Libratto

DEPARTMENT OF RANTS

Why Employees Should Demand Tighter Controls on Waste

Recent revelations of serious risks from some of the most popular drugs have sparked intense public debate about the ability of the FDA to protect the health of the American public. But in the shadow of that discussion looms a much greater threat: the unraveling of employer-sponsored coverage for prescription drugs.

For decades, American workers and retirees have put their trust in a powerful social contract. Back in 1965, costs were so low that Congress comfortably excluded drugs in the legislation that founded Medicare, and few employers provided coverage. As costs rose, employers – sometimes under pressure from unions – stepped in and picked up an ever-increasing share. But today, those costs have become unbearable for many employers.

The bottom line is that we’re on a trajectory of prescription drug costs that cannot be sustained. And the sad part is that those employees who will be affected first are those who can afford it the least – lower-wage earners. As Uwe Reinhardt, professor of economics at Princeton notes, “These trends will price low-income Americans out of the health care the rest of us take for granted.”

For many employers and their workers, the pharmacy benefit is already threatened. For some, it’s on the endangered list. And if something isn’t done, employer-funded prescription drug benefits may someday go the way of the dodo.

The Diners’ Dilemma

Why has an arrangement that worked so well for so long begun to unravel? Much of the finger pointing is aimed at the pharmaceutical companies. But rising drug prices are only part of the story: over the past five years, drug prices have only gone up by about 5% per year. The rest of the overall annual 15% per increase in spend is due to how many and which drugs we take.

Think about it this way. Suppose that your phone bill went up 15% compared to last year, but the rates the phone company charged only went up 5%. How could that be? Well, you might have spent more time on the phone (i.e., more use or utilization). And of the calls you made, a greater fraction might have been more expensive long-distance calls (i.e., mix). Or, you might have signed up for a feature that wasn’t available last year (i.e., new service). All of these factors together contribute to the increase in the overall amount of money you spent on telephone services. In other words, a change in the rates charged by your phone company isn’t the only way to explain a higher phone bill.

The annual growth in prescription drug costs can be divided into the same four areas: inflation, utilization, mix, and the entry of new drugs. Inflation is the increase in the cost of each pill, year to year; it reflects the change in prices set by the drug manufacturer. Utilization is the year-to-year change in the number of pills used (either more pills per prescription or more prescriptions per patient). Mix reflects any shifts in the drugs being used (if the mix shifts from less expensive to more expensive drugs, the overall cost goes up), and new drugs accounts for the entry into the market of a drug that wasn’t available last year.

Over the past five years, inflation accounted for about 5% of the growth in prescription drug costs, and new drugs chip in an additional 1% or so. Utilization and mix together make up most of the balance, about 8% to 10%.

In other words, utilization and mix – how many and which drugs we take – have had a greater impact than price on the increasing amount of money we spend on prescription medications each year. And although we can’t control the prices drug companies charge, as patients we (along with our doctors) decide whether to take drugs, and which drugs to take.

It’s possible that we’re taking more drugs because we need them, and it’s possible that we’re taking more expensive drugs because they’re better. But it’s also likely that we’re taking drugs we don’t need, or using more expensive drugs than are needed to get the job done.

To understand why may be the case, imagine going out to dinner with nine acquaintances; the group’s bill will be evenly split at the end of the evening. On the menu are a variety of items, ranging from inexpensive pasta to pricey duck confit, and a full assortment of beverages. What do you order?

The diners’ dilemma shows how individuals behaving in their own self interest can lead to an outcome in which everyone is worse off. In practice, we navigate the diners’ dilemma pretty well. We realize that our choices affect the pocketbooks of our friends. And if altruism isn’t enough, shame is: our decisions are observed by the people with whom we’re dining, and if we misbehave too much we won’t be invited out again.

But imagine a slightly different situation in which your dinner is one of thousands, or millions, and that no one knows what you’ve ordered. With no one looking over your shoulder, the top-of-the-line meal and an extra drink or two is definitely tempting. As a wrinkle, suppose that a faceless organization picks up 75% of the cost of whatever you order. Two things inevitably happen: we consumer more – and more expensively – than we would otherwise.

This is very much the challenge faced by employers today when dealing with prescription drug benefits. Although both physicians and patients know that someone is picking up the tab, we generally don’t consider that collectively our behavior may be wastefully driving prescription drug expenditures to spiral out of control.

The Power of Generic Drugs

One quick way to get a sense of how efficiently a group of patients is using their prescription drug plan is the rate at which they use generic drugs. Generics are certified by the FDA to contain the exact same molecule as their brand-name counterpart, and to be available in the body to the same degree as the brand.

The degree to which a group of patients use generics is quantified as the generic fill rate. The higher the generic fill rate the better, because generics are so much less expensive than brands. (A good rule of thumb is that a 1% increase in the generic fill rate leads to a 1% reduction in drug spend.) Experts estimate that the generic fill rate could be as high as 70-75% with no reduction in quality of care. Because most plans have generic fill rates below 50%, drug expenditures are probably 25% higher than they need to be.

The best way to drive out this kind of waste is the use of programs that require patients to try the more cost-effective generic before “stepping up” to more expensive drugs. Patients who are known to benefit from the more expensive drugs at the outset can bypass this first step.

The potential savings from step-therapy programs are enormous. In 2003, five groups of drugs alone – those for high cholesterol, high blood pressure, ulcers, depression, and arthritis – accounted for 37% of the money spent on all covered prescription drugs. Except for the anticholesterol drugs, proven step therapy programs are available for each of these categories. And because Zocor, a high-powered cholesterol-lowering drug, will soon lose its patent, a step therapy program for that class of drugs will probably follow.

A Conservation Plan for the Prescription Drug Benefit

Economists tell us that the diners’ dilemma is solved by implementing a fair set of rules that ensure that everyone gets what they need. The equivalent solution for the pharmacy benefit is a set of evidence-based rules about which drugs work in which patients (e.g., step therapy). For those situations in which the more expensive drugs aren’t needed – higher spend but no more benefit – the patient pays.

Unchecked, the spiraling cost of prescription drugs will push the pharmacy benefit out of the reach of an ever-increasing number of employees. And as long as employers are hesitant to make needed changes for fear of employee reaction, they drive their plans closer to the brink of being truly unaffordable.

Those of us who have prescription drug coverage have a good thing going, and so do the companies that employ us. We have access to the drugs we need to be healthy, and our employers retain a productive workforce. But we are like diners offered dinner while someone else picks up the lion’s share of the cost: if we misuse it too much for too long, the party’s over. If we are to maintain a robust and fair prescription drug benefit that provides access to affordable medications, as employees we must not only accept a more active management of the pharmacy benefit to eliminate waste – we must demand it.

Opinions expressed here are solely those of the author and do not necessarily represent the views of the author’s employer.