It’s no secret that rising costs of prescription drugs, particularly expensive specialty drugs, are one of the key drivers of higher medical insurance premiums. Prescription drugs accounted for 16.7% of total personal health care costs in 2015, up from 15.3% in 2013, according to a Dept. of Health and Human Services issue brief earlier this year. Prices have increased 10% or more annually for the past three years. The Wall Street Journal followed 30 prescription drugs from 2010 to 2014 and found that prices rose 76%, or about eight times the rate of general inflation.

The Issue of Rising Prescription Costs

The issue garnered headlines earlier this year when drug manufacturer Mylan dramatically increased the price of EpiPen®, the autoinjector that delivers the right dose of epinephrine to prevent anaphylaxis shock. The price spike wouldn’t have been noticed by patients had they hadn’t been covered by HSA-qualified medical plans (in which prescription drugs are subject to deductible) or other plan designs that create transparency and increase patients’ share of the cost of the drug.

Pharmaceutical manufacturers are developing and marketing new treatments that extend and enhance the quality of patient. These new therapies come with a price tag. And where the same manufacturers have a market advantage (such as a patent), they can unilaterally raise prices to secure a greater return on their investment.

Approaches to Lowering Prescription Drug Costs

How can insurers, employers and employees fight back? Insurers have focused their attention on these costs during the past few years and have crafted strategies to help manage pharmaceutical costs. Below are some of the approaches that they’ve taken:

Higher Cost-Sharing:

A decade ago, most prescription drug plans had two copay levels: generic and brand. Drugs were covered subject to copay, often $5 for generic and $10 or $15 for brand-name drugs. That simple plan is a relic of a bygone era. Today, most prescription plans have three, four or five tiers. Each insurer defines the tiers a little differently. Also, the cost-sharing is much higher on these plans. It’s not unusual for the lower tiers to have higher copays (perhaps $10 to $15 for Tier 1 and $20 to $40 for the second tier) and the higher tiers to cover prescriptions subject to coinsurance of 20% to 50% (with a per-prescription or per-year maximum).

Quantity Limits

Insurers often impose limits for medical or practical limits. Different patients may have a different view of a month’s supply of erectile dysfunction medication, for example, so insurers impose arbitrary limits. Insurers may limit quantities or length of prescriptions for certain drugs or classes of drugs.

State laws may play a role as well. Massachusetts, for example, enacted bipartisan legislation limiting an initial prescription of opiates to a seven-day supply to help counter a spike in heroin use and death that often begins with a patient’s becoming addicted to prescription opioids prescribed for management of an injury.

Formulary

A standard method to controlling costs is through the drugs that insurers cover, called a formulary.

Open vs. Closed Formulary

In an open formulary, insurers cover all FDA-approved prescription drugs.

A closed formulary covers all drug classes (for example, anti-anxiety, cholesterol-lowering, corticosteroids), but not all drugs within a class. For example, if a therapeutic category has seven comparable drugs and five cost between $15 and $25 while two cost between $100 and $145, the insurer may cover only the five lowest-cost drugs. The insurer may allow coverage of an excluded expensive drug if the prescribing physician can demonstrate through an exception process that the patient responds effectively to that drug only. Some insurers give employers the choice of offering an open formulary (covers all FDA-approved drugs) or closed formulary (insurer covers most but not all FDA-approved prescriptions), with the options priced accordingly (higher premium for the open formulary).

Closed formularies also give insurers bargaining power against drug manufacturers. If two or more very expensive specialty drugs are available within the same therapeutic class, insurers can negotiate aggressively with manufacturers and cover only one manufacturer’s drug in exchange for steep discounts. Some insurers have adopted this approach by pitting manufacturers of Hepatitis C drugs against each other and securing discounts off list prices of $70,000 to $90,000 per course of treatment.

Step Therapy

Insurers have used this approach for years. Under step therapy, insurers cover the more expensive drugs, but not initially. Patients whose providers prescribe a high-cost drug must try comparable lower-cost alternatives first. Only if the lower-cost alternatives don’t achieve appropriate results will the insurer cover the more expensive drug. Insurers typically waive the step-therapy requirement for new members who have documented experience with step therapy for that drug with another insurer.

Step therapy has led to sluggish sales of the new class of cholesterol-lowering drugs called PCSK9 inhibitors. Somewhere between 10% and 20% of patients can’t lower their cholesterol levels sufficiently by using statins, the first-line therapy for cholesterol since the late 1980s. Insurers are requiring documentation from prescribing physicians indicating that patients haven’t responded to statins or statins in combination with other drugs before approving the use of PCSK9, a therapy that can cost $10,000 annually.

Limited Network of Specialty Pharmacies

While insurers typically have a broad retail pharmacy network for patient convenience, they are consolidating their networks of specialty pharmacies. Specialty pharmacies carry more expensive medications, often requiring special handling (for example, many prescriptions must be shipped and stored at a certain temperature). Specialty pharmacies deliver medications directly to patients, so patients aren’t inconvenienced by the consolidation.

Performance-Driven Pricing

Harvard Pilgrim Health Care, a New England-based health services company, has created innovative reimbursement programs with some drug manufacturers. Harvard Pilgrim’s reimbursement rates for these drugs vary depending on how the population of Harvard Pilgrim patients respond clinically to the drug. This approach acknowledges that drug manufacturers, to the extent that they can, cherry-pick patients to participate in clinical trials. They’re looking for patients most likely to respond favorably to the drug.

This pricing model shifts some risk to the manufacturer. If the drug delivers the clinical results to Harvard Pilgrim members that the results of the clinical trials suggest, the manufacturer receives higher reimbursement.

This approach typically doesn’t impact patients directly – their maximum cost-sharing usually is less than the low range of potential reimbursement – but its widespread implementation produces some combination of more honest clinical trial results (that are in line with actual patient experience) or lower reimbursements (if the results of clinical trials aren’t replicated across a broader population of patients).

Conclusion

While pharmaceutical companies continue to introduce therapies that increase lifespan and improve the quality of life for millions of Americans with serious illnesses; patients, employers, insurers and state and federal governments will continue to seek solutions to keep therapy affordable.

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