Drugs and Money - Prices, Affordability and Cost Containment
(2003; 158 pages) View the PDF document
Table of Contents
View the documentIntroduction
Open this folder and view contentsPart I: Problems and approaches to a solution
Close this folderPart II: Selected experiences with policy options
View the documentChapter 6: Measures relating to use of drug subsidy lists and to regulation
View the documentChapter 7: Experiences with budgets
View the documentChapter 8: Experiences with reference pricing
View the documentChapter 9: Experiences with patient charges
View the documentChapter 10: Switching to non-prescription status
View the documentChapter 11: Experiences with generics
View the documentChapter 12: Experiences with pharmacy benefit management programmes in the USA
View the documentChapter 13: Experiences with professional education
View the documentChapter 14: Providing affordable medicines in transitional countries
View the documentChapter 15: Access to medicines in low-income countries
View the documentList of Contributors
View the documentBack cover

Chapter 12: Experiences with pharmacy benefit management programmes in the USA

Helene L. Lipton and Kathryn S. Duke

1. Introduction

As an increasing proportion of health care services in the US move from fee-for-service to managed care arrangements, drug prescribing is also moving toward more centralized, proactive management. Pharmacy benefits management (PBM) activities are being developed and implemented by payers such as self-funded employers and managed care organizations (MCOs) as well as provider organizations such as large medical groups and integrated delivery systems. These activities are aimed at controlling drug costs and improving the quality of health care, although critics charge that cost control goals play the dominant role.

While pharmacy benefits management activities can and are performed within MCOs and integrated health care delivery systems such as Kaiser Foundation Health Plan, the main and growing locus of these activities is in dedicated companies, themselves generally known simply as PBMs. PBMs design, implement, and administer outpatient drug benefit programs for employers, MCOs, and other third-party payers. Currently, there are about 100 PBMs in the US [8], and they provide drug services for more than 100 million Americans [4]. As elsewhere in the world, the pressures to contain drug costs flow from the increases in those costs for both public and private MCOs [7,12,16,21,22]. Despite the dramatic increase in costs, very little is known about the nature and consequences of the strategies used by PBMs and their contractual partners to manage drug benefits.

2. The role of PBMs

The main functions that PBMs perform for their clients in today’s US health care system are to provide drug-related administrative services and to manage pharmacy costs. This latter function is increasingly important as pharmacy costs increase while MCOs and employers feel continuing pressure to keep the costs of premiums down [8,10]. The cost containment functions are accomplished through a wide variety of drug payment and utilization management strategies, including but not limited to:

- the processing of drug claims,
- the management of pharmacy networks,
- the negotiation of rebates with pharmaceutical manufacturers,
- the implementation of restrictive positive lists,
- promoting the use of generic drugs [8].

Each of these functions is described in turn below.

2.1. Processing of drug claims

Most PBMs undertake the processing of drug claims as a service and in fact nearly all of their clients rely on them for this function. These claims processing services comprise the automated assessment of drug claims, typically conducted at the pharmacy and meant to detect potential drug payment problems that should be addressed before drugs are dispensed to patients (e.g., checking patients’ eligibility for drug coverage, or checking if the prescription has already been filled at another pharmacy).

2.2. Management of pharmacy networks

Another pharmacy benefits management service is the creation and management of pharmacy networks. These networks consist of outpatient pharmacies under contract to MCOs and/or their contractual PBM partners to provide drug services, typically at a negotiated, discounted fee. PBMs have reported that drug cost savings for their clients have been achieved, in part, by use of discounted fees for pharmacies in their networks [3,8].

2.3. Negotiation of rebates

Negotiating contracts with pharmaceutical manufacturers, and particularly negotiating rebates, has been a major component of PBM activities during the past decade [5]. Rebates are among the most sensitive and controversial of PBM activities, potentially posing issues of discriminatory pricing for pharmacists. Use of rebates has also generated suspicion on the part of government regulators, physician organizations and consumer groups that where PBMs are owned by manufacturers they may engage in anti-competitive behaviour. One study using data from 1995 information estimated that typical rebates were about $1.25 per prescription claim, with reported amounts ranging from $0.80 to $2.50 (an exceptional case) [8]. Other estimates come to a total of $113 million in rebates in 1995, accounting in various health plans for 2-21% of total cost savings attained by the use of PBMs [3].

