufacturer. Acquisition Cost of Generic
b. Some mail-order pharmacies go through a wholesaler. Prescription Drug Products” issued
on March 14, 2002 indicated

pharmacies were purchasing generic Drug Name / Package Unit Cost 9 Difference Per Percent
drugs with an average discount of Strength Size 100 Units Difference
AWP minus 65.9%.7 Product A 90 1.4511
(Calcium Channel
What factors can influence the Blocker) 5mg
value of AWP in my contract with Product A
our PBM? (CCB) 5mg 300 1.42207 $2.90 2%
Many employer/PBM contracts define Drug Name / Package Unit Cost 10 Difference Per Percent
AWP as the average wholesale price Strength Size 100 Units Difference
listed for the National Drug Code Product C (ACE 100 1.18325
(NDC)8 submitted by a nationally Inhibitor) 20mg
recognized pricing source on the
Product C (ACE 3000 1.15987 $2.34 2%
date that the prescription is billed. Inhibitor) 20mg
Contracts may even delineate a
difference in the AWP definition Drug Name / Package Unit Cost 11 Difference Per Percent
as it pertains to retail and mail order Strength Size 100 Units Difference
claims. Often AWP for retail claims Product D 100 2.6681
will be defined as the NDC for the (SSRI) 20mg
package size billed, whereas mail Product D 1000 2.5347 $13.34 5%
order claims will be for the NDC for (SSRI) 20mg
the same product based on package
sizes of 100’s for tablets and capsules
and 480ml’s for liquids. Product function of package size for some
package size is an important issue commonly prescribed products. 9, 10, 11
for employers to understand because
it has a direct effect on the AWP of The AWP discount that a PBM or
the product. In other words AWP health plan offers is also a key concern
may vary for any one product as a of plan sponsors. The extent of the
function of how that product is discount is influenced by a number of
packaged. PBMs use these sizes of variables, including client size, plan
100’s or 480’s as standards because design, regional factors, competition,
they typically purchase products in and the pharmacy plan’s marketplace
bulk and dispense them in smaller clout, but it’s generally in the range of
quantities. However employers 12 to 16% for brand name drugs in
should know the smaller the bottle retail pharmacy and 18 to 23%12 for
size (100’s or less) the more expensive brand name drugs in mail order.
the unit AWP is for the drug. For
many drugs, the product unit cost The retail brand discounts cited above
to the employer will be more if are consistent with discounts reported
the PBM uses the AWP of a bottle in “Report to the President on
size of 100 then it would be if Prescription Drug Coverage” issued
they priced the drug using the by the Department of Health and
AWP of a bottle size of 500 or 1000 Human Services (HHS). The HHS
or higher. Researchers interviewed industry
experts that estimate the retail brand
The chart above illustrates the cost discounts to be between AWP minus
differences for a given product as a 13% to AWP minus 15%. 13

An August, 2000 study by David Kreling enabling the PBM to pocket the
at the University of Wisconsin School of difference 17.
Pharmacy cites research published by
Wyeth-Ayerst that found the Average The reimbursement rates between
Retail Brand Discount in 1998 was AWP the PBM and the retail pharmacies
minus 13.2%14. In addition 22% of the are a result of on-going negotiations
respondents to the Wyeth survey between the PBMs and the pharmacy
indicated that they receive brand name providers and are often based on
discounts of 15% or more 15. the anticipated number of patients
geographically available to any given
Some PBMs choose to offer discount provider. Therefore, participating
arrangements based on Average AWP, pharmacies are often reimbursed
which has a direct effect on the net at variable rates even for one
discount. Average AWP isn’t as single employer.
redundant as it sounds. It is in fact
a means of reimbursement that How do contracted pharmacies
considers averages of certain doses make money under these
and package sizes in determining reimbursement arrangements?
the net cost to the employer. It is difficult for pharmacies to thrive in
today’s competitive market. Successful
The Medco Health Consultant Website pharmacies rely on a high volume
identifies this practice as one that business backed with strong purchasing
intrinsically distorts the whole discounts. Consider the following
concept of AWP and any discount simple example. Using the acquisition
associated with it making comparisons cost numbers cited earlier from the
between AWP’s even more complex 1999 OIG Report we can estimate the
and misleading 16. In fact, this profit of a pharmacy for a brand name
technique actually is a way of drug with an AWP of $100.00.
inflating the AWP, so that any
discount then associated with it may If the full AWP of the drug reimbursed
appear to be greater than it is. Since is $100.00 and the pharmacy has a net
the employer may be focusing more purchase discount for that same drug
on the discount number and not on at AWP minus 22%, and assuming the
what they are actually paying, they PBM is reimbursing the pharmacy at
can be easily misled and may be AWP minus 13%, using the Kreling
figure, with a $2.00 dispensing fee and
SAMPLE PRODUCT AVERAGE AWP/UNIT $10.00 co-payment the following will
illustrate the transaction model and
• Average of most commonly used $.4916 the pharmacies rate of profit:
• Average of all bottle sizes $.4864
• Average of all sources $.6216 What About AWP on Generics?
• Average of all NDCs $.5930 Understanding AWP as it relates to
generics is a little more complicated
But, lowest AWP/unit available on market is $.3945 then understanding AWP’s for
Impact of average AWP on drug spend could be as much as 25% brands. Competition between generic
Source: Medco Health Consulting Website, January 2002
companies on products they mutually
produce is fierce. The report on

generic drugs titled “Medicaid
Pharmacy-Actual Acquisition Cost of
Generic Prescription Drug Products” $87.00 + $2.00 - $10.00 = $79.00
MEMBER CLIENT [(AWP-13%) + Dispensing Fee - Co-pay
issued on March 14, 2002 indicated = Client Invoice]
pharmacies are purchasing these
products at an average discount of $10.00
AWP minus 65.9%18. Additionally,
since generic drugs are relatively
inexpensive, pharmacies have an PBM
opportunity to buy these products $89.00
(Reimbursement = $79.00 + $10.00
in bulk. Often, the larger the bulk Member Co-Pay)
purchase the steeper the discount
offered to the pharmacy.

As a result of the competition and PHARMACY MANUFACTURER

the variability in purchase price for Retail Drug Sold at AWP–
22% or $78.00
generics reimbursement for these Pharmacy Profit $11.00
products on the retail level tends to be ($89.00-$78.00)
even more complicated then brands.
When reimbursing generics PBMs often Source: PWC
use pricing limits known as Maximum
Allowable Cost (MAC). For generic
drugs about three fourths are reimbursed
using limits known as MAC19. These differences between one PBMs MAC
limits are established by PBMs based and the other could be significant.
on the lowest estimated acquisition
cost for any of the generic equivalents Lastly, not all generics have MAC
of a given drug. The MAC tends to be prices. MAC inclusion is based on a
50-60% below AWP 20. The remaining variety of factors including but not
one-forth of generics are reportedly limited to product availability, product
reimbursed like brand name drugs at ratings and amount of time the
AWP minus 13-15% 21. product is on the market. This is why
generic drugs not priced as MAC are
MAC Pricing allows the PBM to set often priced with the same discount
reimbursement on a product specific the PBM uses for brand name drugs22.
basis without regard to which The, number of products included on
manufacturer NDC was purchased or the MAC list should therefore be
used in the billing process. Therefore equally as important to the employer
MAC Pricing eliminates the inherent as the value of the MAC discount
variability in generic product AWP’s. offered by the PBM.
Also, each PBM has a separate and
proprietary means of establishing When considering or comparing MAC
MAC. Therefore no two PBM’s will reimbursements among PBM’s
have the same reimbursement for a employers should focus on the overall
single generic drug. This is an generic discount (MAC & Non-MAC
important issue to employers when generics) and the overall value that
selecting a PBM because the brings to the pricing quote.

