Why Payers Don’t Really Control the Drug Benefit — and Why They Need to

It’s certainly the biggest change in healthcare in my business lifetime: the transformation from a fee-for-service economy fueled by abundant dollars to an essentially capitated world of financial tradeoffs.  The transformation will likely take longer than we expect. (What transformation doesn’t?) Still, payers and providers –and the various big and small service providers hoping to serve them — are already trying to improve  swaths business processes as diverse as connectivity, transparency, and consumer communication (see the David Shaywitz/Tony Wolff skeptical take on at least the digital aspect of all this) .

But relatively little of this re-engineering aims at the purchase and management of drugs.  (We’ll be talking about the most important innovations at the Real Endpoints Symposium, March 11-12, in Philadelphia).

There are a few experiments on the margin.  Some payers are playing with tougher formularies (e.g., UnitedHealth de-preferred major market leaders Januvia and Humira, with significant success in moving the former’s market share to Onglyza and less success with Humira).  “Pathways” in oncology (attempts to standardize physicians on specific drugs) show promise.  And now that Medicare, through its star ratings, is paying plans to improve adherence, there’s an opportunity for new models that predict when patients will adhere to their meds and when they won’t. (For the record, we like RxAnte’s approach.) [Full disclosure: RxAnte’s CEO Josh Benner has consulted for Real Endpoints in the past; and Josh is speaking at the Real Endpoints Symposium.]

But re-engineering pharmacy is pretty low on the priority list, both at payers and at accountable care organizations and health systems that are increasingly acting like payers. This lack of urgency isn’t because they’ve deliberately chosen to let things slide.  The real problem is that the lens through which payers and the provider proto-payers view the drug benefit shrinks the size of the challenge.

That lens shows them cheap drugs.  While overall health spending grew by about 4% last year, the cost of the pharmacy benefit (roughly 15% of total spending) actually shrunk a tiny bit.

But the pharmacy benefit doesn’t mean drug benefits.  It mostly covers the chronic care drugs dispensed at pharmacies or mailed by PBMs.  That’s certainly the vast majority of total scripts.  And those drugs are pretty cheap because plenty of them are generic.

But drug therapy overall is NOT cheap.  The cost of pharmaceuticals which generally fall outside the pharmacy budget – specialty drugs — is growing at 17% a year, That’s  4-5 times the cost of overall medical inflation – and a category likely to constitute 45% of total drug expenditures by 2016, says Express Scripts.   The CEO of one major corporate health benefits manager told me that virtually 100% of his total cost increase was due to the increase in spending on specialty drugs.

Because these drugs aren’t usually paid for through the pharmacy budget, they aren’t managed by the pharmacy system or assessed with the same rigor applied to non-specialty product (which, to be frank, isn’t all that rigorous). That means utilization guidelines and limits are minimal and contracting with manufacturers scarce and ineffective.  Indeed,  most payer P&T committees don’t review drugs covered under the medical side.  These drugs are chosen and bought by the physicians or other health providers who administer them – and they pass on their costs plus administration fees (6% usually) to the plan or employer.

It’s not that medical-benefit drugs are entirely unmanaged.  But their management is quite a bit looser and certainly less consistent because payers simply don’t have the structures to do it.  Many plans rely on their specialty pharmacy vendors — but judged solely on specialty drug inflation, those groups have helped mostly on the margin.

So how to get a handle on this?

If it’s not yet obvious yet to their bosses, pharmacy directors already know that they’re going to have to figure out how to integrate what they already do (run the pharmacy-benefit side) – with what they must do (get controls onto the drug side of the medical benefit).

But I don’t see insurers adding to the management side of their pharmacy operations – for example, increasing the resources allocated to P&T committee processes so they’ll have the time to look at medical-benefit drugs.  P&T committees don’t even have the resources or systems to look at all the new drugs on the pharmacy-benefit side, let alone regularly re-assess older drugs about which new information has cropped up).  Adding a slew of medical-benefit drugs to their portfolio will simply swamp them.

Insurers are probably right in trying to transform their businesses – Aetna, we understand, aims to get a third of its profits by 2018 from the new non-traditional operations it’s investing in or acquiring via its Emerging Businesses unit.  But we’d suggest that at least along with that kind of focus on, among other things, consumer-facing operations with unproven business models, top management would do well to direct more attention to better integrating the cost-management of pharmacy- and medical-benefit drugs.

I don’t pretend it will be easy – but relative to what’s being attempted elsewhere in healthcare, redefining and improving drug management should be relatively straightforward.

image by flickrer Bill Gracey via creative commons.