Your next move in managing drug costs

Your next move in managing drug costs – pharmaceutical benefits

James Heenan

Payers have squeezed short-term savings from the administration of pharmaceutical benefits. Now they need long-term control of expenditures for new products and increased usage. An industry veteran suggests how to make this happen.

As health-care costs have steadily increased, payers have sought ways to become more intelligent purchasers. At first, they realized savings by reducing administrative costs and increasing efficiency in delivery systems, but most payers now understand that the largest and most sustainable savings come from developing a system-wide basis for measuring the value of care. This same approach is evolving for the pharmaceutical component of patient care.

Although pharmaceuticals continue to be only 8 to 10 percent of the total health-care dollar, the average price of a prescription has gone from $16.60 in 1988 to $27.90 in 1994. As a result, many payers have employed managed care organizations or “carved out” the pharmaceutical component using pharmacy benefit management companies. Savings are achieved primarily by negotiating manufacturer discounts and reducing drug delivery costs. Common tactics include generic substitution, mail order pharmacy services, pharmacy networks, drug formularies, step therapy, therapeutic substitution, utilization review programs, and even in-house pharmacies.

These methods have been successful in the short term. Increases in prescription drug prices have fallen from 8.1 percent in 1990 to 1.3 percent in 1994 as measured by the Producer Price Index. Over the past two years, the annual inflation rate for pharmaceuticals has been less than that of medical care in general, according to the Bureau of Labor Statistics.

Savings from reduction in administrative costs have their limits, however, and there is a danger that pushing this approach too far could force increased spending elsewhere in the delivery system. This negative “spillover” effect of arbitrary reductions in pharmaceutical care was validated by a study published last year in The New England Journal of Medicine. It monitored the effects of a cap on monthly prescription costs for a group of non-institutionalized mental health patients in the New Hampshire Medicaid program over a 42-month period. Monthly drug expenditures per patient fell by $16.83, but total mental health costs per patient rose $139 a month. Visits to both community health centers and emergency rooms went up significantly, and total mental health-care costs for the state rose $390,000 during the study period.

Future upward pressure on pharmaceutical costs will be due in part to such uncontrollable factors as changing demographics–especially the increase in average age–and inflationary pressures in the general economy. Other factors, however, can be minimized by proper management. Three that offer the greatest opportunity for long-term savings are improved patient compliance, increased use of prescription drugs in lieu of other therapies, and the introduction of new pharmaceutical technologies for previously unmet medical needs. With billions of dollars in potential expenditures at stake, the tools needed to manage these factors over the long term go far beyond simple techniques to control administrative costs.


The problem of non-compliance is very real. Some 50 percent of all prescriptions dispensed in this country are taken incorrectly, according to a 1991 study in AAPPO Journal, and 10 percent of all hospital admissions are due to prescription non-compliance. The economic consequences have been estimated to be in excess of $100 billion annually. The American Association of Retired Persons recently surveyed its members to try to determine why patients fail to take their medications properly. Less than 10 percent of the respondents attributed this failure to cost. The rest of the varied reasons could be summarized as either the patient’s lack of appreciation of the medication’s importance or a breakdown in communication between the practicing professional and the patient. The solution, therefore, lies in an organized effort to educate the practicing professional (physicians, pharmacists, etc.) and the patient on the value of appropriate pharmaceutical therapy and adherence to the prescribed regimen.

A successful application of this solution was described in Primary Cardiology in 1992. In the Wellspring Compliance Program, hypertensive patients were counseled by pharmacists and given a chance to sign up for an educational program when they picked up their first prescriptions. Those who agreed to participate periodically received literature about their disease and phone calls encouraging compliance. After six months, their blood pressures were significantly improved. These patients were prompter about getting refills and spent more on medication, but the cost was completely offset by their needing fewer physician visits. Such investments in compliance will become all the more important with the inevitable expansion of drug usage.


Three factors will drive increased use of pharmaceuticals. First, as the population ages, the average number of prescription medications per patient increases dramatically. Second, more care will be delivered through outpatient channels. And third, new pharmaceutical technologies will be introduced as alternatives to more expensive therapies or to meet previously unmet medical needs. Long*term solutions to managing this projected increase in utilization go beyond administrative techniques to making fundamental decisions based on the quality of patient care.

