Strategies for managing prescription drug costs

Business & Health, June, 1990 by Linda Stern

Strategies for managing prescription drug costs

American employers will spend $22 billion on prescription drugs for their employees, retirees, and dependents in 1990, and that's not a figure companies are taking lightly.

Employers are taking aim at their prescription drug bills and applying ever more aggressive policies to keep those costs in check.

Roland McDevitt, a health economist at The Wyatt Co., Washington, D.C., notes that "prescription drugs represent 11 percent of total health care expenses for employers, and they respond readily to cost cutting programs."

Among the strategies being used are negotiating directly with pharmaceutical firms, opening company-run pharmacies, hiring consultants to encourage physicians to prescribe less expensive medications, rewarding employees who choose generic drugs, and cutting their own deals with local pharmacies.

Here's a closer look at programs underway across the country.

Corporate pharmacies

Rockwell International Corp. has opened its own corporate pharmacies where there are enough employees to justify the volume of sales. Workers at Rockwell's Avionics Group in Cedar Rapids, Iowa, drop off their prescriptions at the company drug store on their way into work, and their medication is delivered to their work site later that day. They fill out no forms and lay out no money. In 1989 alone, the Avionics Group saved $1.2 million by running its own pharmacy, estimates Larry Milroy, director of benefits management and health services at Cedar Rapids.

But this technique wouldn't work everywhere or for every company. It takes a certain amount of volume to support a corporate-run pharmacy. Milroy says the pharmacy fills about 180,000 prescriptions a year.

"You have to have the right kind of location and enough employees," says Dan Heslin, Rockwell's corporate director of employee benefits, El Segundo, Calif. When Rockwell set up its Cedar Rapids pharmacy it had 10,000 employees there; now it has about 6,000 employees. With dependents and retirees, the total number of people covered is about 35,000.

Most of the savings realized by the corporate pharmacy come from dealing directly with the pharmaceutical manufacturers, Milroy says. "Because of our volume, we're able to get medication 15 percent to 25 percent under the average wholesale price."

In addition, the pharmacy puts all prescriptions into a computerized data base; ineligible claims are kicked out, and records are flagged and physicians are notified if an employee is taking a potentially dangerous combination of drugs or more medication than may be wise for a given condition.

The company picks up even more savings by running a mail-order service from Cedar Rapids for employees around the country who are taking long-term maintenance medication for conditions such as diabetes or high blood pressure.

Rockwell employees still may go to commercial pharmacies if they prefer; however, they must file medical claim forms and receive only partial reimbursement for their prescriptions. Milroy estimates only 3 percent of eligible employees, retirees, and dependents do that.

Bolstered by the success at Cedar Rapids, Rockwell recently opened a second company pharmacy in Dallas last September; a new one will be opening in Anaheim this September.

In other locations, the firms has negotiated discounts with chain drug stores. "The chains are open to negotiation if you want to cut a special deal," says Heslin.

Rockwell employees who go to the chains make a copayment of $4 for generic drugs and $8 for name-brand medications, and Rockwell picks up the rest. Because of the large volume of customers that Rockwell sends their way, the chain stores are willing to discount their prices.

Hiring middlemen

Without getting into the pharmacy business themselves, and without simply shifting more of the payment to their employees, what else can companies do to control costs?

More and more employers are turning to the growing number of consulting firms that specialize in pharmaceutical cost containment. Most of these firms are combining older techniques, such as mail-order and card programs, with new thinking about drug cost savings including encouraging use of generics and stiff review of eligibility and of other prescribed medical treatments. The combination of approaches is an attempt to control utilization. While employers in the past found they could get discount prices with mail-order and card programs, they also found that the ease with which these programs could be used led to overuse by employees.

Rick Lee, a vice president at Value Health Inc., the parent company of ValueRx, a Southfield, Mich., consulting company, claims that a four-step strategy has saved clients 17 percent to 29 percent on their existing drug programs. ValueRx achieves its cost savings by cutting special deals with drug wholesalers; encouraging the use of generics; dealing only with pharmacies that receive bulk discounts; and reviewing drug utilization records.

Lee attributes a flat 7 percent of the savings to the program's reliance on generics. "The greatest area for savings is mandatory enforcement of generics," he says. "Whenever a generic is available and a doctor doesn't insist on a brand name, the pharmacist gets paid only for the generic."