Formularies: balancing cost and quality - Pharmacy Benefits Management: The Next Generation supplement

Business & Health, March, 1995

Formularies have been effective in controlling drug costs, but few employers have exploited their full potential. Most formularies today are still open or voluntary and lack financial incentives to induce physicians, pharmacists, and patients to select a formulary-preferred drug.

Pharmacy benefit managers (PBMs) are working with employers to put more teeth into formularies without taking too big a bite out of patients' benefits. It's a complicated task, but one that could produce significant savings.

Simply put, formularies are lists of drugs rated on clinical and cost bases. PBMs and many large managed-care organizations develop formularies based on the recommendations of their own pharmacy and therapeutics (P&T) committees, made up of physicians and pharmacists.

EFFECTIVENESS BEFORE COST

P&T members look at dosage requirements, side effects, and efficacy first, then at cost. The resulting formulary often is published both as a book and as an electronic data base. Just as critics use stars to rate movies, drugs on formularies are ranked with dollar signs. Employers and PBMs naturally prefer drugs with fewer dollar signs. Ratings go from "most-effective, greatest cost-benefit" ($) to "least-effective, least cost-benefit" ($$$$$). Drugs deemed too expensive or whose efficacy is not accepted by a P&T committee are left off the formulary.

PBMs and other managed care organizations can negotiate significant rebates from manufacturers if they can demonstrate that their volume of business deserves it. Manufacturers will give rebates in the hope of dropping one or two $ symbols from their brand.

In an open formulary, which is the operating standard for some 90% or more of drug benefits for employees outside of staff or group--model HMOs, physicians are sent copies of the formulary, which they may or may not consult. Pharmacists also receive the formulary, and some PBMs provide an incentive for pharmacists to call the physician and suggest a generic or preferred brand over a non-formulary drug. For instance, PCS Health Systems Inc., a PBM in Scottsdale, Ariz., pays its network pharmacists an incentive every time they successfully ask a physician to authorize a generic substitution.

DIRECT TO THE DOCTOR

Increasingly, PBMs are talking directly to physicians, and most are finding the discussions fruitful. PCS monitors physicians, then writes or calls them if their prescriptions deviate widely from the norm. Medco Containment Services, Inc., in Montvale, N.J., employs pharmacists who work exclusively as telemarketers to call physicians and ask them to switch mail-order prescriptions to generics or preferred drugs. If a mail-order prescription is marked DAW, or dispense as written, when a generic or formulary brand is available, Medco calls to confirm that the doctor meant DAW, explains Wayne Gattinella, executive vice president of marketing, Medco. "We are just asking the question," says Gattinella, noting that in 80% of the cases, the telemarketer persuades the doctor to switch to a generic.

Increasingly, manufacturers will retreat from giving rebates to all buyers and will grant them strategically instead, says Brian Bullock, director of benefit management services at Health Care Pharmacy Providers Inc. of Carrollton, Tex., a PBM covering three million lives. "They will go to people who can deliver market shift, as opposed to being able to deliver volume," he says.

Over the past 15 months, the alignment of PBMs with drug manufacturers has been spurred by the desire of drug makers to find a spot on PBM formularies. This movement worries payors, who fear that product choice could be unduly influenced by business interests. "We would have to be convinced that the formulary is therapeutically based and not driven by company ownership. This is medicine we're dealing with, not stocks and bonds," says Robert Bonin, benefits administration manager for First Chicago Corp., a financial services concern in Chicago that has not yet introduced a formulary to its drug plans.

DRUG COMPANY TIES

PBMs now owned by or working with drug companies don't deny that the prices offered by their partners boost their presence on the formulary. "We have a very good contract with Pfizer," says James Lang, vice president of clinical pharmacy services for ValueRx, the PBM subsidiary of Value Health Inc. Value Health has started a joint venture with Pfizer Inc. of New York to investigate disease state protocols. (See "Disease State Management: Rx for Savings," page 11). "Because of the nature of the discount, if the drug is not the preferred brand in most categories, the Pfizer product is pretty close," Lang says.

The formulary's purpose, however, is not to sell more Pfizer products or even more drugs, Lang adds. "We include about 100 over-the-counter drugs on the formulary to remind physicians that those are good choices, too. And I try to encourage no-drug therapy because it might be safer and less costly."

Few plan sponsors would deny that formularies have reduced their costs and have changed the way drugs are developed, researched, and priced in a marketplace increasingly dominated by managed care. Drugmakers know that they can't simply produce a "me-too" product in a therapeutic classification and promote it relentlessly to physicians and make money. So Sandoz Pharmaceutical Corp. of East Hanover, N.J., launched its cholesterol-fighting drug Lescol at an especially low price to gain P&T committee acceptance, and the drug is likely to save payors many dollars. When a new drug carries a high price, drug companies are sponsoring pharmacoeconomic research to show the drug can save other health costs over time.