Pharmaceutical Pricing Practices, Utilization and Costs - Meeting Summary. 3. Panel Discussion: Strategies for Controlling Costs and Increasing Value from Pharmaceutical Expenditures


Following the two formal presentations, panel members and members of the general audience were given an opportunity to make comments on strategies for controlling costs and increasing value from pharmaceutical expenditures.

PBMs' Pricing- and Utilization-Focused Cost-Control Strategies

Representatives of PBMs on the panel reiterated that the cost-control strategies a PBM adopts depend on what the PBM's customers--health plans and health plan sponsors--want. A few PBM customers want the PBM to intervene aggressively to control the utilization and net costs of prescription drugs. Through a combination of strategies--finding the lowest cost drug (not maximizing rebates); finding the best coinsurance or copayment design known to economists; and fully employing prior authorization programs, second opinions, and step therapies--one PBM reported that it has been able to limit growth in prescription drug expenditures to 2-5%.

Panel members agreed that further research is needed on the effects, intended and otherwise, of PBMs' pricing- and utilization-focused cost-control strategies--both alone and in combination.

PBMs' pricing-focused cost-control strategies:

  • Rebates from brand-name drug manufacturers. Researchers and PBM customers said that it would be helpful to get a better understanding of PBMs and their operations. A researcher on the panel noted that PBMs used to make money processing claims, but in the last 10 or 15 years the cost of processing a claim has dropped below the cost of a postage stamp. Retail pharmacy representatives on the panel suggested that PBMs are making money via their share of rebates from brand-name drug manufacturers.
  • Mail service pharmacies. Representatives of retail pharmacies said the perception is that mail order service saves money, and claims have been made that mail order service offers a better environment than the retail environment for generics. Retail pharmacists believe that these claims should be investigated through research.

PBMs' utilization-focused cost-control strategies:

  • Use of drug formularies. Two integrated health systems, with their own physicians, hospitals, and pharmacists--Kaiser Permanente and the U.S. Department of Veterans Affairs (VA)--have had some remarkable successes in managing the utilization and costs of prescription drugs with their drug formularies and other mechanisms. The VA's successes were described in a recent report by the Institute of Medicine. Panel members generally agreed that the techniques used by Kaiser and the VA would not work as effectively in health care systems lacking integration. Most physicians have to deal not with a single formulary but with multiple formularies from different managed care organizations. A researcher on the panel reported that a typical family physician operates with about 6.5 contracts with managed care organizations and a specialist with about 40 contracts. Several panel members, including physicians and consumer representatives, raised concerns about formularies developed by managed care organizations and recommended research to evaluate their effects on clinical outcomes. They also suggested research comparing clinical outcomes in single-formulary environments such as the VA or Kaiser with clinical outcomes under multiple formulary environments, controlling for patients' health status. One consumer organization, the AARP, said that while it does not oppose formularies per se, it believes that it is important to have oversight of the formulary development process, external reviews, appeals, etc.
  • Drug utilization review. Some PBM representatives and large employers said that they do not think that utilization controls at the level of the retail pharmacy are the answer to controlling the costs of prescription drugs. Most PBM customers, whether because of a tight labor market or a backlash against managed care decisionmaking, do not want employees to go to a pharmacy with a prescription only to be told (as they are now) that the drug is not approved by their health plan. As a result, PCS Health Systems, Express Scripts, and other PBMs are now trying to find a place in physician decisionmaking so that if the physician makes the right decision, everything cascades from there, and patients and pharmacists don't get hit with heavy regulatory PBM activity.
  • Disease management programs. Panel members spent a considerable amount of time talking about disease management programs, noting that since Medicare includes many elderly and disabled beneficiaries with chronic conditions, it is going to be very important to be able to manage their drug use appropriately.
    • Sponsors and incentives for disease management programs. One researcher noted that disease management programs can focus on any of several problems throughout the patient management process, and what a particular program focuses on--e.g., compliance with drug therapy, drug substitution programs--reflects the incentives of the PBM, HMO, or other program sponsor. Most disease management programs have had to show a return on investment (cost savings) in the short term--otherwise no one sponsors them. There is a lot of good disease management going on, but it is labor intensive and expensive, and not all of it reduces costs in the short term.
    • Physicians' role in disease management. Physicians reported feeling buffeted by multiple and conflicting disease management strategies. A researcher on the panel said physician groups' ability to devote time and energy to clinical process design, which results in perhaps spending more on certain drugs but achieving overall cost savings, is often constrained by the push for drug component management in disease management programs.
    • Pharmacists' role in disease management. Pharmacists on the panel said that there is a lot of opportunity to take advantage of the existing infrastructure of retail pharmacies for disease management. Pharmacists are trained to do excellent disease management, but with few exceptions, they are not being used for this. Financial incentives are needed to compensate retail pharmacists for disease management.
    • PBMs' role in disease management. PBM representatives said that the infrastructure PBMs have put into place in the last 10-15 years offers the potential to do disease management if the economic incentives are put into place. A critical lesson for Medicare from PBM disease management programs, according to PBM representatives, is the need for an economic incentive structure to pay for case management and disease management services.
    • Focus on a single disease not good for elderly with multiple conditions. One researcher suggested that disease management programs that focus on a single disease may do more harm than good in patients with multiple conditions.
    • Need for outcome research. Several panelists said that the outcome science for "If I do this, then I get that" (whether measured in cost savings, quality of life, patient satisfaction) in most diseases and conditions does not exist. More research of this type is needed.
    • Population-based disease management vs. privacy regulations. One panelist noted that a population-based approach to disease management is on a collision course with Federal and State privacy legislation. Currently, many disease management programs are using an opt-in voluntary strategy. Those who volunteer are the high-performing patients and will do well. People who don't volunteer typically are the more costly patients.
  • Patient cost-sharing. Health insurers and HMOs urged policymakers not to put policies in place that would impede their ability to experiment with new ideas in the realm of prescription drugs. As noted earlier, some health plans have been moving to a three-tiered copayment structure to make consumers bear more of the costs when they opt for an expensive drug over a less expensive (but appropriate) brand-name or generic alternative. Panel members suggested that more research is needed on the effects of three-tiered and other cost-sharing arrangements on the utilization and costs of prescription drugs. Research is also needed on the effects of such arrangements on the appropriate and inappropriate use of prescription drugs and patients' health outcomes.