It is considered that where the clients served by PBMs have aggressive drug use management programs, involving for example managed or closed positive lists, therapeutic interchange programs, and drug-risk sharing arrangements with physician organizations, they can achieve higher rebates since rebate levels are often linked to market share changes, i.e. shifts in market share from the products of one manufacturer to those of another. In practice, however, even a PBM using aggressive drug management interventions may not be able drive market share to the extent anticipated because there may well be multiple stakeholders trying to influence physician prescribing, such as competing PBMs, drug manufacturers, and multiple MCOs contracting with individual physicians or physician groups.

Although there is hardly any published research available on the nature and effects of PBM rebates, available information indicates that a PBM which has negotiated a rebate with the drug manufacturer may then turn over to the client that negotiated amount after retaining an “administrative” portion. The data indicate however that the extent to which this occurs is highly variable, with anything from zero to 100% of the manufacturers’ rebate actually indicate that PBMs also earn income by taking their data on patients’ drug use and expenditure, stripping it of identifying information, and selling it to pharmaceutical manufacturers and other interested parties. Such income may sometimes exceed the revenues that PBMs receive from rebates [8,14].

2.4. Therapeutic interchange

Therapeutic interchange programmes encourage the substitution of a non-formulary drug with a lower-priced, therapeutically drug of similar efficacy (e.g., within the class of nonsteroidal anti-inflammatory drugs or the group of H2 antagonists). The interchange typically occurs when a computer indicates to a community pharmacist that a prescribed drug is not on the positive list (= formulary) applicable to that patient’s coverage. The pharmacist change. Available evidence suggests that most PBMs offer therapeutic interchange programs, including reimbursement of pharmacists for contacting the physician to obtain approval for an interchange. This pharmacist-physician contact is a central feature of therapeutic interchange programs [8]. Some evidence indicates that PBMs believe that physician calling is an effective approach to influencing prescribing behaviour, and that mail-service pharmacies have an advantage over retail pharmacies in this respect because mail-service pharmacists face fewer time pressures in contacting the prescribing physician, are trained in communications skills, and are educated about targeted diseases and drug therapeutic classes [8,10].

Evidence suggests that pharmacies are reimbursed for therapeutic interchange activities at levels ranging from $7 to $15 for each time that the pharmacist contacts the physician about switching a patient’s prescription and/or successfully obtains approval for the switch from the physician. It is difficult to assess how well these programmes achieve their goal of reducing clients’ drug costs because there are no publicly available data on cost savings attributable to therapeutic interchange programs. Opponents of these programmes argue that they intrude on the physician-patient relationship and lead to increased overall health expenditure because the health of patients may suffer when they have restricted access to medically necessary drug therapies. On the other hand, supporters maintain that these strategies hold the greatest potential to slow the rate of growth of pharmacy expenditure.

2.5. Generic substitution

Another type of drug interchange programme used extensively by most PBMs is generic substitution. Whereas with therapeutic interchange the pharmacist can replace a prescribed therapeutic agent by another having similar effects, with generic substitution he or she can only replace it by another (generic) version of the same drug. All PBMs offer their clients mechanisms to increase the use of generic drugs. Programmes of this type are more common and less controversial than therapeutic interchange programs because, in most instances, there are fewer disputes over the therapeutic equivalence of generic substitutes for brand name drugs.

Like therapeutic exchange programs, generic substitution programs can include a mix of physician and pharmacy education activities as well as financial incentives and penalties. For example, some PBMs send letters to pharmacies reminding them of their contractual obligations to meet certain generic drug dispensing standards, and the associated penalties that include possible removal from the pharmacy network. These forms of pressure may be combined with economic incentives such as dispensing fees or patient co-payments that differ for generic and brand name drugs. “Maximum Allowable Cost” programs can provide still another economic incentive to dispense generic drugs. Here, the PBM or its client distributes to the pharmacies a list of prescription drugs for which MCO reimbursement will be provided only at a generic price level, regardless of which drug is actually dispensed. This principle is comparable to the reference price system, used in several European countries.

2.6. Formularies /positive lists

One of the major ongoing activities of PBMs is development and maintenance of drug formularies or positive lists. The term formulary can be confusing. In this book the term is used for a volume containing summary drug information about individual drugs including at least the generic name, indication(s) for use, contraindication(s), dosage schedules, and warnings (see Chapter 4, Section 5). Though PBMs in the US usually use the term ‘formulary’ merely organization, the term ‘positive list’ is formulary. If a physician or other health care professional wants to prescribe a drug that is not on the positive list, the procedures involved and the out-of-pocket cost to the patient will vary, depending on how restrictive the positive list is.

