The pharmacy benefit landscape of today is all but unrecognizable from its predecessor of just a decade ago. In 1997, minimal emphasis was placed on restrictive networks and plan designs, but now, these are common.
No wonder, with years of copayment, deductible, and premium increases that have outpaced the national inflation rate.
Today the average payer can no longer carry the burden, and the burden on members is also growing.
Regardless of individual opinion on how best to resolve the health care cost crisis, most agree that the problem is fast reaching critical mass. Let's explore how patient education, financial incentive, and active participation in decision making can affect the success of cost sharing and cost shifting.
First we will separate cost shifting from cost sharing. In cost shifting, little is done to contain costs, but much is done to shift the burden — generally to the patient. Cost sharing, however, focuses on proactive programs where both patient and payer make smarter care choices, and thus share the burden of driving costs down.
One of the most frequently used techniques for cost containment is increased copayment. Unfortunately, this has generally been perceived as cost shifting, so the problem isn't necessarily resolved, resulting in a greater burden on the patient without any material reduction in drug costs. The result of this cost shifting has some unintended and potentially more significant long-term implications. According to government data, the number of employees at large private-sector companies enrolling in company-sponsored plans dropped by almost 7 percent between 1996 and 2004. The main reason for this decline was increased shared costs.
Why is this the case? Is there any real difference between cost sharing and cost shifting? The short answer is yes, but the differences can be subtle. Most would probably approach cost containment efforts through benefit design with the age-old carrot-and-stick approach, with a heavy emphasis on the stick.
Trends in pricing models
Before we can look at solutions, we must first understand human behavior. Beginning in 1974, the Rand Corp. performed a groundbreaking study, the Health Insurance Experiment (HIE), that provides insight into human behavior and its effect on benefit design and health care costs. Among its conclusions:
- Cost sharing can reduce spending without affecting health. In other words, patients should be able to live with well thought-out cost sharing.
- Income-related cost sharing limits are ideal. Basing sharing levels on patients' income is full of philosophical and administrative problems, but if the goal is to reduce costs without reducing quality of care, this should be part of the benefit design.
- Targeting coinsurance, with the goal of promoting effective health care use, is key.
There has been extensive discussion of how to slow the increase in drug costs. While a government study released early this year reported 2005 as having the slowest rate of growth at 5.8 percent, sadly, pharmaceuticals still account for 10 cents for every dollar spent in health care today.
The pharmacy benefit industry has progressed from an indemnity to a single-fixed copayment model to a tiered copayment model, which is where the majority of benefit plan designs fall. The main philosophy behind a multitiered benefit structure further supports the carrot-and-stick theory: If you choose a tier-1 drug, you have the carrot of a lower copayment; choose a tier 3 (or higher) drug and you have the stick of higher costs.
This approach works if the decision is fairly easy (e.g., only choosing between reward and penalty) and if the distinction between the choices is quantifiable. Unfortunately, the implementation of tiered benefit structures has been flawed in several ways.
We have seen deductibles and copayments continue to rise. Indeed, average copayments have increased across all tiers, with the greatest increase in the upper tiers. According to the Kaiser Family Foundation, the average tier 2 (preferred) copayment increased by 69 percent from 2000 to 2005, while tier 3 (not preferred) copayments jumped 105 percent. We now find $100 or greater copayments on tier 3.
Tier 1 copayments rose 43 percent during the period. Because the copayments have increased for all tiers, many members fail to recognize the value of a tier 1 drug, and instead focus on the fact that the copayment has risen significantly. Thus there is no carrot. Some innovators have seen the value of adding incentives for generics and even over-the-counter medications.
Most tiered designs are based on flat copayments rather than percentage copayments, also called coinsurance. Fixed-amount copayments do not have as great an effect on the consumer as paying a percentage of the total prescription amount.
Historically, there has been less effort by payers and insurers to educate patients about tier 1 and tier 2 medication efficacy and value than has been expended by the pharmaceutical industry through direct-to-consumer advertising for brand drugs. This results in patients' concluding that they must buy the most current and popular medications, on tiers 1 and 2, and consequently pay a greater share of the cost.
Formularies, and the resultant tiers, are typically designed for broad groups of patients with differing health needs. Because of this approach, many new and costly therapies are found in the higher tiers, or even excluded completely, problematically giving patients with unique care needs the perception that they are being denied access to treatment.
Further complicating the mix is the movement toward member empowerment. To make plan changes that simply focus on economic influences without empowering patients will result in minimal savings and greatly reduced member satisfaction.