What Are Rebates? to influence market shares of rebated
Rebates are moneys returned by a products 25.
seller to a purchaser that are delayed
from the sales transaction, and can According to Kreling, rebates are
be considered a negotiated price intended to reduce net drug program
discounting strategy targeted to drug costs and their impact can be
manufacturers. Manufacturers pay a substantial. However, some advise
rebate based upon the amount of the caution about focusing on maximizing
firm’s products that are dispensed by rebates when the emphasis should
the pharmacies providing prescription be on minimizing total costs. For
service to beneficiaries or enrollees. example, a 20% rebate may seem very
The rebates usually are a percent of attractive, yet if that is applied to a
the value (at the manufacturers $50.00 brand name drug prescription
transaction price) of a drug dispensed (approximate average brand name
and occur separate from the claims drug prescription price), the net
submission/payment cycle as an after price would be $40.00, considerably
market arrangement. PBMs often more than what might occur if a
negotiate and administer the rebates generic drug was dispensed (with an
for drug plan sponsors and charge a approximate average price of $17.00).
fee or percent of the rebate for If rebates detract from the potential of
administering the rebates, although the overall best cost-effective drug
some sponsors (e.g., HMOs) may choices, they may lead to false
engage directly in the rebate process. economies 26.
They ultimately reduce drug program
costs for sponsors 23. Kreling believes that rebates as cost
control strategies can produce savings
What is the extent of savings from for overall program costs. However,
rebates and discounts? since rebates generally are associated
In the HHS report on prescription with newer, brand name drugs, they
pricing,24 manufacturers’ rebates to continue to foster a new drug mind
FEHBP plans were estimated to range set that serves to keep a focus on
from 2 to 21 percent of acquisition newer, typically more expensive
price and as high as 35 percent for brand name drugs as our primary
selected drugs. Rebates may occur therapeutic agents and may lead to
merely because the PBM (or health less emphasis on overall more cost
plan or program sponsor) represents a effective therapies. However
volume purchaser of a manufacturers according to a study by Frank
product. Rebate arrangements also Lichtenberg never drugs tend to
may have some purchase volume or lower all types of non-medical
market share requirements associated spending, resulting in substantial
with them, giving credence to the net reduction in the total cost of
notion that the discount truly reflects treating a given condition. 27
a volume difference. Market share
stipulations associated with rebates What percentage of the savings is
often are connected to incentives being passed on to my company?
such as formulary inclusion or Rebates may be expressed as a per
pharmacist and patient incentives claim rebate, a per brand claim rebate

or a per rebateable claim rebate. Each Mail order rebates are even greater
type of rebate is different from the due to the higher number of units
other. The easiest one to understand is dispensed per claim and the PBMs
the per claim rebate. A per claim ability to switch non-preferred
rebate means the employer is going to medications to the preferred
receive the designated rebate value for medications. It is not unusual to see
each claim (brand and generic) billed mail order per claim rebates at two
to the PBM. A per brand rebate means to three times the amount of retail
that the employer will receive a per claim rebates.
designated rebate value only when a
brand name drug is dispensed. A per What is the criteria for formulary
rebateable claim means that the placement?
employer will receive a designated Formulary inclusion is a decision
value only when a formulary drug made by an independent board of
is dispensed. pharmacists and physicians retained
by the PBM on a consulting basis. This
When a PBM is quoting on a per board is commonly referred to as a
brand or per rebateable basis a Pharmacy & Therapeutics Committee
calculation needs to be performed to (P&T). The P&T Committee typically
determine what the per claim basis meets quarterly to review current
would be. Often the per brand and per formulary products and make
rebateable quotes are considerably additions and deletions to the existing
larger then the per claim quote and formulary based on new product
therefore appear to be the better offer. availability, drugs going off patent and
This not always true. other related matters.

Consider choosing between a $6.00 per The role of the P&T committee is to
rebateable claim offer and a $3.00 per decide the amount of control and form
claim offer. Looking at the numbers it the formulary will take as well as to
would be hard to believe that the most design and coordinate all other aspects
advantageous offer of the two is the of the system. The P&T committee also
$3.00 offer. The reason is simple. is the communications link between
The universe of eligible claims gets the MCO’s medical staff and the
reduced considerably with the $6.00 pharmacy providers 28.
offer. You can reasonably assume 38
to 40% of the claims gets thrown Before a product is included on the
out because they are generics and formulary the P&T Committee will
therefore are excluded from the meet and debate on several issues
rebateable claim population. Out of related to the product. The P&T
the remaining brand name claims an Committee will consider the products
additional 25% gets dropped because clinical efficacy, cost effectiveness,
they are non-formulary, non-rebateable relative market share and potential
products. Once you reduce the original for rebates as well as other relevant
$6.00 number by the designated information prior to making a
percentages your net rebate value recommendation. If the P&T
becomes $2.70 therefore making the Committee concludes the sum of
$3.00 offer more favorable. these considerations support the

products formulary inclusion they will A preferred or partially restricted/
recommend the product be designated closed formulary specifies the drugs
as preferred. covered, but allows exceptions to the
list, usually with increased cost
The underlying intent of a formulary, sharing (sometimes labeled incented
simply a list of covered or reimbursable formularies) or administrative effort
drugs, is to improve prescribing and (e.g., prior authorization). Drugs in
drug use quality. Formularies target a preferred formulary often are
drug use decision-makers, including specified as the formulary drug
both prescribers and consumers, and because of a rebate arrangement with
can be considered a benefit structure the drug’s manufacturer (although
component intended to control or clinical parameters are, or are claimed
influence utilization by specifying to be, the primary determinants of
which drugs can be used. They can be potential formulary selection and
established by PBMs, health plans, status) 29.
sponsors, hospitals, and others and
take several forms. They are labeled Employers need to educate themselves
in various ways to reflect the breadth to both the benefits and limitations of
of drugs included and/or ease of their drug discounts and rebates as
access to drugs not listed. An open well as other aspects of the pharmacy
formulary includes all drugs. A closed benefit programs. There are many
or restricted formulary only includes common employer strategies used by
or covers listed drugs. Closed PBMs in an attempt to control cost
formularies may vary in breadth, where the cost to the employer
ranging from including only one select sometimes out weighs the benefits.
drug within a therapeutic category or The challenge is a difficult one but the
drug group to including multiple pay off in savings could be significant
drugs within a therapeutic category. to the employer.


1. “Medicaid Pharmacy – Additional Analysis of the Actual Acquisition Cost of

Prescription Drugs” (A-06-02-00041) dated September 16, 2002.

2. “Report to the President: Prescription Drug Coverage, Spending, Utilization,

and Prices” From the Department of Health & Human Services April 2000.

3. “Medicare Outpatient Drugs – Program Payments Should Better Reflect

Market Prices”. Testimony of Laura Dummit Before the Subcommittee on
Health, March 14, 2002.

4. Ibid.

5. “Report to the President: Prescription Drug Coverage, Spending, Utilization,

and Prices” From the Department of Health & Human Services April 2000.

6 “Medicaid Pharmacy – Additional Analysis of the Actual Acquisition Cost of

Prescription Drugs” (A-06-02-00041) dated September 16, 2002.

7. Ibid.

8. An NDC is a unique 11-digit number, which identifies the manufacturer, the

label name and strength and the package size the product was bottled in.

9. Source, First Data Bank, January 2, 2002.

10. Source, First Data Bank, January 4, 2002.

11. Source, First Data Bank, January 29, 2002.

12. “HCFA Study of the Pharmaceutical Benefit Management Industry,

PricewaterhouseCoopers LLP, June 2001.