The most restrictive positive list is a closed formulary, which allows patients access to drugs outside the list only if they provide a higher co-payment or even pay the entire cost of the desired drug, or if their physician can successfully override the positive list. A managed formulary/positive list uses a more comprehensive approach by combining incentives and financial penalties in order to encourage the use of ‘preferred’ drug products. For physicians, from PBM or MCO pharmacists intended to educate them about cost-effective drug prescribing. This educational approach can, however, be combined with sanctions in the form of economic penalties which can be imposed on physicians. For pharmacists, the economic rewards may take the form of higher dispensing fees payable to pharmacies if targeted rates of adherence to positive lists are met. For patients, higher co-payments may be required for ‘non-preferred’ open positive list is the least restrictive type of list and allows full reimbursement for non-formulary drugs. Typically, it lists all drugs and drug products, but provides rankings that indicate preferred products.

However strong the pressure may be from a PBM to encourage the use of preferred drugs, managed and even closed positive lists always include some provisions to allow prescribing outside the list. The override mechanism can range from allowing prior authorization requests (which may or may not be granted), to allowing override if the physician concurrently provides information showing that particular drug is medically necessary for the patient involved. Some PBMs allow override without imposing particular requirements; in such a case, the physician may receive periodic reports from the PBM that list all instances of his or her having prescribed outside the list over a specified time period and remind him or her of the preferred drugs.

As MCOs continue to search for drug cost savings, they are increasingly moving from open to managed or closed positive lists. A survey of pharmacy benefit management trends and forecasts found that in 1996, 25% of surveyed MCOs described their positive lists as closed; one year later, the figure was 32%. Interestingly, the percentage reported by employers held constant at 12.5% for both years. Looking toward the future in 1998, MCOs predicted that almost 40% of them would have closed positive lists in 1999, whereas less than 20% of employers expect to offer closed positive lists in that same year [12].

Given these trends, increasing attention is being paid to the criteria set for including a drug on a positive list. Although those criteria have traditionally included safety and efficacy, one study found that seven of eight large PBMs stated that the cost of the drug product was an important criterion in decisions [18]. As discussed above, one way to decrease the cost of a particular drug is for the PBM to negotiate rebates or discounts with the manufacturer, then place that drug on the formulary but omit all (or certain) other therapeutically equivalent drugs produced by other manufacturers.

3. Controlling drug costs or overall health costs?

Although most pharmacy benefit management strategies employed in the US today are focused on containing the costs and utilization of drugs, some health care organizations are adopting innovative approaches to integrating pharmacy and medical services in an attempt to achieve savings in overall health care costs. This strategy recognizes that although drug costs might increase if case management of chronically ill patients leads to improved medication compliance, overall costs might decrease if there are reduced rates of hospitalization and/or visits to emergency departments. Asthma, depression, gastrointestinal conditions and diabetes lead the list of PBM-sponsored disease management initiatives, largely because it is believed that improved compliance with self-management practices, prescriber adherence to best practices, and appropriate use of medications used to treat these conditions can result in overall cost savings [11,12].

All major PBMs and many MCOs have developed and are implementing disease management programs designed to integrate pharmacy and medical services. Such programs assume a comprehensive, integrated view of disease, focusing on chronic, high-cost medical conditions in which drugs play a critically important treatment role. Disease management treats a disease across the continuum of care: from wellness to critical condition, from prevention to tertiary care, from home to hospital. Designed to prevent acute episodes of illness, disease management works proactively to educate patients and assure compliance with drug regimens and to educate physicians to improve prescribing decisions and other clinical practices. Proponents maintain that disease management fulfills the promise of managed care by managing the quality and processes of care, not just by containing costs [2].

MCOs and some PBMs have identified several barriers to successful large-scale implementation of disease management programs [8]. Many PBMs do not have access to diagnostic data and must therefore rely on patient self-report or drug use information to develop assumptions about patients’ diagnoses. Another challenge is the need to integrate medical and pharmacy databases, a necessary step for successful disease management, but difficult and costly to achieve. Finally, there is the problem of timeliness of data on medical claims, which are often available only after delays in claims processing. Although numerous reports suggest that disease management programs can have promising results, no studies have yet been published in peer-reviewed journals to document the results of disease management programs sponsored by PBMs.

4. Countervailing forces

At the same time that MCOs and self-funded employers attempt to control increasing drug costs through use of internal pharmacy benefits management activities and PBMs, they must contend with a range of countervailing forces. Some of the most important of these forces are negative reactions to positive lists on the part of the public or elected officials; concerns about patient confidentiality; and increased use of direct-to-consumer (DTC) drug advertising by pharmaceutical manufacturers.

