Rising drug prices call for employer vigilance

The Affordable Care Act requires that employers’ prescription drug benefits cover at least one drug in every category and class in the U.S. Pharmacopeia (the official list of approved medicines). Yet recent research indicates that prescription drug prices are climbing more quickly than general medical costs. In response, employers need to be vigilant about these expenses and actively devise strategies to cope with their impact.

On the way up

How drastically are prices rising? “In 2015, nearly one-third of branded drugs experienced annual price increases of 20%,” observed Express Scripts, the largest U.S. pharmacy benefit management (PBM) company, in its 2015 Drug Trend Report. The company forecasts 7% annual increases for “traditional” drugs for 2016 and 2017, and 26% annual increases for “key specialty” drugs over the same period.

Industry researcher Truveris, creator of the National Drug IndexSM (NDI), reports that brand-name drugs rose on average by 15% last year (up from 11% in 2014). Meanwhile, the far more costly “specialty” drugs rose 9% and generics went up 3%.

That low reported average cost increase for generics may be misleading, however, because it masks price spikes within certain drug classes. For example, in 2014, when the NDI for generics rose by 5%:

  • Generic drugs treating muscle pain and stiffness shot up 32%,
  • Generics treating heart disease jumped 24%, and
  • Generic drugs treating infections rose 12%.

“These spikes are troubling in that they disadvantage particular patient groups,” stated the Department of Health and Human Services (HHS) in its Understanding Recent Trends in Generic Drug Prices report, issued in early 2016. The agency offered a variety of explanations for the disparities — including small markets with limited entry; the impact of mergers, acquisitions, and market exits; the ability to obtain new market exclusivities; and distribution activities.

The HHS report does point out that the cost of some generics has decreased, offsetting price spikes in other drug categories. But the decreases “exert no sizable influence on overall drug spending.”

Public and private efforts

Several states — including California, New York, Maine, Vermont, Maryland and Delaware — have jumped into the fray in an effort to control costs. Typically, their approach has been to pass laws limiting employees’ exposure to the most costly drugs. On the private sector side, some PBMs are trying to zero in on the most expensive, heavily used drug treatments for conditions such as high cholesterol, cancer and hepatitis.

Express Scripts, for instance, calculates that “unmanaged” pharmacy benefit programs experienced an average 12.9% cost increase last year, contrasted to a 5.6% increase for “managed” plans and 3.3% for its own “tightly managed” plans. The company in its 2015 Drug Trend Report describes its approach as employing “a combination of clinical programs and strategic reimbursement solutions.” For example, its cancer program seeks to address “inefficiencies in the market, whereby some cancer treatments produce a wide range of outcomes across different indications and treatment scenarios, yet prices charged remain the same.”

Promoting generic drugs through benefit plan design incentives is still the most important source of cost control, according to Express Scripts. “Encouraging use of generics over more expensive brand alternatives, when clinically appropriate, keeps costs down and helps patients adhere to their prescribed therapy.”

Expansion of tiers

Another good source of data on this topic is the 2015-2016 Prescription Drug Benefit Cost and Plan Design Report by the Pharmacy Benefit Management Institute (PBMI). It reveals how employers are encouraging employees to use generic drugs, as well as share in the overall costs of their drug benefits. Many employers are adding more price tiers — in other words, varying benefit levels based on specific versions of drug treatments used.

For example, in 2015, 10% of surveyed employers used a four-tier schedule, up from just 1% in 2008. But that growth is coming at the expense of three-tier plans, which fell to 44% last year from 68% in 2008. The once dominant two-tier pricing schedule, consisting only of one price for generics and another for brand drugs, has become a mere blip on the screen, with only 2% of employers using it.

Also according to the PBMI report, in 1985 the average co-pay for retail-purchased generic drugs was $10, $20 for “preferred” brands and about $57 for nonpreferred brands. The $10 average generic drug co-pay has remained essentially constant since 2000, while the other categories — particularly nonpreferred drugs — have risen significantly.

Along with offering co-pays, using a deductible amount is an increasingly popular cost-sharing arrangement. Per the PBMI report, 36% of employers’ drug plans featured a deductible, up from only 14% in 2014. At the same time, however, more employers sought to put a cap on employee drug spending, with 33% using an out-of-pocket limit last year, up from 18% in 2014.

Overall, the PBMI report points to “evidence-based decision-making, including quantitative analyses of clinical and financial outcomes” as a critical tool for employers to effectively manage prescription drug benefits. The report also recommends “continuous monitoring, measurement, and, when necessary, adjustment of benefit design strategies in response to evidence.”

Means to succeed

There’s no doubt about it: Employers face a double-sided challenge in their efforts to keep rising drug costs from diminishing both their financial success and their employees’ physical well-being. Although there’s no easy solution, the first step is setting up the means to monitor and wisely react to the current prescription drug environment.


Sidebar: Drug prices + utilization rates = spending changes

The following table represents 2015 average spending changes for the customer base of Express Scripts, the largest U.S. pharmacy benefit management company. The data is based on the combination of changes in drug price and utilization rates for the top 10 conditions treated with “traditional” medications (as opposed to the expensive and more narrowly targeted “specialty” drugs). The table also shows utilization rates for generic drugs within each category. Higher generic utilization rates indicate availability of competitively priced generic drugs plus incentives built into drug benefit plans for employees to use those drugs.

2015 changes for top 10 medical conditions
Spending rank Condition Utilization rate + price trend Generic drug use rate
1 Diabetes 14% 52%
2 Pain/inflammation 3% 94%
3 High cholesterol -9% 83%
4 Attention disorders 9% 74%
5 High blood pressure / heart disease -13% 96%
6 Heartburn/ulcer 36% 92%
7 Mental/neurological disorders 0% 78%
8 Asthma -2% 43%
9 Compounded drugs -54% 36%
10 Skin conditions 28% 86%
Source: Express Scripts 2015 Drug Trend Report

Although higher utilization rates for drugs treating particular conditions raise drug costs, they can also mean a reduction in overall health benefit spending. How so? Because, when employees comply with prescription instructions, they’re more likely to have a positive medical outcome than if they opt for an alternative therapy method or delay treatment altogether.