Meeting Summary - Pharmaceutical Pricing Practices, Utilization and Costs

IV. Strategies for Controlling Costs and Increasing Value From Pharmaceutical Expenditures

The final session of the conference focused on the identification of strategies that might be adopted to control rising prescription drug expenditures and maximize the value for dollars spent on a pharmaceutical benefit. The session began with two formal presentations:

David Kreling, Ph.D., R.Ph., Sonderegger Research Center, School of Pharmacy, University of Wisconsin, described strategies that PBMs have adopted to control the costs of their customers' prescription drug programs.
Helene Levens Lipton, Ph.D., Institute for Health Policy Studies, Department of Clinical Pharmacy, University of California at San Francisco, reported on physician group practices' failed efforts to share financial risk for patients' drug costs with HMOs, as well as on hand-held, electronic prescribing devices.

The session also included a Panel Discussion and a "Lightning Round" of public policy researchers' perspectives.

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1. Cost Control for Prescription Drug Programs: Pharmacy Benefit Manager (PBM) Efforts, Effects, and Implications--David H. Kreling, Ph.D., R.Ph.

Dr. Kreling noted that PBMs use two general types of strategies to control the costs of their customers' prescription drug programs: (1) pricing-focused cost-control strategies; and (2) utilization-focused cost-control strategies. Similar strategies are also used by HMOs, health plans, State governments, and other entities.

Pricing-focused cost-control strategies are aimed at obtaining rebates or discounts on prescription drugs from drug manufacturers or pharmacies:

Discounts from pharmacies. PBMs may "negotiate" payments or reimbursements to pharmacies for prescription ingredient costs and/or dispensing fees.
Rebates from brand-name drug manufacturers. PBMs' rebates from brand-name drug manufacturers typically have some purchaser volume or market share requirements associated with them.
Mail service pharmacies. PBMs may encourage or require consumers to use mail service pharmacies for long-term prescription drug therapy for chronic illnesses.
Utilization-focused cost-control strategies focus on consumers, prescribers, or pharmacies in an effort to influence which drugs and/or how many drugs are used:
Drug formulary. A formulary is a list of drugs approved for use/reimbursement. A formulary may be a closed formulary that allows no exceptions; a partially closed formulary that allows exceptions with prior authorization or increased cost-sharing; or an open formulary that includes all drugs.
Financial incentives to use generics. PBMs may give financial incentives to patients, pharmacists, or prescribers to use generic prescription drugs rather than brand-name drugs.
Drug utilization review. PBMs may review drug utilization, either retrospectively or concurrent with the prescription-dispensing process, to identify and intervene to correct utilization problems.
Disease management programs. PBMs may implement programs intended to maximize the effectiveness of drug therapy and outcomes for specific medical conditions, as well as to minimize the total treatment costs for those conditions.
Patient cost-sharing. PBMs may require patients to share the costs of prescription drugs via copayments (paying a fixed cost per prescription) or coinsurance (sharing a direct proportion of costs). Coinsurance can sensitize consumers to differences in the costs of the drugs they use, conceivably driving drug use to lower cost (generic or discounted) drugs but may reduce consumers' access to high-cost drugs. Currently, copayments are far more common than coinsurance.

What limited research there is about the effectiveness of various types of pricing-focused and utilization-focused cost-control strategies suggests that none of the approaches is without limitations. Because of the complexity of the reasons for drug use and increasing expenditures, most of the strategies have unintended effects that may end up compromising cost-control efforts.

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2. Managing the Unmanageable: Drug Payment and Utilization Management Strategies in Physician Organizations--Helene Levens Lipton, Ph.D.