One solution is to establish a drug utilization review program incorporating a prospective decision-making process that includes input from all the stakeholders in the quality of care. This prospective process bases decisions about the selection of pharmaceuticals and how they will be used on clinical and scientific evidence as well as on cost factors. An ideal plan should also have a mechanism for concurrent review at the point of dispensing to detect duplicate prescriptions and excess or incorrect dosing, and to guard against interactions with other prescriptions. The final piece of the solution comes with establishing a mechanism for retrospective review of drug utilization. This can detect fraud and abuse as well as over- or underutilization by physicians, and be the basis for outcomes analysis that ultimately contributes data as a feedback loop into the prospective process.


According to Alan Garber of Stanford University: “Technological change, broadly defined, may be the most important controllable component of health spending growth; thus, no plan to limit the health budget will be successful unless it influences the dissemination of medical technology.” This statement is equally true of emerging pharmaceutical technologies. With the current cost of bringing a new drug to market estimated at more than $350 million, break-through pharmaceutical products can be expected to command premium prices. Over the next four years, there are already at least two dozen products that could be introduced with combined worldwide sales value of $8 billion within their first three to five years. (See the list on page 32.) The management tool that’s needed to maximize the value of that spending is a well-defined system of technology assessment.

The Institute of Medicine defines technology assessment as “any process of examining and reporting properties of a medical technology used in health care.” In simpler terms, it’s a system that answers the question: How clinically or economically attractive does a technology have to be to warrant using it? The answer is usually given as a cost-effectiveness ratio:

Net Resource Cost

__ = _______________________

How much weight should be given to individual factors that reduce quality of life? As with cost of resources, this is a highly individual choice. Cultural factors, especially ethical and religious beliefs, have a major impact on how people view the value of life under any circumstances. Even without national agreement on every point, however, the QALY measure can be used as a standard indicator of outcome across all medical conditions and treatments, while at the same time taking into account the age of the patient.

This system of technology assessment allows at-risk parties to decide in advance how much they are willing to pay to achieve an additional QALY, or how much they are willing to trade off for using a less than optimum but less costly technology. Those decisions establish a basis for adopting and utilizing a new technology. There are a number of academic and commercial enterprises conducting formal technology assessment. In the case of pharmaceuticals, a convenient source of cost-effectiveness data should be the manufacturers themselves. This data can either be collected during clinical trials conducted to gain regulatory approval from the Food and Drug Administration or by independent studies done in cooperation with reputable technology assessment centers.

It is true there are currently no financial incentives to gather this data during the FDA approval process, which does not consider cost effectiveness. Even if FDA does not look beyond clinical effectiveness, however, employers and other payers–once they exhaust the short-term savings in the administration and delivery of pharmaceutical benefits–may well exert enough pressure to make such research standard.

Coupled with improvement in patient compliance and management of increased drug usage, an adequate mechanism of assessing the potential cost effectiveness of new pharmaceutical technology will be a key factor in maximizing the return on dollars spent on therapy over the long term.


Considering all the costs

In determining the cost-effectiveness of a new pharmaceutical product–or any new technology–it’s not enough to look at the cost of treatment. Researchers need to consider four separate categories in which expenses can incur or money can be saved. Here are examples of what is included in each.

Direct costs

* Direct health-care costs related to the program of technology

* Costs of tests and treatments induced or averted as a result of clinical information obtained

* Costs required to treat side effects and complications

* Savings because of avoidance of subsequent morbidity

* Costs of treating conditions during added years of life

Direct personal costs

* Transportation

* Home care services

* Equipment and supplies used in the home, special foods

Direct non-health costs

* Property damage or loss

* Crime and criminal justice costs

* Special education costs

Indirect costs

* Productivity gains or losses

* Opportunity cost of time spent by patients (e.g., travel, waiting for providers, hospitalization)

Source: Intel Journal of Technology Assessment in Healfh Care, 1990

James Heenan is director of U.S. business planning for the Upjohn Company in Kalamazoo, Mich.

COPYRIGHT 1995 A Thomson Healthcare Company

COPYRIGHT 2004 Gale Group