Utilization Management to Control Costs vs. Clinically Determining Appropriate Utilization

Physicians and other panelists emphasized that it is important not to conflate utilization management aimed at controlling costs with determining appropriate utilization clinically (i.e., determining what is clinically best for patients according to health care providers). Utilization quality controls (e.g., generic prescribing) have some underlying scientific basis; however, volume controls such as those used by the Medicaid program have no good scientific basis, may drive patients to other venues, and may have an impact on the disease process that may end up costing the program sponsor more than the costs saved in reduced volume.

What Information Might Help Improve the Performance of the U.S. Pharmaceutical Market?

In several sessions of the 2-day conference, panel members identified information that they thought could help improve the performance of the U.S. pharmaceutical market:

  • Information on prescription drug prices and manufacturers' R&D costs. As noted earlier, panel members disagreed about whether prescription drug prices and manufacturers' R&D costs should be made more transparent. (See discussion in Pricing Practices in the Pharmaceutical Market)
  • Information for consumers on prices and appropriateness. Consumer advocates and researchers on the panel suggested that consumers need information on drug prices and on which drugs are appropriate for them. It is important that such information be supplied by a source that is trusted by the public to provide good, unbiased information.
  • Implications of the Medicaid best price. Some panel members suggested that policymakers need to know more about the implications of the Medicaid best price. If businesses are asked to take risks on pharmaceutical benefits, and if the Medicaid best price is affecting businesses' ability to take risks, policymakers should understand the implications of that.
  • Economic policy research conducted from a societal perspective. One researcher argued that U.S. policymakers need good economic policy research on health care in general and pharmaceuticals in particular conducted from a societal perspective. Such research is not very forthcoming from either the academic or the policy world.

How Can Information Be Developed and Conveyed?

Panel members also discussed what mechanisms might be used to convey information about prescription drugs to consumers and other parties:

  • The role of the Federal Government in developing information. Several panelists suggested that the Federal Government should play a key role in developing and conveying information for consumers on the prices and appropriateness of prescription drugs. A researcher on the panel recommended establishing a Federal agency to evaluate economic policy related to health care and pharmaceuticals from a societal perspective. Panel members noted that there are 40 to 50 million people, especially the elderly or individuals enrolled in public programs with low levels of health care literacy. Functional illiteracy is more prevalent among beneficiaries in public programs and rises with age. Such individuals will need help to navigate new systems put into place in the event of the enactment of a Medicare prescription drug benefit. AARP survey data indicate that many people in the current generation of Medicare beneficiaries rely primarily on their physicians for guidance.
  • The role of new technologies in conveying information. Several panel members commented that changes in the use of technology will improve the flow of information to physicians, patients, and others. For physicians, hand-held, electronic prescribing devices now in development show considerable promise for making information--e.g., formulary information, cost information, clinical practice guidelines--available to physicians at the point of prescribing. One vehicle for conveying information to consumers is the Internet, but it will probably be used more by Baby Boomers than by the current generation of Medicare beneficiaries.

