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Pharmacy: What's The Prescription For Managing Costs?

The percentage of total healthcare expenses that are attributable to pharmacy continues to rise rapidly, as does the focus on these costs. A few years ago only 10-12% of healthcare expenses were from pharmacy while today that number is often north of 20%. So how do we explain this trend?

The ongoing introduction of many specialty pharmacy drugs will continue to increase unit costs and now that nearly all drug companies spend more money on advertising than they do on research and development, utilization will increase as well. Put simply, these advertisements work and the public demands the recognizable drug with the household name. Nearly everyone has heard of Lipitor, but most people could not name other drugs for cholesterol, some of which are considerably cheaper.

Employers need to make sure they have a specific plan of attack for pharmacy going forward. This is particularly true for larger employers who are either self insured or whose premium is based directly on their experience. To manage these costs, employers need to focus on pharmacy from a total cost perspective taking into account both unit cost and utilization. It may be appropriate to consider a direct PBM (Pharmacy Benefit Management) relationship versus accessing pharmacy through the medical TPA, comparing all aspects of unit cost. Depending on the specifics of the employer, we have found that this may save a considerable amount of money.

In-depth reporting on a timely basis is crucial. The data will determine where clinical resources should be allocated, which plan designs can support the changes in targeted behavior, and whether certain approaches in step therapy and preferred drug lists should be implemented.

Any carveout approach needs to contemplate whether the standalone pharmacy data can be integrated with the medical data. It is also important to evaluate whether there will be any loss in effectiveness of the clinical programs with the carveout approach.

Today, for an average employer, half of their top 15 drugs as measured by dollars spent, are specialty drugs. By 2014-15, with the patent expiration of many of the most popular brand drugs in conjunction with additional specialty drugs that are expected to come to market, most employers will see all of their top 15 drugs will be specialty drugs. This will lead to a large increase in cost per script and overall cost for pharmacy. A critical component to managing specialty pharmacy costs is making sure these drugs are used for their specialty purpose; today many of these drugs are advertised heavily for other conditions where a much cheaper drug can be just as effective. Analyzing unit cost, utilization and plan design is just as important for specialty pharmacy as for traditional pharmacy costs.

I have the opportunity to work with numerous hospitals, both as a lead advisor for several in North Carolina as well as co-chairperson for the National Hospital Practice Group of the Benefit Advisors Network. Our work with hospitals on pharmacy focuses on maximizing the steerage to their in-house pharmacies, leveraging GPO (Group Purchasing Organization) pricing and, when applicable, utilizing the 340B legislation in an appropriate manner.

For clients that are not hospitals, in addition to the approaches mentioned above, increasingly there may be opportunities for employers to partner with hospitals in communities with large employee populations to lower overall pharmacy spend (in addition to medical spend). From a North Carolina perspective, this opportunity is greatest in the eastern part of the state. The increase in pharmacy costs and the emergence of Accountable Care Organizations (ACOs) along with other population management approaches to healthcare should accelerate this opportunity.

Rick Kelly is the Managing Partner of PBS and leads the pharmacy practice of the firm.  His work in the pharmacy area has been recognized throughout the healthcare industry and results in organizations seeking his opinion and guidance, including BCBSNC, United Healthcare and being appointed to the National Pharmacy Advisory Council for Cigna Healthcare. He also is invited on a regular basis by the PBM industry to their strategy and leadership conferences.

Posted March 24, 2011

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