13. “Report to the President Prescription Drug Coverage, Spending, Utilization,

and Prices” From the Department of Health & Human Services April 2000.

14. “Cost Control for Prescription Drug Programs: Pharmacy Benefit Manager
PBM Efforts, Effects and Implications”. David Kreling, PhD, R.Ph. University
of Wisconsin School of Pharmacy, August 2000.

15. Ibid.

16. Calculating the “average” Average Wholesale Price, A Ruse to Confuse You
on Potential Savings, Medco Health Consultant Website, January 2002.

17. Ibid.

18. “Medicaid Pharmacy – Additional Analysis of the Actual Acquisition Cost of

Prescription Drugs” (A-06-02-00041) dated September 16, 2002.

19. Report to the President Prescription Drug Coverage, Spending, Utilization,
and Prices” From the Department of Health & Human Services April 2000.

20. Ibid.

21. Ibid.

22. Ibid.

23. “Cost Control for Prescription Drug Programs: Pharmacy Benefit Manager
PBM Efforts, Effects and Implications”. David Kreling, PhD, R.Ph. University
of Wisconsin School of Pharmacy, August 2000.

24. “Report to the President Prescription Drug Coverage, Spending, Utilization,

and Prices” From the Department of Health & Human Services April 2000.

25. Cost Control for Prescription Drug Programs: Pharmacy Benefit Manager
PBM Efforts, Effects and Implications”. David Kreling, PhD, R.Ph. University
of Wisconsin School of Pharmacy, August 2000.

26. Ibid.

27. “Are the Benefits of Newer Drugs Worth Their Cost? Evidence from the 1996
MEPS. Frank Lichtenberg, PhD. Health Affairs, Sept/Oct 2001:241-251.

28. Managing The Pharmacy Benefit: The Formulary System, Robert Goldberg,
February 1997, Academy of Managed Care Pharmacy.

29. “Cost Control for Prescription Drug Programs: Pharmacy Benefit Manager
PBM Efforts, Effects and Implications”. David Kreling, PhD, R.Ph. University
of Wisconsin School of Pharmacy, August 2000.


egardless of the type of Disability and disease
healthcare and pharmacy management data
benefit an employer While HIPAA privacy regulations may
provides, it is crucial to impose new challenges for employers
ensure that it’s effective. The key disability data should be carefully
questions here are: dissected as well. In addition to
looking at the overall cost of short-term
• What measures can the company disability, benefit managers should
use to determine its value? request a report on the number of
• Do employees have access to the claimants, broken down by disease
treatment they need? category and duration, from the
company’s short-term disability (STD)
Direct healthcare expenses, for medical and workers’ compensation carriers.
claims and pharmaceuticals, are the If they don’t keep such details in the
place to start. Although these costs records, such detailed reporting can
reveal only part of the picture, they’re be added as a requirement in the
a means of detecting changes and Request For Proposal. Determining
patterns. Increases in Rx costs for the ratio of medical claimants who
treatment for a condition in the year file STD claims for a particular
after a disease management or condition—and comparing the ratio
compliance program was introduced, with that of previous years—is a
for instance, may be offset by a decline valuable measure of whether efforts
in medical claims. to manage it are effective. In addition
STD relapse rates vary for chronic
While pharmaceutical spending is diseases. This is another important
unlikely to decline, the PBM or the reason to consider disease management
health plan providing the Rx benefit programs which focus on medication
should conduct drug edits to assess— compliance and persistence.
and report on—the appropriateness of
the medications prescribed for patients Administrators of disease management
with the most prevalent and costly programs should provide detailed
conditions. Quarterly reports, which reports as well, with outcomes
should include such information as the measures—number of inpatient stays,
generic dispensing rate, the percentage trips to the emergency room, and
of prescriptions that involved requests doctor visits, for example, as well as
for drugs requiring priorauthorization, Rx and medical claims costs. 11 Other
and the approval rate, are a valuable vendors, including the Employee
source of outcomes analysis as well. Assistance Program, behavioral
An approval rate of >80% or persistent health/substance abuse carveout,
requests for a particular type of and sponsors of health promotion or
non-formulary drug, or both, could wellness programs, should be expected
indicate a need to reconsider the to provide similar data as well.
product’s placement to ensure that
employees have greater access. 2


five most costly conditions for firms in

or employers that want to be
more proactive in assessing the oil, gas, and mining business. In
and managing healthcare this predominantly male industry,
costs, including prescription however, childbirth isn’t even on the
drug benefits, further analysis is top 10 list.
Pinning down the specifics requires
No matter how well informed they gathering and analyzing as much data
may be about the factors driving up as possible. (See Mining the Data on
drug costs nationally, it is impossible page 32.)
for employers to make sound
decisions about healthcare spending The key questions are:
without knowing where their own
biggest expenses lie. Companies • Which diseases are most prevalent
should attempt to identify their among the firm’s employees?
most significant cost drivers, health • Which conditions account for the
information analysts from The highest direct medical expenses,
MEDSTAT Group advise, and use including pharmaceutical costs?
the findings to develop a targeted • What indirect health-related
strategy to bring costs in line. 20 expenses should be considered to
get a complete picture?
MEDSTAT has published a list of the • How can positive health
top 10 most costly conditions the behaviors be promoted within the
business community faces, with workforce?
findings derived from claims • What is the economic impact to a
representing some 4 million workers company by increasing the
at more than 60 large companies. productivity of its workforce?
Overall, coronary artery disease is • What is the (ROI) return on
the most expensive physical illness investment of a healthy at-work
on the list, followed by GI disorders, workforce?
hypertension, childbirth, and arthritis.
In the mental health arena, bipolar For many employers, however, the
disease tops the chart. But every answers remain elusive. Claims data,
organization is different, and the broken down by disease category, is a
problems that plague the companies crucial part of the investigation. But
in the MEDSTAT database aren’t HMOs, in which about a third of
necessarily the same ones affecting individuals with employer-sponsored
every workforce. 20 health coverage are enrolled, are the
least likely to be able to produce it.
Employee demographics, particularly
age and gender breakdown, as well as Important as it is to look at total
regional differences, are among the claims costs, focusing on medical
myriad factors that determine a firm’s and drug spending alone can also
unique health profile. Type of industry be deceptive. Depending on the
plays a key role as well. For example, size of the workforce or the group
diseases of the ear, nose, and throat represented by the data, an isolated
and back problems rank among the case or several instances of high-risk