Other Strategies For Improving Competition in the U.S. Pharmaceutical Market

Some panelists supported the use of strategies to improve the operation of the U.S. pharmaceutical market to control costs and increase value from pharmaceutical expenditures without massive government intervention. Research is needed on all of these strategies:

  • Reconsidering incentives for prescription drug R&D. As discussed earlier, there are many patent and patent-like protections available to brand-name drug manufacturers. Consequently, generic drug products often struggle to get in the market. An important question for U.S. policymakers is: Is what the country is buying in terms of incentives for R&D through drug patent and exclusivity arrangements worth the cost, or can we find a more cost-effective approach to promote innovation? Another question is: What can the Federal Government do to stimulate the innovation of breakthrough products rather than "me-too" products?
  • Reconsidering the licensing of products developed with NIH-funded research. U.S. drug manufacturers are sometimes given an exclusive license to market new prescription drug products developed with research funded by the National Institutes of Health (NIH). These products are subject to the usual patent rules, and there are no constraints on price. A question for policymakers is: Is this practice in the best interest of consumers, and if not, what should be changed?
  • Educating providers and consumers about the relative value, benefits, risks, and costs of drugs. There are often competing therapies in a given therapeutic class, but providers and consumers are not aware of it. Important questions for U.S. policymakers are: How can credible information about the relative value of different drug therapies be developed? Second, how can that information best be conveyed to the appropriate parties?
  • Making physicians more aware of generic drugs. Unlike brand-name drug manufacturers, generic companies do not detail products to physicians--instead, generic companies sell their products to drug wholesalers and the chain pharmacies. A generic drug representative suggested that physicians need to be sensitized to the fact that there are generic products available that they could use as an alternative to brand-name drugs. Possible approaches for making physicians more aware of the availability of generic drugs include generic sampling or academic detailing for generic products.
  • Giving consumers a choice of different pharmacy benefits, priced accordingly. An alternative to micromanaging the utilization of pharmaceutical benefits might be to give consumers different levels of pharmacy benefits, priced accordingly--for example (1) a closed formulary; (2) a formulary with a medical necessity override; (3) a three-tiered formulary, and (4) an open formulary. The pricing of the different pharmacy benefits would reflect different experiences with utilization.
  • Developing measures of the value of prescription drug benefits. Health care purchasers indicated that they would like to have measures that they could use to measure the value (quality/cost) of the benefit programs they are purchasing. Consumer Reports has done some work in measuring value, as has the National Committee on Quality Assurance. More research is needed in this area.
  • Reconsidering Medicaid best price. Representatives of PBMs and health plans on the panel suggested that policymakers should consider repealing the Medicaid best price and allowing the free market to work. Policymakers need to consider the following questions: Is the Medicaid best price keeping States which have a huge volume (employees and Medicaid) from getting the best price? Is the Medicaid drug rebate policy established in 1990 lowering the ability of private purchasers to negotiate steep discounts with pharmaceutical companies? One retail pharmacy representative agreed that the Medicaid Federal upper limit list needs to be reformed; however, he cautioned against repealing Medicaid best price, noting that Medicaid best prices were adopted because Medicaid was unable to negotiate effectively.
  • Reconsidering the criteria for designating drugs as prescription drugs or OTC drugs. Some prescription drugs in the United States are available OTC in other countries. Blue Cross Blue Shield believes the designation should be based on safety not a pharmaceutical company's economic strategy.

Direct U.S. Government Intervention to Reduce the Prices of Prescription Drugs

A few panelists supported the direct intervention of the U.S. Government in the pharmaceutical market to control costs and increase value from pharmaceutical expenditures:

  • Government price controls and regulations. Several panelists noted that a Medicare benefit prescription drug benefit can be expected to increase the utilization of prescription drugs. They argued that rather than focusing on reducing utilization--given that the problem for many Medicare beneficiaries is an inability to afford prescription drugs that they need--U.S. policymakers should focus on controlling brand-name pharmaceutical manufacturers' prices and pricing practices. Price controls are used in much of the industrialized world outside the United States, and most of these countries have lower drug prices than the United States. In the United States, however, price controls are less politically popular and there are concerns about the effects of price controls on innovation.
  • Government contracts with pharmaceutical manufacturers. One panel member argued that more money for business as usual is not going to work. He recommended that the Federal Government enter into contracts with drug manufacturers to cut the prices of prescription drugs substantially (e.g., to the level of the manufacturers' marginal costs or to the Federal Supply Schedule level). Although the manufacturers would probably make up most of their lost revenue in higher volume, the Federal Government could agree to make up any lost revenue so that the drug companies would be left financially whole. In addition, to address concerns about research and innovation, the Federal Government could provide additional money to the National Institutes of Health, change intellectual property laws to encourage the development of breakthrough products, etc.
  • Another panel member suggested that perhaps the Federal Government could negotiate risk-based contracts with drug anufacturers under which the drug manufacturers would share utilization risk with the Federal Government and sell their products at marginal costs. This approach, he said, would protect the manufacturers' profitability, although decreasing their profit margin, and would get more prescription drugs to the people who need them.