Dr. Lipton discussed two strategies used by physicians to affect patients' prescription drug utilization:

Physician groups' financial risk for HMO patients' drug costs. Physician groups throughout the country have been losing the battle in managing financial risk for HMO patients' drug costs, largely because they do not have sufficient information or control. As a result, physician groups are now trying to eliminate (or reduce) their financial risk for HMO patients' drug costs. They are moving away from capitation contracting toward "incentivized" pharmacy contracts based on formulary compliance, generic drug fill rates, etc.
Hand-held, electronic, point-of-prescribing devices. Palm Pilots or other hand-held, electronic, point-of-prescribing devices have the potential (1) to reduce medication errors through enhanced legibility and electronic identification of potential drug therapy problems; (2) to enable physicians to access data on patient compliance, improving ability to improve outcomes; (3) to maintain a complete record of client transactions; and (4) to provide physicians immediate feedback on availability of formulary and generic drugs, with the potential to decrease costs. Dr. Lipton recommended independent controlled research trials to assess the impacts of e-prescribing technologies (e.g., hand-held e-prescribing devices, electronic medical records, and Web-based technologies).

Following the two formal presentations, panel members and members of the general audience were given an opportunity to make comments on strategies for controlling costs and increasing value from pharmaceutical expenditures.

PBMs' Pricing- and Utilization-Focused Cost-Control Strategies

Representatives of PBMs on the panel reiterated that the cost-control strategies a PBM adopts depend on what the PBM's customers--health plans and health plan sponsors--want. A few PBM customers want the PBM to intervene aggressively to control the utilization and net costs of prescription drugs. Through a combination of strategies--finding the lowest cost drug (not maximizing rebates); finding the best coinsurance or copayment design known to economists; and fully employing prior authorization programs, second opinions, and step therapies--one PBM reported that it has been able to limit growth in prescription drug expenditures to 2-5%.

Panel members agreed that further research is needed on the effects, intended and otherwise, of PBMs' pricing- and utilization-focused cost-control strategies--both alone and in combination.

PBMs' pricing-focused cost-control strategies:

Rebates from brand-name drug manufacturers. Researchers and PBM customers said that it would be helpful to get a better understanding of PBMs and their operations. A researcher on the panel noted that PBMs used to make money processing claims, but in the last 10 or 15 years the cost of processing a claim has dropped below the cost of a postage stamp. Retail pharmacy representatives on the panel suggested that PBMs are making money via their share of rebates from brand-name drug manufacturers.
Mail service pharmacies. Representatives of retail pharmacies said the perception is that mail order service saves money, and claims have been made that mail order service offers a better environment than the retail environment for generics. Retail pharmacists believe that these claims should be investigated through research.

PBMs' utilization-focused cost-control strategies:

Use of drug formularies. Two integrated health systems, with their own physicians, hospitals, and pharmacists--Kaiser Permanente and the U.S. Department of Veterans Affairs (VA)--have had some remarkable successes in managing the utilization and costs of prescription drugs with their drug formularies and other mechanisms. The VA's successes were described in a recent report by the Institute of Medicine. Panel members generally agreed that the techniques used by Kaiser and the VA would not work as effectively in health care systems lacking integration. Most physicians have to deal not with a single formulary but with multiple formularies from different managed care organizations. A researcher on the panel reported that a typical family physician operates with about 6.5 contracts with managed care organizations and a specialist with about 40 contracts. Several panel members, including physicians and consumer representatives, raised concerns about formularies developed by managed care organizations and recommended research to evaluate their effects on clinical outcomes. They also suggested research comparing clinical outcomes in single-formulary environments such as the VA or Kaiser with clinical outcomes under multiple formulary environments, controlling for patients' health status. One consumer organization, the AARP, said that while it does not oppose formularies per se, it believes that it is important to have oversight of the formulary development process, external reviews, appeals, etc.
Drug utilization review. Some PBM representatives and large employers said that they do not think that utilization controls at the level of the retail pharmacy are the answer to controlling the costs of prescription drugs. Most PBM customers, whether because of a tight labor market or a backlash against managed care decisionmaking, do not want employees to go to a pharmacy with a prescription only to be told (as they are now) that the drug is not approved by their health plan. As a result, PCS Health Systems, Express Scripts, and other PBMs are now trying to find a place in physician decisionmaking so that if the physician makes the right decision, everything cascades from there, and patients and pharmacists don't get hit with heavy regulatory PBM activity.
Disease management programs. Panel members spent a considerable amount of time talking about disease management programs, noting that since Medicare includes many elderly and disabled beneficiaries with chronic conditions, it is going to be very important to be able to manage their drug use appropriately.
- Sponsors and incentives for disease management programs. One researcher noted that disease management programs can focus on any of several problems throughout the patient management process, and what a particular program focuses on--e.g., compliance with drug therapy, drug substitution programs--reflects the incentives of the PBM, HMO, or other program sponsor. Most disease management programs have had to show a return on investment (cost savings) in the short term--otherwise no one sponsors them. There is a lot of good disease management going on, but it is labor intensive and expensive, and not all of it reduces costs in the short term.
- Physicians' role in disease management. Physicians reported feeling buffeted by multiple and conflicting disease management strategies. A researcher on the panel said physician groups' ability to devote time and energy to clinical process design, which results in perhaps spending more on certain drugs but achieving overall cost savings, is often constrained by the push for drug component management in disease management programs.
- Pharmacists' role in disease management. Pharmacists on the panel said that there is a lot of opportunity to take advantage of the existing infrastructure of retail pharmacies for disease management. Pharmacists are trained to do excellent disease management, but with few exceptions, they are not being used for this. Financial incentives are needed to compensate retail pharmacists for disease management.
- PBMs' role in disease management. PBM representatives said that the infrastructure PBMs have put into place in the last 10-15 years offers the potential to do disease management if the economic incentives are put into place. A critical lesson for Medicare from PBM disease management programs, according to PBM representatives, is the need for an economic incentive structure to pay for case management and disease management services.
- Focus on a single disease not good for elderly with multiple conditions. One researcher suggested that disease management programs that focus on a single disease may do more harm than good in patients with multiple conditions.
- Need for outcome research. Several panelists said that the outcome science for "If I do this, then I get that" (whether measured in cost savings, quality of life, patient satisfaction) in most diseases and conditions does not exist. More research of this type is needed.
- Population-based disease management vs. privacy regulations. One panelist noted that a population-based approach to disease management is on a collision course with Federal and State privacy legislation. Currently, many disease management programs are using an opt-in voluntary strategy. Those who volunteer are the high-performing patients and will do well. People who don't volunteer typically are the more costly patients.
Patient cost-sharing. Health insurers and HMOs urged policymakers not to put policies in place that would impede their ability to experiment with new ideas in the realm of prescription drugs. As noted earlier, some health plans have been moving to a three-tiered copayment structure to make consumers bear more of the costs when they opt for an expensive drug over a less expensive (but appropriate) brand-name or generic alternative. Panel members suggested that more research is needed on the effects of three-tiered and other cost-sharing arrangements on the utilization and costs of prescription drugs. Research is also needed on the effects of such arrangements on the appropriate and inappropriate use of prescription drugs and patients' health outcomes.

Utilization Management to Control Costs vs. Clinically Determining Appropriate Utilization

Physicians and other panelists emphasized that it is important not to conflate utilization management aimed at controlling costs with determining appropriate utilization clinically (i.e., determining what is clinically best for patients according to health care providers). Utilization quality controls (e.g., generic prescribing) have some underlying scientific basis; however, volume controls such as those used by the Medicaid program have no good scientific basis, may drive patients to other venues, and may have an impact on the disease process that may end up costing the program sponsor more than the costs saved in reduced volume.

What Information Might Help Improve the Performance of the U.S. Pharmaceutical Market?

In several sessions of the 2-day conference, panel members identified information that they thought could help improve the performance of the U.S. pharmaceutical market:

Information on prescription drug prices and manufacturers' R&D costs. As noted earlier, panel members disagreed about whether prescription drug prices and manufacturers' R&D costs should be made more transparent. (See discussion in Pricing Practices in the Pharmaceutical Market)
Information for consumers on prices and appropriateness. Consumer advocates and researchers on the panel suggested that consumers need information on drug prices and on which drugs are appropriate for them. It is important that such information be supplied by a source that is trusted by the public to provide good, unbiased information.
Implications of the Medicaid best price. Some panel members suggested that policymakers need to know more about the implications of the Medicaid best price. If businesses are asked to take risks on pharmaceutical benefits, and if the Medicaid best price is affecting businesses' ability to take risks, policymakers should understand the implications of that.
Economic policy research conducted from a societal perspective. One researcher argued that U.S. policymakers need good economic policy research on health care in general and pharmaceuticals in particular conducted from a societal perspective. Such research is not very forthcoming from either the academic or the policy world.

