Seeking the Rx for rising drug costs - Cover Story

Business & Health, Jan, 1993 by Jeannie Mandelker

Employers looking to control health care costs do not often target prescription drug benefits first. Drug benefits make up only 10% to 15% of all employer-paid health benefits, according to PCS, a vendor of managed care pharmacy services, in Scottsdale, Ariz. But since the cost of drugs has been soaring, employers have paid much more attention to prescription drug prices.

More recently, the inflation rate of prescription drugs relative to the overall inflation has stabilized. Prescription drug price inflation was three times overall consumer inflation in 1991, according to the Bureau of Labor Statistics, in Washington. In the first 10 months of 1992, prescription drug inflation was 1.8 times the rate of inflation. Still, businesses paid $22 billion in 1991 for prescription drugs for employees, retirees, and dependents, according to Hewitt Associates, a benefits consulting firm in Lincolnshire, Ill., yet most employers don't know if their employees are getting the best and most cost-effective drugs.

"Right now employers don't know what they're buying," says Philip Gerbino, vice president for academic affairs, Philadelphia College of Pharmacy and Science. "If I were an employer, I would go to managed care providers and say, 'Show me that l am spending my money wisely.'"

Most providers would be hard pressed to prove they are prescribing the most cost effective drugs for their covered individuals, but it's not because they don't want to.

Pharmacoeconomics is an approach by which providers would be able to offer such proof. While some managed care organizations have had limited success in studying the outcomes and cost effectiveness of drugs, others are relying simply on pharmaceutical manufacturers to provide such data.

Meanwhile, employers, which would benefit the most from such research, have remained on the sidelines. They have traditionally relied on their insurers and the pharmaceutical and therapy (P&T) committees of their HMOs to make the right choices on their formularies. But there's a world of difference between choosing drugs for a formulary and measuring the outcomes and cost effectiveness of one drug against another.

Managed care administrators, drug researchers, and drug companies, however, are beginning to take pharmacoeconomics seriously. Employers would be wise to take heed, too, since it may be the first step necessary to harness the runaway cost of drug benefits. The Zitter Group's Center for Outcomes Information, an outcomes education firm in San Francisco, surveyed benefits managers from Fortune 1,000 companies last year. The group found that most benefits managers are unfamiliar with pharmaceutical outcomes research, cost effectiveness analysis, and total therapy costs. For the survey, pharmaceutical outcomes research was defined as research into the issues that patients perceive, such as quality of life, side effects, morbidity, and mortality.

Defining pharmacoeconomics

An interdisciplinary approach to evaluating the true value of drug therapy, pharmacoeconomics factors in the cost of all intervention and therapeutic procedures in an episode of care, such as visits to the doctor, blood tests, surgery, and drugs, and assesses the impact of potential side effects, which might mean more visits to the doctor.

But evaluating the cost of drug therapies is time-consuming and can be expensive. Drug outcomes studies can cost as little as $150,000, or as much as

$1 million, according to managed care organizations that have conducted such studies. Some drug manufacturers and academicians say HMOs, with their extensive patient and drug records, are in a perfect position to measure the true value of a drug. Smaller HMOs say only the drug companies have the resources to do drug outcomes research. Other HMOs want to see what develops now that the federal Agency for Health Care Policy and Research, in Rockville, Md. has stated it will focus on outcomes in its clinical effectiveness trials beginning in 1994.

Some health care buyers are turning to other sources for pharmacoeconomics data. The Zitter Group found last year that 27 out of 30 (90%) U.S. pharmaceutical firms surveyed have begun to study outcomes, up from only 66% of those surveyed in 1990. Of those 27, 17 had assigned formal responsibility for outcomes activities to at least one individual or department.

Schering-Plough, in Kenilworth, N.J., for instance, formally incorporated its outcomes research as part of its health economics department and now considers outcomes for products in development and for drugs already on the market.

Customer demand

Behind the drug companies' newfound interest in outcomes is customer demand from HMOs, as well as hospitals. Today, 40% of all prescriptions are paid for by third-party payers, such as managed care plans or Medicaid, and that figure is expected to rise to 75% by 1996, says Kenneth Abramowitz, a health care analyst with Sanford C. Bernstein & Co., an investment firm, in New York. Providers are asking for more research to back post-market claims.