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Managing the Unmanageable: Drug Payment and Utilization Management Strategies in Physician Organizations

Helene Levens Lipton, Ph.D.
Institute for Health Policy Studies, Department of Clinical Pharmacy

University of California at San Francisco

A background report prepared for the Department of Health and Human Services' Conference on Pharmaceutical Pricing Practice, Utilization and Costs

August 8-9, 2000

Leavey Conference Center, Georgetown University

Washington, DC

Final Version

The Current Situation

  1. Growth in drug spending has been at double-digit rates in both public and private sectors since 1995.
  2. Drug costs account for 10-13 percent of HMOs’ medical budgets and half of all HMO cost increases.
  3. Increased drug spending is an important component of health insurance premium increases.
  4. Some health plans are paying more for prescription drugs than for primary care physicians’ services and acute care hospitalizations.
  5. Due to escalating drug costs, HMOs, PBMs and physician groups are adopting innovations in drug payment and utilization management strategies.
  6. In this paper, I will:

-- describe the nature of selected drug payment and utilization management strategies and how they play out in clinical practice

-- indicate the extent to which such innovations are grounded in evidence-based behavioral change literature

-- delineate potential options for controlling drug costs while maintaining or improving quality of care

Innovations in Drug Payment Mechanisms

  1. Some HMOs are attempting to relieve some cost-increase pressures by requiring more cost-sharing from physicians.
  2. Assumption of drug risk is shifting in varying degrees to physician groups (medical groups, IPAs, integrated delivery systems).
  3. Of those physician groups assuming risk for drug costs, most are at partial risk (i.e., physician groups share in a proportion of savings and/or losses with HMOs).

Physician Groups’ Problems with Managing Drug Risk

Physician groups are “flying blind” (information asymmetry):

  1. HMOs’ pharmacy PMPM rates are viewed as too low by physician groups
  2. Inadequate “drug-risk adjusters” when negotiating drug PMPM rates with HMOs, including:
  3. no drug-related age/sex risk adjusters
  4. often no provisions for severity-of-illness indexing, newly emerging drug therapies, drug price inflation, and/or increased drug use
  5. perverse incentives: medical groups with well-managed drug costs find themselves pushed to even lower PMPM drug rates in subsequent contracts
  6. Physician groups have limited or no control over:
  7. Drug benefit design (e.g., patient copays, drug benefit caps, formulary structure and rebate incentives): Changes in drug benefit design can lead to increased drug use and costs, with no concomitant increase in pharmacy PMPM rates for medical groups. Some analysts maintain that the design of the pharmaceutical benefit is the primary determinant of the product’s financial performance in the market.
  8. Development, management, and changes of formularies: Changes in formularies, especially the addition of expensive, new brand-name drug products, increase drug budgets significantly, without concomitant increases in the medical groups’ pharmacy PMPM rates.
  9. Limited or no knowledge of rebate arrangements among HMOs, PBMs and drug companies.
  10. Lack of timely, complete, accurate, and auditable pharmacy claims data from HMOs and PBMs. Physician groups cannot drive use of cost-effective prescribing practices without adequate drug use and expenditure data delivered in real time.

Emerging Trends in Drug Risk

  1. Physician groups are trying to eliminate or reduce “downside” drug risk; incidence of capitation contracting is on the decline
  2. Some movement toward “incentivized” pharmacy contracts (based on drug PMPM budget, formulary compliance, and generic fill rate)
  3. Increasing patient cost sharing
  4. a major mechanism to manage the pharmacy benefit (e.g., tiered copayments)
  5. disproportionate burden to seniors, whose use and average cost/Rx is high

Drug Payment and Utilization Management Strategies in Physician Organizations: A Light Industry

NOTE: “ * ” indicates strategies pertaining primarily to HMOs

A. Drug Benefit Design*

  1. drug benefit ceiling (“cap”)
  2. formularies (managed/ closed)
  3. copayments for drugs
  4. coinsurance for drugs
  5. mail-service pharmacy program
  6. generic prescribing (mandatory vs. voluntary)
  7. reduced copayments for generic drugs
  8. exclusion of generic drugs from drug benefit ceiling
  9. other

D. Expanded Roles for Health Professionals

  1. hiring pharmacist(s)
  2. hiring nurse(s) or other health professional(s)
  3. medication management programs for providers
  4. use of opinion leaders (“physician champions”)
  5. other

G. Administrative Bodies/Measures

  1. P & T committee (or functional alternative)
  2. advanced information systems
  3. therapeutic edits/blocking claims*
  4. prior authorization
  5. restricted access of drug company sales representatives to physicians
  6. programs to control drug sample supply
  7. new-to-market drug evaluation process before formulary inclusion
  8. other

B. Management-by-Contract*

  1. alignment with PBMs
  2. rebate negotiations with drug companies
  3. reimbursement rates for pharmacy network providers
  4. stop-loss provisions with HMOs
  5. “carve-outs” for certain high-cost drug categories (e.g., HIV, self- injectables)
  6. physician group direct contracting with drug companies
  7. generic/formulary aligned financial incentives for pharmacy network providers
  8. re-insurance for all pharmacy costs or for high-cost drugs
  9. other

E. Front-End Strategies: Prescribing Guidelines/ Restrictions

  1. preferred drug list
  2. drug-specific, “best-practice,” or other treatment protocols
  3. protocol-based, computerized, real-time alerts at time of prescribing
  4. stepped care (e.g., start with cheapest effective drug; if drug fails, go to the next therapeutic level)
  5. . technological aids to formulary compliance at time of prescribing (e.g., Palm Pilots)
  6. other