How Can Information Be Developed and Conveyed?

Panel members also discussed what mechanisms might be used to convey information about prescription drugs to consumers and other parties:

The role of the Federal Government in developing information. Several panelists suggested that the Federal Government should play a key role in developing and conveying information for consumers on the prices and appropriateness of prescription drugs. A researcher on the panel recommended establishing a Federal agency to evaluate economic policy related to health care and pharmaceuticals from a societal perspective. Panel members noted that there are 40 to 50 million people, especially the elderly or individuals enrolled in public programs with low levels of health care literacy. Functional illiteracy is more prevalent among beneficiaries in public programs and rises with age. Such individuals will need help to navigate new systems put into place in the event of the enactment of a Medicare prescription drug benefit. AARP survey data indicate that many people in the current generation of Medicare beneficiaries rely primarily on their physicians for guidance.
The role of new technologies in conveying information. Several panel members commented that changes in the use of technology will improve the flow of information to physicians, patients, and others. For physicians, hand-held, electronic prescribing devices now in development show considerable promise for making information--e.g., formulary information, cost information, clinical practice guidelines--available to physicians at the point of prescribing. One vehicle for conveying information to consumers is the Internet, but it will probably be used more by Baby Boomers than by the current generation of Medicare beneficiaries.

Other Strategies For Improving Competition in the U.S. Pharmaceutical Market

Some panelists supported the use of strategies to improve the operation of the U.S. pharmaceutical market to control costs and increase value from pharmaceutical expenditures without massive government intervention. Research is needed on all of these strategies:

Reconsidering incentives for prescription drug R&D. As discussed earlier, there are many patent and patent-like protections available to brand-name drug manufacturers. Consequently, generic drug products often struggle to get in the market. An important question for U.S. policymakers is: Is what the country is buying in terms of incentives for R&D through drug patent and exclusivity arrangements worth the cost, or can we find a more cost-effective approach to promote innovation? Another question is: What can the Federal Government do to stimulate the innovation of breakthrough products rather than "me-too" products?
Reconsidering the licensing of products developed with NIH-funded research. U.S. drug manufacturers are sometimes given an exclusive license to market new prescription drug products developed with research funded by the National Institutes of Health (NIH). These products are subject to the usual patent rules, and there are no constraints on price. A question for policymakers is: Is this practice in the best interest of consumers, and if not, what should be changed?
Educating providers and consumers about the relative value, benefits, risks, and costs of drugs. There are often competing therapies in a given therapeutic class, but providers and consumers are not aware of it. Important questions for U.S. policymakers are: How can credible information about the relative value of different drug therapies be developed? Second, how can that information best be conveyed to the appropriate parties?
Making physicians more aware of generic drugs. Unlike brand-name drug manufacturers, generic companies do not detail products to physicians--instead, generic companies sell their products to drug wholesalers and the chain pharmacies. A generic drug representative suggested that physicians need to be sensitized to the fact that there are generic products available that they could use as an alternative to brand-name drugs. Possible approaches for making physicians more aware of the availability of generic drugs include generic sampling or academic detailing for generic products.
Giving consumers a choice of different pharmacy benefits, priced accordingly. An alternative to micromanaging the utilization of pharmaceutical benefits might be to give consumers different levels of pharmacy benefits, priced accordingly--for example (1) a closed formulary; (2) a formulary with a medical necessity override; (3) a three-tiered formulary, and (4) an open formulary. The pricing of the different pharmacy benefits would reflect different experiences with utilization.
Developing measures of the value of prescription drug benefits. Health care purchasers indicated that they would like to have measures that they could use to measure the value (quality/cost) of the benefit programs they are purchasing. Consumer Reports has done some work in measuring value, as has the National Committee on Quality Assurance. More research is needed in this area.
Reconsidering Medicaid best price. Representatives of PBMs and health plans on the panel suggested that policymakers should consider repealing the Medicaid best price and allowing the free market to work. Policymakers need to consider the following questions: Is the Medicaid best price keeping States which have a huge volume (employees and Medicaid) from getting the best price? Is the Medicaid drug rebate policy established in 1990 lowering the ability of private purchasers to negotiate steep discounts with pharmaceutical companies? One retail pharmacy representative agreed that the Medicaid Federal upper limit list needs to be reformed; however, he cautioned against repealing Medicaid best price, noting that Medicaid best prices were adopted because Medicaid was unable to negotiate effectively.
Reconsidering the criteria for designating drugs as prescription drugs or OTC drugs. Some prescription drugs in the United States are available OTC in other countries. Blue Cross Blue Shield believes the designation should be based on safety not a pharmaceutical company's economic strategy.