pregnancies or premature births, for impossible, to quantify. Disability
example, might give the false insurance providers should be able to
impression that there’s a need for an produce STD claims data, broken
intensive prenatal care program. In down by disease. Similarly, human
fact, a case management program resources departments should track
directed at catastrophic cases might unscheduled absences and be able to
be a more appropriate response. report on patterns, but a lack of
disease-specific data is likely to
But even the most finely tuned preclude using this as a measure
medical and pharmaceutical claims of a condition’s indirect costs.
data present an incomplete picture.
Direct healthcare costs alone should
never be the sole criterion for
decisions about healthcare spending,
any more than the cost of a particular A recent study of diabetic workers at a large firm found that only 70% of their total
drug should. Yet at most corporations, healthcare costs were related to direct medical expenses—for physician visits,
they are the only costs considered, hospitalization, medications, and the like. Fully 30% related to the disability/lost
resulting in a serious underestimate of productivity burden. Overall healthcare costs for employees with diabetes were two
the total burden of a disease. A small and a half times higher than those of their non-diabetic colleagues.) 21
but growing number of organizations
are attempting to put a price tag on
the indirect costs associated with
various medical conditions. (See Bank
A study linking medical and short-term disability (STD) claims at a major
One case study on page 33.)
manufacturing firm identified some conditions—most notably ischemic heart
What are those indirect costs? Some disease and cancer—that have very high medical expenditures but low disability costs
firms focus exclusively on the and others where the opposite is true: Sprains and strains (excluding back problems)
productivity loss associated with had the lowest ranking in claims costs among the 10 categories studied, for examples,
absenteeism and short-term disability but third highest in disability costs. Together with mental health disorders, another
(STD). Others include presenteeism, prominent cause of productivity loss, sprains and strains accounted for a quarter of
the phenomenon of being at work but the company’s short-term disability days.) 22
not fully functioning. Research leaves
little doubt that these indirect disease-
related expenses are an enormous
drain on the corporate bottom line.
Consider the impact of depression, which has a national health tab estimated at
The Institute for Health and $30 to $44 billion a year. While employers often worry about the direct cost of
Productivity Management estimates treating the disease, numerous studies suggest that it’s a bargain compared to the
that the indirect costs related to cost of untreated depression. One study found, for instance, that individuals who are
chronic conditions typically account depressed but not receiving care for the condition consume two to four times the
for as much as 55% of the total healthcare resources of other enrollees. Another revealed that depressed employees
expenditures, and considerably more take as many as 10 sick days a year because of their depression alone. 23 Still others
in some cases. 17 showed that patients whose access to psychotropic drugs is arbitrarily restricted often
end up hospitalized, exacting a human and economic toll far greater than any savings
For most companies, though, much of
on medication costs that might have been achieved.) 24
what comprises indirect costs and
productivity loss is difficult, if not

MINING THE DATA Productivity loss because of sub-par
performance on the job is even more
To determine which diseases are most prevalent and which are costing you the most, benefit elusive. It has been tracked by large
managers are advised to pull together as much in-house information and data from third party organizations whose workers is easily
vendors as possible, then turn to additional resources for help in filling in the missing pieces. quantifiable: Bank One was able to
While some of the facts and figures are likely to be inaccessible, this partial list can help gauge the productivity of customer
employers get started:
service representatives, for instance,
by measuring the portion of the day
• Number of employees, broken down by age, gender, job category, and locale.
they spent in contact with customers
• Number of covered dependents, broken down by age. and time away from their desks (and
• Number of covered retirees, broken down by age and Medicare eligibility. therefore not on providing services). 25
A large insurance company conducted
Absenteeism: a similar study of the productivity of
• A tally of unscheduled absences, with year-to-year comparisons and any other information claims processors, this one involving
revealing reasons or patterns. the effects of allergy medication (see
box page 38), by tallying the output, or
Medical claims data: number of processed claims. 26
• Direct costs, by disease category and number of claimants in each group.
• Separate data on catastrophic cases. Unless a company’s workers perform
a particular function that can be easily
Pharmacy claims data: tracked and counted, however, it’s no
• Rx drug costs, grouped according to therapeutic category and number of claimants in each
simple matter to approximate the
• Prior authorization assessment (if part of the plan),by type of strategy, drug category,
amount of time they are unproductive.
number of requests, and approval rate. And linking presenteeism to a
particular disorder and putting a price
Short-term disability: tag on it requires more complex
• Number of short-term disability claimants, by disease category, duration, and by occupational calculations than most employer
and non-work- related condition. purchasers can manage.
• Number of workers’ compensation claims, by cause and duration of disability.
• Percentage of medical claimants who file STD claims, by disease category.
• Percentage of STD and workers’ compensation claimants who go on long-term disability. Matching Data and
Disease management:
• Number of program participants and participation rate. What employers can do, however, is
• Outcomes measures, including a comparison with pre-program medical and Rx claims cost
use published studies of disease
and disability rates.
prevalence and indirect health-related
Behavioral health/substance abuse: costs as a starting point, then adapt
• Claims data, by diagnosis and number of claimants. the findings to fit their workforce
• Employee Assistance Program data, including number of users, average number of visits, demographics. Bank One’s use of
and percentage who seek additional mental health services. epidemiological data as part of its
effort to gauge the impact of migraine
Additional resources: headache—described in Targeting
• Health Risk Appraisals Disease with Integrated Data on
• Epidemiological studies, including prevalence data and estimates of direct and indirect
page 33—is a case in point.
disease-related costs (primary sources include the Journal of Health Promotion and the
American Journal of Public Health).
Because women are three times as
likely as men to suffer from migraines,

the financial institution had to adjust workforce. The calculator accounts
the figures to reflect its predominantly for regional differences in both
female workforce. Depression, too, healthcare delivery and disease
strikes disproportionately, affecting prevalence.
some 12% of women but less than 7%
of men in the U.S. each year. 27 The calculator focuses on asthma,
hypertension, heart disease,
The Bank One case study also depression, diabetes, smoking,
highlights the use of another valuable and chicken pox, a childhood
source of information about employee ailment with high productivity loss
health, the Health Risk Appraisal. A because of parental absenteeism—
relatively inexpensive resource an expense that compliance with
available to all but firms so small that immunization guidelines could go a
employee confidentiality could be long way to eliminate. The NCQA’s
jeopardized, HRAs typically address intent is to emphasize the benefits of
risk factors, such as being overweight contracting with an accredited health
and having high blood pressure; plan, but the findings can easily be
lifestyle and behavioral measures, extrapolated to help employers decide
such as smoking and seat belt use; and where to focus their healthcare dollars.
emotional factors, such as stress and The calculator gives benefit managers
anxiety. Questions about the presence a tool for considering the financial
of conditions such as diabetes and implications of the productivity gains
migraine headaches can be included
as well.
While completing the questionnaire
is generally voluntary, the expected Bank One’s sophisticated health data management system provides the means for analysis
of the full range of factors that affect corporate healthcare costs. In addition to demographics
response rate (about 20%) is often and medical and pharmaceutical claims, the computerized database tracks short-term disability,
sufficient to provide a relatively both occupational and non-job related, scattered absences, participation in wellness and
accurate picture of direct and indirect disease management programs, employee health risks, and more, providing an accurate picture
healthcare costs. Not surprisingly, of the true cost of a disease. Corporate Medical Director Wayne Burton recommends that
research has found that the drain companies create a matrix with direct costs on one axis and indirect costs on another, then
target the conditions with high costs in both places.
on productivity correlates with
the number of self-identified Companies that lack data that pinpoint indirect costs should consider Bank One’s approach to
health risks. 25 migraines. The condition, which studies have shown to affect about 6% of men but 18% of
women, was a major headache for the 80,000-employee corporation, which has a 70% female
Other resources can be helpful, too. workforce.
One notable tool is the NCQA Quality To determine whether the prevalence figures were an accurate measure of the disorder’s impact
Dividend Calculator. Provided by the for the company, Bank One sent a Health Risk Appraisal that included the question, “Do you
committee that accredits health plans have migraine headaches?” to the 20,000 workers at one of its units. One in five of the nearly
nationwide, this online resource 4,000 respondents—more than 23% of the women and nearly 8% of the men—said Yes.
( uses
Bank One also used published literature to assess indirect costs, referring to a survey in which
demographic and other data you migraine sufferers reported missing an average of three days a year and performing poorly for
supply about your workforce to a total of about five days because of their condition. The next step: Using employees’ average
estimate the economic value of daily pay to calculate migraines’ financial toll on Bank One, which came to well over $20 million
productivity losses associated with in absenteeism and lost productivity annually. 28
various ailments affecting your

that improved quality of care can be out-of-pocket costs, health plan
expected to provide, for example. premiums, and benefit structure.
Its algorithms and parameters can
An updated version of the Quality calculate the direct per patient per
Dividend Calculator also allows year cost associated with diabetes,
employers to factor in a range of for instance, including the treatment
variables, including comorbidities, needed to achieve and maintain the
direct claims costs, employee recommended level of disease control.