Taking human behavior into consideration once again, you will readily recognize the effect that direct-to-consumer advertising can have on member behavior. We are all conditioned to believe that "If it is new, it must be improved" and "If it costs more, it must be significantly better." Even if you place economic penalties on more costly drug choices, without educating patients on the positive aspects of older, proven, less costly medications, the patient perception that he is being forced to accept an inferior product will simply result in a sense of deprivation. There must be valid medical reasons to choose more costly solutions, and the idea that new and more costly medications are automatically superior must be changed gradually through communication and education.
PBMs must play a role in helping payers educate their members on the overall benefits of making more economical and therapeutically effective choices. Comparison tools are key, so the patients can no longer fail to grasp the total cost to the payer, the total cost to themselves, and the value of equally effective — but less expensive — alternative therapies. Informed choices, and the resulting personal responsibility, will in most cases result in better outcomes.
Effective cost sharing
Let's look at some ways of constructive cost sharing that result in lower costs for both the payer and the patient, keeping these objectives in mind:
- Cost sharing should not prohibit prescription drug use, especially in patients with chronic illnesses. Instead, it should actually help promote the appropriate use of medication therapy.
- Attempts should be made to keep patients from feeling that they are shouldering an unfair portion of the cost.
- Cost sharing should provide positive reinforcement for both the payer and patient. Patients should be shown cost savings over historical expenditures that is due to proper decision making.
Education has an impact
In a recent case study, the Alamo Group, a Texas-based a manufacturing company with facilities in several states with several thousand covered lives, implemented several constructive cost-sharing practices. The three basic components of the program included patient education, coinsurance (replacing a flat copayment design), and support for clinical programs.
The patient education portion of the program required 30-minute meetings between employees, the human resources department, and a representative of HydeRx Services, a PBM partnering with HealthTrans. In the meeting, the employees were provided with a detailed explanation of the new benefit and supporting rationale for the change. They were further provided with information on ways to lower their out-of-pocket costs, including ideas such as specific questions for physicians, where to shop for lower cost medicine, and why generics and OTC medications are as effective as brand drugs. The employees were also offered the opportunity for individual counseling.
Next, the PBM implemented utilization management programs to reinforce these messages and enforced step therapy for key disease states. Patients taking suitable medications were advised on the benefits of pill splitting, and mandatory 90-day maintenance dispensing was implemented.
The benefit design was overhauled as well. We replaced a traditional copayment structure with coinsurance.
The employer worried that these changes might increase employees' costs significantly, thereby reducing the effectiveness of the program. In fact, after the program had been in effect for a year, we discovered that while utilization actually increased throughout the benefit year, the employer had saved approximately 34 percent while the employees had saved 30 percent compared with the previous year. The program continues to be extremely well received and economically successful for both the employer and employees. This is due in large part to the ongoing commitment by Alamo Group to maintain a cost-sharing ratio that does not exceed 30 percent for the employees. As a result, the employer has not shifted the burden of financing pharmacy benefits to employees.
Percentage copayments are more effective and cost-efficient when coupled with proper benefit designs and patient education because the patient shares in the cost savings. For example, if there is a flat $10 copayment for tier 1 drugs (including generics) and a particular generic medication is $7.25, the patient does not benefit from making the economically prudent decision. There is no incentive. However, if the patient has a 30-percent copayment for the same tier 1 drug, then he will only pay $2.18 for the script. While critics may point out that the employer would now have to pay $5.07 that it wouldn't have had to pay under the flat copayment design, what they fail to realize is that this type of incentive will help shift tier 2 and tier 3 drug decisions to tier 1 decisions, thereby saving the employer or health plan more money in the aggregate.
|Alamo Group's change from copayments to coinsurance|
|Tier||Old plan||New plan|
|High cost||25 percent||25%|
Unfortunately there are no silver bullets and we will find flaws in any proposed system. Catastrophic coverage is one area that is particularly problematic. With the increasing availability and utilization of high-priced specialty pharmaceuticals, coinsurance (percentage copayments) will not always work on their own. One approach is to carve out these medications and the associated portion of the risk map, and use specialized insurance programs for that component in conjunction with the tools outlined above.
Health care costs are high on many agendas, but creating the correct roadmap for improvement is of utmost importance. Whether you are an advocate of public sector intervention or believe in placing the responsibility on the private sector, it is clear that action is necessary. If the objective is simply to shift cost, the result will most likely be continued escalation in costs, reduced enrollment (and associated government subsidization on the taxpayers' dime) and overall resentment. Changes that are only financial will have minimal impact on members, so a blended approach of education, reward, and penalty is key to success.
It will take an investment in time and resources on everyone's part, but as studies and experience over the last 30 years show, the results can be dramatic.