4.1. Public reaction to positive lists

As MCOs increase their efforts to control the rising costs of drug therapies, there is growing public awareness of and sometimes criticism of these efforts, which are sometimes regarded as an example of putting cost concerns ahead of health care quality. Even as elected officials at the national level grapple with concerns about managed care by putting forth competing visions of a comprehensive “Patients’ Bill of Rights”, state lawmakers are enacting laws in response to more specific concerns about managed care cost containment efforts. These new state laws cover such topics as requiring health plans to allow women specified minimum hospital stays after childbirth or mastectomy, or requiring physicians to inform certain male patients of specified diagnostic procedures for prostate cancer detection.

In this political environment, it should not be surprising that California, a large state considered to be at the forefront of managed care health system changes, enacted laws pertaining to positive lists and, more generally, pharmacy benefits management. One of these laws requires that MCOs maintain an ‘expeditious process’ by which prescribing list. The MCO must notify the patient of its reasons for any disapprovals [17]. Another California law prevents an MCO from limiting or disapproving payment for a patient’s drug if that patient had previously been taking that drug, had been covered for it by the MCO, and if the patient’s physician continues to prescribe it. This law also requires all MCOs to disclose publicly “in language that is easily understood and in a format that is easy to understand” whether they use a positive list, what a positive list is, how that MCO determines which prescription drugs are included or excluded, and how often the MCO reviews the content of the positive list [1].

These laws illustrate the lack of understanding and support among part of the public for many of the pharmacy benefit management strategies now taking place. Such restrictions and disclosure requirements can be expected to continue and to become more widespread if the public perceives PBM and payer activities as being motivated more by cost containment than by health care quality considerations.

4.2. Patient privacy concerns

Analysts have raised issues about ethical and legal conflicts created by disease management programs sponsored by PBMs. PBMs have access to drug use and sometimes diagnostic data about enrollees and these data are used to target patients in attempts to enroll them in disease management programs. Identifying employees for voluntary participation in PBM-sponsored disease management programs through medical and/or pharmacy claims data is permissible under current law. Some analysts have however questioned whether such efforts might not constitute an invasion of patient privacy [14]. The Joint Commission on Accreditation of Healthcare Organizations and the National Committee of Quality Assurance, two powerful groups that inspect and accredit hospitals and MCOs, have announced that although they already have standards to safeguard medical privacy, they are considering several additional requirements to protect patient confidentiality while still allowing quality improvement, care management, and other important oversight activities to go forward. More generally, health officials, private sector accreditation bodies, and consumer advocates have been holding patient confidentiality conferences to discuss the need to enact general privacy safeguards before the US federal government establishes a national health care database. Mandated under the 1996 Health Insurance Portability and Accountability Act, commonly known as the Kassebaum-Kennedy Act, the federal government will require the health care system - including physicians, pharmacists, and MCOs - to maintain a uniform computerized record-keeping system. In view of this imminent centralization of information (the US Secretary of Health and Human Services was required to issue privacy regulations by February 2000 if Congress fails to act), public figures are concerned that there are no federal rules to protect the confidentiality of medical records, and want to respond to reports of damaging consequences such as employees being fired when their employers learned they were taking medication for depression or had other potentially stigmatizing health problems. It remains to be seen whether medical privacy concerns will present new obstacles to improved pharmacy benefits management interventions, including the movement toward more comprehensive disease management programs.

4.3. Direct-to-consumer advertising

Although direct-to-consumer prescription drug advertising (DTC) first appeared in the US in the early 1980’s, these activities have increased sharply first half of 1998 were $631 million, a 16% increase over this spending in the same period the previous year [6] and it has continued to rise since. There may be several reasons for the widespread and growing use of DTC. Perhaps one motivation underlying this development is manufacturers’ attempts to circumvent PBMs cost containment efforts by trying to inform patients about specific drug products and by encouraging them to ask their physicians to prescribe them. There is some evidence that physicians fear that consumers will obtain misinformation from DTC advertisements [9]. Specific physician criticisms were that these advertisements raise unrealistic expectations among consumers, minimize potential side effects [9] and fail to identify equally efficacious and less expensive alternatives [20].