national and regional insurers, and

lthough employer
purchasers generally track PBMs projects an increase in 2003 of
rising prescription drug nearly 20%. 30 A recent report by the
spending in their health Centers for Disease Control and
plans, they may not have a solid idea Prevention (CDC) based on data
of the impact of Rx costs on their from a government survey tracking
healthcare budgets. Here, two key physicians’ prescribing patterns since
questions are addressed: the 1980s, concludes that drug costs
will double in the next 5 years. 31
• What portion of the recent
double-digit health plan premium But how much of recent premium
increases does the Rx spending increases – 12 to 15% for large
surge actually account for? employers and much more for
• What’s driving the increase in small companies – is attributable to
drug spending? increased drug spending? Even if
medication costs were to account for
The answers will help identify ways to 15% of a health plan’s premiums and
manage costs without jeopardizing those costs rose by 20% per year, that
employee health. would still amount to just 3 percentage
points (0.15 x 0.20 = 0.03)—about a
In 2001, the most recent year for quarter or less of the latest round of
which figures are available, the national premium increases. It is apparent that
tab for healthcare climbed to more than other factors are at work. Increased
$1.4 trillion, 8.7% more than in 2000. costs for physician services and
Outpatient drug costs grew by 15.7%. hospital care, insurer profits and the
The tally reflects public and private cyclical nature of premium increases
sector spending. That encompasses are all contributing factors.
money spent on drugs for government-
sponsored and employer-sponsored
pharmacy coverage, and Americans’ Volume vs Cost
out-of-pocket expenditures on
prescription medicine. 29 Is increased drug spending a
predictable consequence of the surge
With this increase, outpatient in pharmaceutical use, which is itself
pharmaceutical spending accounted the combined result of a rapidly aging
for just under 10% of the national population, an explosion of new and
healthcare tab, about the same as in better treatments, and new clinical
the early 1960s. The percentage guidelines? Or is inflation the key
declined steadily throughout the culprit? The answer is both, but the
late 1960s and 1970s and then began specifics of the relative contribution of
to rise again throughout the 1980s these factors may vary for specific
and 1990s. therapeutic areas and the
characteristics of the population.
Predictions are that prescription drug
benefit costs will continue to escalate One large study using paid claims
in the coming years. A Segal Company assessed changes in use and cost for
survey of managed care organizations, seven of the largest or fastest-growing

therapeutic categories over a three- Volume appears to be driven primarily
year period in the late ’90s. In each by three factors:
category, the researchers found
substantial increases in spending— • Demographics
ranging from a low of 43% for • Expanding medical knowledge
gastrointestinal drugs to a high of • Disease management
219% for hormone replacement
therapy. Further analysis, with Demographics is a key factor, as the
everything affecting cost per day graying of America alone is responsible
of treatment going into the price for a sizeable increase in drug use. As
column and everything affecting seniors age, more chronic disease
intensity of use and number of becomes almost inevitable. For every
users classified as volume, found one-year increase in average age of the
volume to be the predominant enrolled population, Merck-Medco
factor in every case. 32 reports, spending on pharmaceuticals
goes up 4%.
More recent but unpublished work in
a large managed care population by These are notable findings for a nation
Protocare Sciences corroborated this with well over 34 million seniors and
finding. Its analysis of spending from nearly 76 million Baby Boomers not
1999 to 2001 found 70% accounted for far behind. The first wave of Boomers,
by volume and the rest by higher Rx who comprise nearly a third of the
prices, including changes to newer, population, turned 55 in 2001. That’s
more expensive products. A similar about the time when drug use patterns
study using a PBM database by diverge from those of their younger
Brandeis University researchers found counterparts as age-related chronic
that price and volume were equal diseases develop.
factors in the rapid growth in drug
spending. 33 The increase in price per Expanded medical knowledge
daily dose came mostly from the shift about particular diseases or conditions,
from less expensive to more costly new and more effective multi-drug
newer drugs within the same category. regimens, and better diagnostic tools
A decline in generic use added to the have contributed to the surge in drug
rising costs. consumption as well, as treatable
diseases are detected and treated earlier.

Disease management programs,

One study of enrollees in a large PBM found, for instance, that while those over 65 represented typically developed for chronic
just 6 % of the participants, they accounted for 20% of drug use and Rx spending. 33 diseases like asthma, diabetes, and
heart failure, boost drug use, too.
Indeed, their success lies in convincing
people of the importance of following
A landmark diabetes trial completed in the early ’90s, found that tighter control of blood a healthy lifestyle and a regimen of
sugar can reduce or eliminate many of the disease’s most devastating effects, and recently
revised national guidelines for cholesterol management that lower the threshold for initiating maintenance drugs, fostering
therapy. New parameters and updated clinical protocols have led to the identification of more compliance, and assuring that those
patients who need more treatment. who have not been getting adequate
care receive needed treatment.

Older Drugs vs Newer Drugs
How much has prescription drug use expanded? In 2000, according to the National
Association of Chain Drug Stores, retail outlets dispensed some 2.8 billion scripts, up from
Although increases in volume account 2.1 billion in 1995—a 33% rise.
for much of the surge in Rx spending,
questions are frequently raised about
the cost and value of newer drugs
patterns by handing out generic
A recently published Health Affairs samples, reportedly accounted for a
study supports the claim that many savings of $3.5 million in the first six
newer drugs represent real value. The months. Michigan Blue Cross-Blue
study classified drugs by FDA Shield partnered with pharmacies
approval date, then looked for links across the state to encourage greater
between the age of the product and usage of generics, resulting in savings
cost, morbidity, mortality, and of some $3.4 million in the fourth
productivity loss. It concluded that quarter of 2001.
savings associated with use of newer
drugs in place of older drugs, due Clearly, generics and older medications
largely to a decline in hospitalization can be important components of a
and a shorter length of stay, were more balanced and cost-effective pharmacy
than three times the additional cost of benefit plan. It’s equally clear that
the new medications. 34 Newer drugs many new drugs offer significant
also often have fewer side effects, an benefits over older medications.
important issue for some patients.
The goal should be for
But when newer drugs are not needed, each individual patient to
they can create problems other than have the right medication
cost inflation. For example, the CDC at the right price—the
has launched an educational campaign drug that will appropriately,
in response to the alarming rise in adequately, and cost effectively
antibiotic-resistant bacteria. Its focus address the problem.
is twofold: emphasizing to physicians
and patients that most upper
respiratory infections are viral in In this context, the final factor said to
nature, and thus antibiotic therapy be driving greater volume as well as
isn’t necessary, and promoting older influencing the use of newer drugs is
antibiotics as first-line treatment for direct-to-consumer (DTC) advertising.
many uncomplicated bacterial In 1996, pharmaceutical firms
infections. 35 collectively spent $791 million on
marketing to consumers. After FDA
What about generics? Some pharmacy revised the rules governing broadcast
benefit managers and health plans ads in 1997, investment surged, rising
have begun pushing generics as they to $2.5 billion in 2000. 36 Whether this is
scramble to control costs, programs good or bad is a matter of continuing
that can save a substantial amount debate and study.
of money. Merck-Medco’s Generics
First, a program that encourages Supporters contend that DTC ads
physicians to alter their prescribing encourage patients who would