Direct U.S. Government Intervention to Reduce the Prices of Prescription Drugs

A few panelists supported the direct intervention of the U.S. Government in the pharmaceutical market to control costs and increase value from pharmaceutical expenditures:

Government price controls and regulations. Several panelists noted that a Medicare benefit prescription drug benefit can be expected to increase the utilization of prescription drugs. They argued that rather than focusing on reducing utilization--given that the problem for many Medicare beneficiaries is an inability to afford prescription drugs that they need--U.S. policymakers should focus on controlling brand-name pharmaceutical manufacturers' prices and pricing practices. Price controls are used in much of the industrialized world outside the United States, and most of these countries have lower drug prices than the United States. In the United States, however, price controls are less politically popular and there are concerns about the effects of price controls on innovation.
Government contracts with pharmaceutical manufacturers. One panel member argued that more money for business as usual is not going to work. He recommended that the Federal Government enter into contracts with drug manufacturers to cut the prices of prescription drugs substantially (e.g., to the level of the manufacturers' marginal costs or to the Federal Supply Schedule level). Although the manufacturers would probably make up most of their lost revenue in higher volume, the Federal Government could agree to make up any lost revenue so that the drug companies would be left financially whole. In addition, to address concerns about research and innovation, the Federal Government could provide additional money to the National Institutes of Health, change intellectual property laws to encourage the development of breakthrough products, etc.
Another panel member suggested that perhaps the Federal Government could negotiate risk-based contracts with drug anufacturers under which the drug manufacturers would share utilization risk with the Federal Government and sell their products at marginal costs. This approach, he said, would protect the manufacturers' profitability, although decreasing their profit margin, and would get more prescription drugs to the people who need them.

Following the discussion of strategies for controlling costs and increasing value, five health policy researchers were asked to give their perspectives on everything they had heard at the conference.

Stanley Wallack, Ph.D., Brandeis University

Dr. Wallack said that if he were sitting as a key policymaker, he would expect the utilization and expenditures of prescription drugs to go up. He would be interested in the following topics:

How efficient is the U.S. pharmaceutical market and can we make it more efficient?
What is the "value" of pharmaceuticals from a societal perspective? Developing information to answer this question will require substantial funding from the public sector.
Is the drug industry making monopoly profits? Conference participants gave very little attention to this question. In a monopolistic market, more value goes to the manufacturer than to other parties.
What potential is there for increasing the utilization of generic drugs? Perhaps in the new drug approval process, brand-name drug manufacturers should be required to say how their new product will compare to generics in terms of price.
Do we want to use information to change the U.S. pharmaceutical market generally or do we want to use targeted incentives (e.g., incentives for R&D)?
Can disease management techniques be used for high users of prescription drugs? High users account for an increasing proportion of individuals who use prescription drugs and are at the greatest risk for drug interactions.

Robert Helms, Ph.D., American Enterprise Institute

Dr. Helms said that when talking about economic systems, the bottom line for economists is how well an economic system provides value to consumers--i.e., satisfies consumer wants and adapts technology to consumer wants in an efficient way. This is something we should keep in mind in the debate about prescription drugs--what we are after is providing what consumers want.