There is some evidence that prospective drug consumers believe differently, suggesting DTC is effective in reaching the consumers’ mind. One survey reports that 59% of consumers think DTC advertisements help them “make their own decisions” about different drugs [15], and another survey indicates that 28% of consumers would change physicians in order to obtain an advertised medication that they desired [19]. Some large MCOs report that these new channels of drug manufacturers’ product promotion are driving up drug costs by creating unprecedented patient pressures to increase pharmaceutical use and to use the advertised and perhaps more expensive drugs [10].

5. Conclusion

Pharmacy benefit management strategies are evolving and are characterized by experimentation and innovation. Insurors feel ongoing pressure from public and private health care purchasers to contain drug costs, and can be expected to continue using pharmacy benefit management activities as an important part of their cost control efforts. However, insurors and the PBMs which they employ must move carefully to avoid appearing too restrictive to lawmakers, patients, and potential drug consumers. The US public generally supports the effort to keep health care costs down, but the public is also becoming more informed and less tolerant of some of the specific restrictions and economic incentives currently in use to control drug expenditure. Disease management may be a key part of future efforts by PBMs to address both cost and health care quality concerns, but there are significant practical, legal, and economic issues to address before these programs can be effectively implemented on a large scale.


[1] AB 974, Chapter 68, Statutes of 1998.

[2] G. Borzo, Drug firms expand into patient care, American Medical News 39(24) (1996), 1,7,8.

[3] General Accounting Office, Pharmacy Benefit Managers: FEHBP plans satisfied with savings and services, but retail pharmacies have concerns, GAO/HEHS-97-47, Washington, D.C., 1997.

[4] M. Gibaldi, Vertical integration: the drug industry and prescription benefits managers, Pharmacotherapy 15 (1995), 265-271.

[5] H.G. Grabowski and C.D. Mullins, Pharmacy benefit management, cost-effectiveness analysis and drug formulary decisions, Social Science & Medicine 45 (1997), 535-544.

[6] IMS Health and Competitive Media Reporting release, 11/11/98.

[7] L. Johannes, Some HMOs now put doctors on a budget for prescription drugs, Wall Street Journal (12 May 1997), A1.

[8] D.H. Kreling, H.L. Lipton, T.C. Collins and K.C. Hertz, Assessment of the impact of pharmacy benefit managers, Final Report to the Health Care Financing Administration, National Technical Information Service, Springfield, VA, 1996, Pub. No. PB97-103683.

[9] M. Lipsky, The opinions and experiences of family physicians regarding direct-to-consumer advertising, Journal of Family Practice 45(6) (1997), 495-499.

[10] H.L. Lipton, L.H. Syed and M.R. Stebbins, Description and potential impact of pharmaceutical benefit management strategies in Medicare-risk HMOs: an exploratory study. Presented at Annual Meeting of the Gerontological Society of America, November 22, 1998, Philadelphia, Pennsylvania, USA.

[11] R. Navarro, ed., Novartis Pharmacy Benefit Report: 1997 Trends and Forecasts, Totowa, New Jersey: Emron, Inc., 1997.

[12] R. Navarro, ed., Novartis Pharmacy Benefit Report: 1998 Trends and Forecasts, Totowa, New Jersey: Emron, Inc., 1997.

[13] Newark Star-Ledger, 1998, reported in 11/11 California Healthline.

[14] R. O’Harrow Washington Post Jr.,. (27 Sept. 1998), A1.

[15] Prevention Magazine, reported in 11/11/98 California Healthline.

[16] R.L. Rundle, CalPERS to pay 2.7% boost in HMO rates, Wall Street Journal (16 April 1997), A3.

[17] SB 625, Chapter 69, Statutes of 1998.

[18] K.A. Schulman, E. Rubenstein, D.R. Abernethy, D.M. Seils and D.P. Sulmasy, The effect of pharmaceutical benefits managers: is it being evaluated?, Annals of Internal Medicine 124 (1996), 906-913.

[19] Time Magazine, reported in 11/11/98 California Healthline.

[20] R.D. Waltermire, Direct-to-consumer advertising of Rx drugs can be harmful to your health, Drug Benefit Trends 10(10) (1998), 60-61.

[21] J.B. White and R.L. Rundle, Big companies fight health-plan rates: employers demand HMOs and hospitals cut costs, Wall Street Journal (19 May 1998), A2.

[22] R. Winslow, Health-care inflation revives in Minneapolis despite cost cutting, Wall Street Journal (19 May 1998), A1.

Suggested reading

D. Saikami, Financial risk management of pharmacy benefits, American Journal of Health-Systems Pharmacy 54 (1 Oct. 1997), 2207-2212.

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