EXAMPLE otherwise not seek medical treatment
An example that shows the interplay among the multiple factors driving volume and for their conditions to do so. However,
price relates to asthma. Spending on asthma medications rose by 94% from 1995 to opponents assert that such advertising
1998. The main reason: The average number of prescriptions per patient went from nine prompts demands for high cost
to 14 per year. Another key factor was the switch to newer drugs. Both the increase in medications that may not be necessary
prescriptions per patient and the shift to newer inhaled corticosteroids were likely and may interfere with the doctor-
driven by guidelines issued by the National Heart, Lung, and Blood Institute in 1997
patient relationship. As this debate
stressing the importance of using inhaled corticosteroids as a maintenance medication.
This is a prime example of a case in which focusing solely on the cost of the drug gives
continues, it is important that efficient
an incomplete—and misleading—picture: While the per patient drug cost rose from and effective means be sought for
$236 to $460 a year, the rate of hospitalization (averaging $11,000 per patient stay) fell physicians to assist patients in
by 27% and emergency room visits, at $450 each, declined by 8%, helping to offset the evaluating the range of health care
additional drug spend.) 32, 37 information and making informed
choices about their health.47, 48

A study of claims processors taking allergy medicine revealing that the cheaper, older product
(a sedating antihistamine) was not a bargain at all highlights the importance of considering
side effects that interfere with work performance as well. By measuring the number of claims
processed in the weeks after an employee filled a prescription, the researchers found that the
newer, more expensive drug (a non-sedating antihistamine ) was by far the more cost-effective
choice when productivity effects were considered.) 26


future. And the Pacific Business Group

he movement toward
“patient-directed” financing on Health (PBGH), a purchasing
models for health benefits coalition representing some 44 major
that give employees more firms and 3 million employees,
choice and control, as well as more recently announced plans to make its
responsibility for decision-making, is own version of a patient-directed
widely recognized as a means of benefit available to its members. 39
making employer costs more
predictable and employees more The appeal of patient-directed
responsible—and is a logical next step. healthcare extends beyond the
Some benefit managers believe that employer community. Many
this approach is ideally suited employees welcome the opportunity
to prescription drugs. to have greater control as well. It
reflects a consumer empowerment
It’s not a single strategy, however, but movement, characterized by patients’
an array of options that encompasses greater knowledge of preventive
both commonly understood variations measures, heightened awareness of
and promising new designs. On the prevalent conditions and their
far end of the spectrum is a defined treatment, and increasing insistence
contribution model in which an on partnering with the physician of
employer would give each staff their choice. It also addresses the
member a set amount of money to demands of many consumers—the
be used to purchase health coverage, roughly six in 10 Americans with
including pharmacy benefits, on the employer-sponsored health coverage
open market. But current tax laws and foremost among them—who objected
the individual insurance marketplace strenuously to the controls imposed
will have to change to make that a by HMOs just a few years ago.
viable option. In a less radical patient-
directed model, the company While not right for everyone PDHC
continues to provide the structure, can work for a large percentage of our
select the coverage, and bear the risk. population. For those who are unable
or unwilling to participate actively in
While Medtronic, the medical device healthcare decisions, additional
manufacturer, stands out as an early support will be necessary.
adopter, employer interest in following
suit is rapidly growing. William M. Information technology, which
Mercer reports that nearly half (45%) brings the latest studies and journal
of the firms it surveyed are interested
in defined contribution plans; Towers
Perrin finds that four firms in 10 have
implemented or are considering Minneapolis-based Medtronic added this type of arrangement in 2001, putting $1,000
adopting a patient-directed benefit, into a spending account for each single employee and $2,000 for each family who
and a Washington Business Group on signed on. Enrollees were given a choice of a range of deductible levels, which went as
Health/Watson Wyatt survey suggests low as $1,500 for an individual or as high as $7,000 per family. The monthly premium,
that three employers in 10 are likely based on their selection, also covers a catastrophic policy takes over after the
or very likely to move to a defined deductible has been met.) 38
contribution strategy in the foreseeable

articles to the desktop and into the of non-traditional practitioners
home, is a key reason 21st century and, often, for contact lenses and
healthcare consumers are better procedures like laser vision
informed and more involved than correction that more traditional
their predecessors. A single Internet plans don’t cover.
search under “consumer health”
yields well over 2 million entries, This increasingly popular approach,
including many web sites developed which typically allows unused funds
by leading medical societies and to roll over to the following year, gives
healthcare organizations. 40 employees an incentive to take cost
into consideration. That freedom
Magazines and newspapers have prompts employers with a stake in
responded, too, to the public’s keeping their workers healthy to ask:
seemingly endless quest for news How can a company be sure its
about medicine and health. DTC ads workforce will get the care—and the
provide targeted information about medications—they need?
diseases and treatments and urge
Americans to consult with their Arming employees with information,
doctors as well. including the price and relative value of
prescription drugs and other medical
Patient-directed healthcare also services and treatments, will help
supports Americans’ growing interest ensure that the decisions they make are
in alternative medicine: Typically, truly value-based. With that in mind,
consumers are free to use the money patient-directed benefits need to be
in their accounts to pay for the services paired with information and support.


particular medications are already

ging Baby Boomers, said to
be the most savvy group under way and genetically based
of healthcare consumers custom therapies are close at hand.
our nation has ever had, At the same time, researchers
rapid increases in our understanding have stepped up the study and
of disease states, and Americans’ identification of human protein
insistence on the most innovative function—known as proteomics—
medical treatments, are some of the which has the potential to have a
factors driving the ever-growing major effect on drug development
demand for more and better as well.
prescription drugs. The supply side
is keeping pace, with pharmaceutical With the vision of customized
companies unceasingly pursuing new drugs as the primary focus, many
products based on groundbreaking pharmaceutical companies are
scientific knowledge and capabilities. spending billions of dollars in their
quest to bring genetic therapies to
These realities—including the fact market—a development Americans
that elderly Americans take three are sure to embrace. Indeed, surveys
times more prescription drugs than attest to their keen interest in medical
the rest of the population—have innovation.
already led to a sizeable increase in
the use of medication. 41 The number In one study, for instance, seven in 10
of retail prescriptions dispensed in of those polled expressed a positive
the U.S. went from 2 billion in 1994 attitude toward genetic testing to
to 2.5 billion in 1998 and 2.9 billion in predict disease—and six in 10
2000. Of the $100 billion spent on expected to be tested themselves. 43
prescription drugs in 1998, more than Another found that U.S. adults have
a third covered drugs introduced a greater interest in technological
since 1991. 42 advances than their European
counterparts. Not only do they want
As the promise of genomics is everything medicine has to offer, the
fulfilled, drugs will play an even survey found, but about half of those
greater role in the maintenance and polled rejected the notion that a
management of Americans’ health. In private or public sector purchaser
addition to evaluating and redesigning might not be able to pay for it. 44
their pharmacy benefit plan now,
employers nationwide need to look The nation’s health has already
toward the next 10 to 15 years in improved in many ways, and
anticipation of the changes and Americans can look forward to living
adjustments ahead. longer and remaining healthier longer
than their parents did—and longer
The mapping of the human genome than they could have hoped for even a
has opened the door to the day when decade ago. Yet significant problems
pharmaceutical companies offer remain. In addition to getting older,
customized drugs. Clinical trials the U.S. population is growing fatter
involving the use of genetic markers and more sedentary. The same
to predict patients’ responses to consumers who push for new and