It is very probable that prescription drugs will be added somehow to Medicare, and when this is done, the basic debate will be whether to use a market approach or a regulatory approach. Economics offers a lot of literature about what happens under both systems, and Dr. Helms quite frankly is on the market side. He is fairly optimistic that the prescription drug market will work out. The market provides incentives for innovation. And the higher prescription drug costs go, the more incentives there are to make the pharmaceutical market work more effectively

Beth Fuchs, Ph.D., Health Policy Alternatives

Dr. Fuchs said that she came to the conference hoping that she would get more information that would help her analyze Medicare prescription drug proposals, but she is now more confused than ever because of the complexity of things. Dr. Fuchs said she believes it would be helpful to have more information about whether PBMs could help get Medicare beneficiaries access to prescription drugs in an affordable manner. What would happen if PBMs were given a free rein in a public-private approach? Could a PBM-like entity produce significant savings that would help Medicare's 40 million beneficiaries get access to prescription drugs in an affordable manner? Finally, Dr. Fuchs noted that much of the information that policymakers need to make policy regarding prescription drug benefits has been proprietary or lost in the academic literature. She encouraged drug manufacturers and policy analysts to make this information available in a form that policymakers and researchers can use.

William Scanlon, Ph.D., U.S. General Accounting Office (GAO)

Dr. Scanlon said that he felt as though lots of different boxes had been opened and everything poured out of them at this conference. He said he believes that policymakers need two types of information:

Information related to market failure in the U.S. prescription drug market. Conference participants identified several aspects of market failure in the prescription drug market. Many of the problems are tied to a lack of information--information on the underutilization and overutilization of drugs, what prices are being paid, what utilization we should want, clinical information, etc. A key question that arises is: How do we generate more information about what pharmaceuticals can do and how they should be used? It is important to bear in mind that if a Medicare prescription drug benefit is enacted, all of the relationships and prices that exist in the U.S. prescription drug market at present will change.
Information related to the design and management of a Medicare prescription drug benefit. In designing and managing a prescription drug benefit, policymakers will not necessarily chose between a market approach or a regulatory approach. Instead, they will probably combine the two approaches. In any event, information will be critical. It is impossible to run a market economy unless there is good information flowing freely and people are able to act on it, and it is impossible to regulate an economy without huge amounts of good information. Getting information down to the level of Medicare beneficiaries is going to be particularly important if consumers are going to play a role in health care cost containment or quality enhancement.

Judith Feder, Ph.D., Georgetown University

Dr. Feder said that it is not surprising that there are so many questions at the end of the 2-day conference. She noted, however, that policymakers do not have the luxury of certainty. They never have all the information they could use and have to make decisions with the best information available. Dr. Feder believes the discussion at this conference has two two kinds of policy implications:

Managing prescription drug benefits for the insured. The bulk of the discussion at the conference has focused on the use and costs and prices of prescription benefits for the insured population. The consensus at this conference seems to be that the role of government--apart from examining the policies it has in place--is to facilitate the market. There was advocacy of a role for government in (1) getting more information about pricing and other behaviors; (2) creating an entity that is a source of independent information on prices and on values; and (3) promoting guidelines that give some indication of the range of ways to think about the value of prescription drug products. There was support expressed for techniques and ways to help physicians--as well as pharmacists--in the prescribing process. Given the survey data that people trust their physicians, Dr. Feder believes that enabling doctors to work with their patients to make what are inevitably difficult choices about prescription drugs is a good idea.
Providing prescription drug benefits for the uninsured. Right now many of the people who are most in need of prescription drug coverage--elderly Medicare beneficiaries--are among the people least likely to have it. Dr. Feder concluded by saying that she absolutely believes that Medicare beneficiaries ought to have prescription drug coverage and that it ought to be an entitlement. The country does have the resources, she said--it is just a question of making a choice about how those resources are used. Having Medicare rely on best practices for managing drug utilization and costs in the private sector will lead those practices to improve over time.