H. Clinical Process Redesign: Patient/ Physician-Focused Interventions

  1. condition-specific therapeutic guidelines
  2. disease management programs
  3. pharmacist-or nurse-directed chronic disease clinics
  4. multi-disciplinary health care teams to treat targeted groups of patients
  5. nurse/social worker case management
  6. patient education initiatives (on cost of drugs, self management, compliance, prevention, etc.)
  7. other interventions designed to change clinical practice

C. Incentives Targeting Use of Generics

  1. generic drug sample programs in medical offices (e.g., only generic drug samples in closet)
  2. mail programs
  3. other

F. Prescription Monitoring and Modification Mechanisms

  1. prospective drug utilization review
  2. retrospective drug utilization review
  3. therapeutic interchange (“switch”) programs
  4. profiling physicians’ prescribing practices
  5. academic detailing
  6. other

I. Other Initiatives

  1. policy measures/legislative initiatives to limit/ eliminate pharmacy risk
  2. cross plan regional prescribing guidelines
  3. other

Two Major Types of Drug Use Management Strategies Used in Physicians’ Organizations

  1. Drug Component Management: Behavioral change interventions designed to decrease drug budgets through changing an individual physician’s prescribing decisions regarding specific drug products. Examples: formularies, academic detailing, electronic prescribing devices
  2. Clinical Process Redesign: Innovative clinical management strategies leading to a new set of drug-use management strategies, potentially improving quality of care and reducing overall health care costs. Clinical process redesign may increase expenditures for selected drugs but have the potential to achieve overall health care savings. Examples: pharmacist or nurse-directed chronic illness clinics, integration of “best-practice” guidelines, multi- disciplinary health care teams for chronically ill patients
  3. Limitations of Drug Component Management: Most physician groups are devoting time, energy, effort and resources to drug component management. This represents an “opportunity cost” in terms of redirecting resources toward addressing other sources of medical errors such as therapeutic duplication, drug-drug interactions, inappropriate duration, inappropriate dosage, and less- than-optimal selection of drugs due to patients’ diagnoses and medical histories. Attention paid primarily to drug component management constrains the ability of groups to make systemic changes through clinical process redesign.

Case Study of an Emerging Drug Use Management Innovation: Handheld, Electronic Point-of-Prescribing Devices

Intended Effects of Handheld, Electronic Prescribing Devices (e.g., Palm Pilots)

Physicians’ ability to receive real-time feedback about potential drug-therapy problems:

  1. medication errors reduced (through enhanced legibility of prescription orders and electronic identification of potential drug-therapy problems)
  2. increased and more reliable physician access to data on patient compliance
  3. creation and maintenance of a complete record of transactions, through electronic drug and refill histories
  4. immediate feedback on availability of generic and formulary- preferred brand-name drugs with potential to decrease drug costs

Limitations of Handheld Electronic Prescribing Devices

  1. unreliable radio frequency connections
  2. slow processor speeds
  3. small screen size limits information display space
  4. clinical algorithms often incomplete
  5. time consuming when used on patients with multiple diagnoses
  6. false positive/false negative rates unknown (are medication errors really reduced?)

Unintended Effects of Electronic Prescribing Devices

Are we doing the right thing for the wrong reasons? In allowing 1000 electronic flowers to bloom in the current medical marketplace, we may reinforce characteristics inherent in multiple formularies. Does the ease of electronic storage and retrieval of formularies:

  1. perpetuate the current system of multiple, competing formularies?
  2. align physicians’ prescribing decisions more with health plan/PBM priorities than with optimal drug use for patients?
  3. preclude development of independent, unbiased drug information sources?
  4. retard development of standardized interfaces?


  1. Need for controlled, independent studies of impacts on physician acceptance, time-and-motion, reduction in medical errors, decreasing costs
  2. Need for “head-to-head” research trials to assess impacts of diverse electronic prescribing technologies (e.g., comparisons among hand-held prescribing devices vs. electronic medical records vs. Web-based technologies).

The Disconnect between Best Practices and Drug Use Management in the Trenches

Many strategies currently used by physician groups:

  1. are ineffective in decreasing drug costs (e.g., mailed “Dear Doctor” letters containing scientific truths, physician profiling, drug utilization review, formularies alone)
  2. have not been studied or evaluated rigorously in peer- reviewed journals (e.g., tiered copayment structures, therapeutic interchange [“switch”] programs)
  3. are effective in some settings but often resisted by doctors (e.g., so-called “academic detailing” efforts sponsored by HMOs and/or PBMs)
  4. are effective in a single setting, but often ineffective for physicians with multiple HMO contracts (e.g., competing and conflicting drug formularies)

What can be done on the physician group level to increase the quality and economy of drug prescribing and use?

  1. Make greater use of effective strategies and evaluate unproven ones. Efforts should be made to integrate strategies in physicians’ organizations that are known to be effective. These include but are not limited to:
  2. physician groups’ use of physician champions
  3. academic detailing efforts sponsored by physicians’ groups
  4. clinical process redesign programs
  5. promote and increase generic drug use.
  6. Evaluate unproven strategies designed to control drug costs.
  7. Conduct studies to assess the financial and quality-of-care impacts of unproven yet widely-used strategies, including tiered copayments and therapeutic interchange.