MANAGING INJECTABLES better treatments often fail to take
responsibility for their own health or
More than 117 biotechnology, or biotech, drugs are on the market today, with 75% for the financial consequences of the
of them having been approved by the Food and Drug Administration (FDA) within healthcare decisions they make.
the past 6 years. Currently 30-40% are chemotherapeutic or cancer-related agents.
More than 350 new entities are in the pipeline undergoing clinical trials targeting In the face of this dichotomy,
over 200 diseases, from Alzheimer’s to AIDS, cystic fibrosis to rheumatoid arthritis employers must take a leadership
and diabetes to multiple sclerosis. These injectable products are a rapidly growing role. There is clearly a need to
force to be reckoned with. continue to offer effective Rx coverage,
but judicious use of innovative
Biotech drugs have provided hope and given relief to people suffering from some therapies demands greater consumer
rare and devastating disorders. But the price tag is high because of the more involvement. Employee education—
sophisticated technology used to develop and manufacture them. Many specialty focusing on clinical information and
injectables are administered in the physician’s office or the home, with the drugs quality data and the knowledge
coming directly from the physician. Thus, until now, they have remained virtually consumers need to conduct their
hidden from view, their costs and coverage imbedded in medical claims and the risk own cost-effectiveness and trade-off
largely shouldered by physicians and medical groups. analyses—becomes a key benefit
management tool. But convincing
Now the explosive growth in these high-tech entities is causing doctors to demand Americans that they must shoulder
relief—and health plans and PBMs to face the need to manage the escalating cost more of the cost and responsibility for
of these high-cost products in a way that balances employer and employee needs. the technological advances they value
so highly may be employers’ biggest
As injectables move from the medical to the Rx side of the healthcare budget, they benefit management challenge.
are a cost driver employers cannot afford to overlook. Purchasers should ask their
health plan or PBM how these costs are being managed and request their help in
determining which drugs will provide benefits that outweigh their costs. 45, 46


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Appendix A Private HMOs, once seen as a viable

way for the government and employer
Reviewing Coverage for purchasers to save money and offer
Retirees seniors a comprehensive package that
included Rx benefits, have withdrawn
Rx spending is especially high for from the Medicare market in record
those age 65 and over. The drug cost numbers so the stability of a Medicare-
alone has led to a steady decline in risk HMO should be investigated
the number of employers offering carefully before adding it as a
retiree coverage, which wraps around coverage option. There are hidden
Medicare benefits. FASB 106, the 1992 factors to consider before making any
accounting rule that forced companies changes in coverage as well, not the
to recognize the cost of retiree coverage least of which is the fact that delayed
on their balance sheets, also interfered retirement is a likely consequence
with employers’ ability to continue to of not offering health benefits to
provide benefits. In 2001, only 23% of early retirees. 1
large employers—defined as those
with 500 or more workers—offered
health insurance to Medicare-eligible
retirees. In 1995, 35% did. 1

The number of employers offering

health benefits for retirees under 65
continues to shrink as well, going from
41% in 1995 to 29% in 2001. That same
year, per retiree costs for health and
pharmacy benefits for early retirees
averaged $6,642, according to the most
recent data from Mercer Human
Resource Consulting, compared to
$2,717 per Medicare-eligible retiree.

Companies that still offer retiree

coverage are advised to carefully
review their expenditures, an
important step in considering whether
there are ways to mitigate retiree
health costs. Decisions to drop or scale
back coverage—by increasing copays,
adding deductibles, and capping drug
expenditures, for instance—in the
absence of contractual agreements
precluding any such change, should be
carefully reviewed for both legal and
financial ramifications.

Appendix B

Appendix C possible value measures (significant
therapeutic advantage for most
Other Tools patients; significant advantage for
some patients; or no significant
benefit) and three price levels: more
Formulary selection tools expensive, about the same, or lower
than the drug or group of drugs it
While few employer purchasers are would replace. There are three
personally involved in formulary options for formulary placement as
decisions, many discuss selection well: unrestricted, restricted access, or
strategies with their pharmacy outright exclusion.
plan administrator. The following
tools highlight selection criteria to In this model, a new drug that offers
inquire about: significant advantages for most
patients gets unrestricted coverage,
AMCP Format for Formulary regardless of cost. If it is significantly
Submissions is an evaluation tool better for some, access is unrestricted
developed to help pharmacists, PBMs, if the drug costs less than other
and health plans determine the impact comparable products. If the price is
of a drug’s inclusion or deletion from about the same or higher, enrollees
a formulary. The evaluation tool have restricted access—which could
aims to reduce “uncertainty in the take the form of prior authorization,
pharmacoeconomic evaluation higher copay or coinsurance, or, in a
process,” according to the Academy step-care model, only after an
of Managed Care Pharmacy (AMCP). unsuccessful trial with the alternate
drug or class of drugs. A medication
The Format asks pharmaceutical firms found to have no significant
applying to have a new product added advantage gets restricted access if it’s
to a formulary to provide evidence priced about the same or lower. If the
well beyond the scope of what the price is higher, the drug is excluded.
FDA requires. Specifics include quality More information can be found at
of life and patient satisfaction
indicators, extensive outcomes data,
evidence of improvement over existing
medications, and other measures
that carry significant weight in
determining whether to put the new
drug on the approved list. Available

A Coverage Decision Grid developed

by the Pharmacy Benefit Management
Institute offers guidance in factoring
clinical findings into formulary
decisions. A sample grid lists three

Appendix D kinds of disorders likely to afflict your
workforce. See Goetzel, RZ,
Disease Management Ozminkowski, RJ.
Resources Pharmaceuticals: Cost or investment?
Journal of Occupational and
Environmental Medicine. 2000;
High-cost conditions of pressing
42(4):338, for more details.
concern to employers are listed in a
variety of publications, some ranked
Official Disability Guidelines 2002
only by direct medical costs and
(7th Ed.) estimates time away from
others including indirect costs as
work and productivity loss for
well. None will necessarily mirror
high-volume health conditions. The
a specific company’s experience, data comes from a number of
but each will provide guidance government sources, with the
regarding diseases and disorders Occupational Safety and Health
that can be addressed. Administration (OSHA), the Bureau
of Labor Statistics, and the National
How Illness Hammers Productivity Health Interview Survey among them.
and Health Risks Take their Toll, two For more information or to purchase
charts included in a report on a large the guide, contact Work Loss Data
productivity study (The real measure Institute, 500 N. Shoreline Blvd.,
of productivity. Business & Health. Suite 1101N, Corpus Christi, TX 78471
November 1999:49) highlight diseases or call 800-488-5548 or 361-883-5000.
and risk factors—smoking, inactivity, Orders can also be placed at
and psychological distress, for
example—associated with a high
degree of productivity loss. Each Other references on the role of in-
shows a total score, or Worker house disease management programs
Productivity Index, reflecting its include:
overall impact. And each is divided
up to show where the problem lies: In-House Disease Management
in high rates of absenteeism, lengthy Programs
periods of disability, or a lot of time 1. Diabetes Management Making the
wasted on the job. Business Case. CDC/WBGH. 1999.
(WBGH 202-628-9320, Julie Gonen
Top 10 Physical and Mental Health contact)
Conditions, ranked according to total
payments based on findings from a 2. Employers’ Managed Health Care
multi-employer database with more Association (MHCA). Diabetes and
than 4 million covered lives, focuses the Workplace: How Employers Can
on medical costs. A series of charts Implement Change. 2000
broken down by industry—finance,
insurance, and real estate; government 3. Burton WN, et al. Bank One’s
entities; manufacturing; and oil and Worksite-Based Asthma Disease
gas extraction and mining, among Management Program. J Occup
them—allows you to zero in on the Environ Med. 2001:43:75-82

4. Burton WN, et al. Asthma Disease
Management: A Worksite-Based
Asthma Education Program. Disease
Management. 4(1) 2001 3-13.

5. Burton WN and Connerty CM.

Worksite-Based Diabetes Disease
Management Program. Disease
Management. 2002. 5(1) 1-8.

6. Burton WN and Connerty CM.

Evaluation of a Worksite-Based
Patient Education Intervention
Targeted at Employees With Diabetes
Mellitus. J Occup Environ Med. 1998.
40(8) 702-706.

