United States , Washington, DC

While pharmacy benefit cost increases still exceed medical benefit cost increases, the gap has been shrinking steadily as employers have adopted a range of approaches to manage pharmacy benefit costs. Now employers are exploring new ways to improve compliance with prescribed regimens, according to a Mercer survey.

In 2007, prescription drug benefit costs rose 9.3 percent among large employers (those with 500 or more employees), while overall medical costs rose 5.1 percent – a difference of about four percentage points, Mercer’s survey found. In 2000, by comparison, drug benefit costs rose 18.3 percent and health benefit costs rose 6.6 percent – a difference of about 12 percentage points.

Having already experienced the impact of cost sharing and tiered copayment structures, employers are looking to other cost-reduction strategies to decrease costs over time – such as more actively encouraging members to use generic drugs and mail-order plans. They are also exploring innovative techniques to improve drug therapy compliance as a way to control total health plan spending in the future.

“Employers and their pharmacy benefit managers have made significant changes, such as moving from an open formulary to a tiered structure, or increasing the percentage of drug expenditures paid by members. Our survey indicates that many employers have achieved as high a level of member cost-share as they deem appropriate – for now – and are exploring other ways to manage costs. This presents new challenges, especially in the management of highly expensive specialty drugs,” said Lisa Zeitel, senior consultant and co-leader of Mercer’s managed pharmacy business.

Pharmacy benefit cost management strategies

According to Mercer’s survey, most employers use tiered copayments for their prescription drug benefit; the most common arrangement (72 percent at retail and 68 percent at mail order) is a three-tier structure with increasing copayment amounts for generic, formulary brand-name and non-formulary brand-name drugs.

Among employers that offer a card plan, 5 percent of employers with 500 or more employees and 10 percent of those with 20,000 or more employees have implemented four- or five-tier structures.

More than a fifth of all large employers, and nearly half of those with 20,000 or more employees, require coinsurance for one or more drug categories. Coinsurance offers greater price transparency and allows employers to share costs consistently with employees, even when drug prices increase or fluctuate. In addition, coinsurance supports consumerist strategies; the pharmacy benefit has been identified as one area in which the use of coinsurance can have an immediate effect on member buying habits.

Virtually all respondents provide a mail-order plan. In most plans (77 percent), members have a copay incentive to obtain drugs through the mail. A small portion penalize members who don’t use the mail-order plan for maintenance drugs: 6 percent require an additional copay from members who continue to use retail pharmacies after a specified number of fills, and 10 percent discontinue retail coverage altogether. More commonly, employers use targeted communication to educate members on the value of the mail-order plan (36 percent). Only 13 percent of respondents do not use any mail-order incentives or penalties.

Generics and specialty drugs

There is a large opportunity to lower costs now and over the next several years as some significant brand-name drugs become available as less-expensive generics. To encourage the use of generics, some employers require members to pay the difference in cost between a brand-name and a generic drug, in addition to the generic copay, if they request a brand drug when a generic equivalent is available. Nearly half of respondents (49 percent) are using such a program, often called a Dispensed As Written (DAW) 2 penalty, and over a fourth (29 percent) reported using a tougher version, DAW 1, which imposes the penalty even if the physician requests the brand drug. Use of these penalties appears to be growing; an additional 9 percent of respondents said they will implement DAW 1 and 10 percent of respondents said they will implement DAW 2 within the next two years.

Very few employers surveyed (4 percent) waived generic copays for a period of time as an incentive. However, the use of targeted communications intended to educate members and/or prescribers about generic alternatives is increasing; 64 percent of respondents now use targeted communications, up from 48 percent in 2005.

The management of specialty or biotech drugs is becoming increasingly important for employers, and a growing number of respondents say they have recently reviewed plan benefits and limits for specialty or biotech drugs (45 percent in 2007, up from 34 percent in 2005). This figure rises to 68 percent among the largest employers (up from 51 percent in 2005). Another 30 percent of respondents said they plan to review plan benefits for specialty drugs in 2008.

“Since there is such a large number of specialty products in the pipelines of drug manufacturers, employers are very concerned with how to manage this high-cost and rapidly expanding area of pharmaceuticals,” said Peter Wickersham, senior consultant in Mercer’s managed pharmacy business.

Compliance programs

Mercer's National Survey of Employer-Sponsored Health Plans reported that employers see health management as the single most important health benefit cost management strategy over the next five years. One important aspect of health management is encouraging evidence-based clinical practices. The current follow-up survey asked employers specifically about using incentives in pharmacy plan design to improve drug compliance and adherence, a strategy that has received much publicity in the past year. In particular, employers were asked if they are providing financial incentives (by lowering or waiving drug copays/coinsurance for specific drug therapies) for members to maintain higher levels of drug compliance.

The survey findings suggest that this is still an emerging trend used only by a limited number of employers. Only 6 percent of employers use financial incentives for diabetes treatment, the largest percentage in any therapeutic category. Over one-fourth (26 percent) of employers, however, are considering implementing a financial incentive program for diabetes therapy in the future, and approximately one-fourth are considering the same approach for other therapeutic classes used to treat chronic conditions (e.g., cholesterol, asthma, high blood pressure).

A slightly smaller percentage of employers now waive or reduce copays for specific classes of drugs, contingent upon the member's participation in a related disease management program. This incentive is most commonly used by employers for diabetes management (4 percent of employers report offering this benefit to employees). About a fourth of all respondents say they are considering this approach.

“Many employers have heard the buzz over evidence-based designs or value-based formularies, and a small group of them have become early adopters of this approach,” Mr. Wickersham noted. “Other employers are still weighing their options but are asking very good questions about how to apply these concepts to their own employee population.”

An example of this type of pharmacy benefit design is Mercer’s Dx-Rx Pairing™, which encourages patients to follow pharmacy treatment plans prescribed by their physicians for certain high-cost chronic conditions by addressing common barriers to compliance. Mercer developed Dx-Rx Pairing in conjunction with Niteesh Choudhry, MD, PhD, a leading researcher at Harvard Medical School, and several other national experts.

Figure 1:  Employers’ likely actions in cost/quality management of drug benefits

Notes for editors:
This survey was conducted in May 2007 as a follow-up to Mercer’s National Survey of Employer-Sponsored Health Plans 2006. All respondents to the 2006 survey with 500 or more employees were invited to participate. Of those 508 submitted completed questionnaires, a response rate of approximately 31 percent. Results are not weighted and represent only the employers who responded.

About Mercer
Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and multi-manager investment management. Mercer’s 17,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges. For more information, visit www.mercer.com.