Appendix E product, the enrollee has to pay
entirely out of pocket.
Defining the Terms
A selective, or restrictive, formulary,
like a closed formulary, provides
The design of an organization’s Rx automatic reimbursement only for
benefit plan will have a sizeable drugs on the preferred list. The
impact on employee health and difference lies in the modifications.
productivity and on the corporate A selective formulary may have one
bottom line. The choices are or a number of exceptions, typically
increasingly complex, however, based on evidence of medical
as many design elements intersect necessity. Step therapy is one example.
and overlap. Rather than simply excluding
particular drugs or groups of drugs,
Not surprisingly, the terms used to formularies with step care provisions
describe many of the elements of a require evidence of an unsuccessful
pharmacy program overlap as well, trial with one (older and lower-priced)
and thus may mean different things therapeutic class of drugs before
to different people. In this milieu, authorizing coverage of a newer,
even the word “purchaser” may generally higher-priced treatment.
need clarification. It is used throughout
the Guide to mean the employer A financial incentive formulary
purchaser, but it has also been used typically encourages physicians to
to denote the health plan, or payer. prescribe preferred drugs and uses
The word “payer”—which has been differential copays to influence
avoided in the Guide—can create enrollees’ choices. In 2001, for
confusion, too, since it can apply to example, the average three-tier Rx
the health plan or the purchaser. benefit had a copay for a branded,
non-formulary drug set more than
three times as high as the one for
The Formulary the purchase of a generic drug.

At its most basic level, a formulary

is a list of prescription drugs that a The Cost Share
pharmacy benefit plan recommends
or provides reimbursement for. Cost-sharing provisions can be based
on a fixed amount or a percentage of
An open, or voluntary, formulary the total cost of a prescription drug.
provides coverage for the vast majority
of FDA-approved medications, although Flat dollar copayment, in which
specific categories—products used for an enrollee pays one set amount
cosmetic purposes, for instance— regardless of the drug, have all but
may be excluded. disappeared as drug costs have
continued to rise.
A closed, or mandatory, formulary
only covers drugs on the list. If a Two-tier copays, with one price for
doctor prescribes a non-formulary generics and another higher price for

branded drugs, and three-tier copays in generic form must pay the full cost
have replaced them. Like two-tier differential.
plans, three-tier structures have
generic drugs on tier one. But the Prior authorization is a more
second tier is reserved for brand drugs restrictive form of utilization
on formulary, and non-formulary management, often reserved for high
branded products occupy the third cost non-formulary drugs. Examples
tier. In 2001, three-tier copays include requiring confirmation of the
averaged $9, $17, and $31, respectively. diagnosis at the point of sale,
physician confirmation of medical
Coinsurance, a cost-sharing provision appropriateness of a particular drug,
based on a percentage of the actual or evidence of a failed trial with one
price, has the advantage of exposing or more lower-priced medications
workers to the true cost of drugs—a (step therapy), and employer
system employers purport to favor approval of medical exception.
but rarely use.
Compliance/case management
programs go beyond the standard
Utilization Management forms of DUR. These services
focus on enrollees with one chronic
An electronic system linking every illness or on a patient population
pharmacy in a network is crucial with multiple health problems and
for effective drug utilization review feature refill reminders, identification
(DUR), an assessment of the of patients who are underutilizing
appropriateness of Rx drug use medication or have stopped taking
and prescribing patterns at the it entirely, and steps to intervene, when
point of sale and retrospectively. necessary, with patient and physician.

Concurrent review is part of the

dispensing process: The system Terms Relevant to Pharmaceutical
flags the pharmacist if a newly Pricing (from PWC)
prescribed drug has the potential to
interact dangerously with another Acquisition Cost – The net cost a
medication the patient is taking. retail, mail or hospital pharmacy
Assuring that the proper dosage is pays a manufacturer, wholesaler or
prescribed and screening for distributor to purchase a drug
therapeutic duplication occurs at product.
the point of sale as well.
Average AWP – A reimbursement
Generic substitution may also be model used by some PBMs that
part of the concurrent review. It can averages the costs of a single drug
be voluntary, with different copays entity across dosages and package
for generic and brand versions of sizes to determine a pre-discounted
a product designed to act as an starting point.
incentive, or mandatory, which means
that any participant who opts for the Average Wholesale Price – (AWP)
branded version of a drug available The published price offered to

industry entities that represents Mail Order Pharmacy – A pharmacy
the full undiscounted cost of the facility owned or contracted by a
prescription drug. PBM that is in the business of
filling prescriptions that are received
Brand Name Drug Product – 1) A in the mail or via the internet and
brand product protected by patent shipping the orders to a members
and distributed by the innovator address.
manufacturer. 2) A brand product that
is no longer protected by patent but Marketshare – A milestone that
is produced and distributed by the establishes a products sales frequency
innovator manufacturer. that is measured against other
products within the same
Co-Payment – The members portion therapeutic class.
of the drug cost that is designated in
the Summary Plan Description (SPD). Maximum Allowable Cost – (MAC
The co-payment is paid to the Pricing) A reimbursement limit
pharmacy at the point of sale and established by a PBM or government
deducted from the reimbursement entity that establishes a deep but
by the PBM. variable discount across individual
generic drug products.
Dispensing Fee – A contracted fee
between a PBM and a network or Medi-Span – A price distributor that
mail order pharmacy that is paid was once owned by First DataBank.
to the pharmacy for the service
of dispensing the prescription to National Drug Code – (NDC) A
the member. Dispensing fees are unique 11 digit number assigned to a
independent of the cost of the drug drug product that numerically
but reimbursed as an addition to conveys the manufacturer, dosage/
the discounted drug cost. strength and package size of the
product. NDC numbers are used by
First DataBank – A price distributor PBMs to identify the AWP on the
that is a subsidiary of The Hearst date of service of the claim.
Net Purchase Discount – The amount
Formulary – 1) An approved list of discount expressed as a percentage that
products covered under a plan. 2) a pharmacy saves off AWP as a result
A list of preferred products that are of a purchasing agreement from a
rebateable under agreements between manufacturer, wholesaler or distributor.
manufacturers and the PBM.
Non-MAC Generics – Drug products
Generic Drug Product – A generic classified as generics that are not
product that is chemically equivalent to included on a PBMs MAC list due
the active ingredient to a corresponding to the products limited availability,
off patent brand name drug and is or rating. Non-MAC generics
produced and distributed by one or typically are reimbursed at brand
more companies. name rates.

Package Size – Refers to the size of Product Ratings – Refers to such
the container the drug product is things as a-rated generics, etc.
packaged in. Individual drug products
are typically available in a array of Rebates – An amount of money that is
sizes. Often each size is associated paid to a PBM from a drug manufacturer
with a separate AWP unit cost. for either representing their product on
a formulary or committing to move
P&T Committee – Refers to a product market share of the product.
Pharmacy & Therapeutics Committee A percentage of the rebate paid to the
that is made up of typically PBM is shared with the employer or
independent representatives from payer.
the physician and pharmacist
communities that meet quarterly RedBook – A price distributor that is a
on behalf of a PBM to discuss subsidiary of Medical Economics, Inc.
matters specific to a formulary.
Retail Pharmacy – A chain or
Pharmacy Benefit Managers – (PBMs) independent pharmacy in the retail
Companies that manage the financial community that is enrolled in a
and claims aspects of an employer or PBM provider network and services
payers prescription benefit plan. customers within a community.

Pharmacy Reimbursement Formula – Unit Cost – Refers to the per unit, per
AWP minus (an established discount pill per ml cost of the drug that when
percent) + dispensing fee minus multiplied by the actual quantity of
co-payment. the prescription will yield the total
cost of the drug.
Price Distributors – Commercial
entities that routinely survey
manufacturers, wholesalers and
distributors for drug prices and report
these prices expressed as “Average
Wholesale Prices” to entities within
the drug industry.


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