What You Should Know About Prescription Drugs

Prescription drugs are a key component of today's healthcare landscape. Recognized as a contributor to both longer life expectancies and the rampant rise in healthcare expenses, it's important for consumers, employers, and health plans to stay abreast of new developments and strategies to help maximize savings.

Drug Prices
In 2014, U.S. prescription drug spend increased by 13.1 percent – the largest annual increase since 2003. The main reason for this upsurge was not utilization, but rather price increases in the category of specialty medications. While this drug class represents only one percent of all U.S. prescriptions, it constituted almost one-third of the total drug spend in 2014. Moreover, prices of specialty drugs increased by more than 25 percent last year.

Specialty Drugs
Specialty drugs are biologic medications used to treat serious conditions such as multiple sclerosis and cancer – and they are generally quite expensive. In 2014, hepatitis C medications alone represented nearly half of the percentage increase in specialty prescriptions. To give you some context for this expense, consider that the current cost for hepatitis C treatment comes in at about $1,000 per pill. That amounts to approximately $94,500 for a typical 12-week course of treatment.

This growth trend in specialty drugs is expected to continue in the 20 percent range over the next three years due to increases in utilization, brand inflation, and the rapid development of highly-targeted and costly treatment plans. The following details the average before-insurance-coverage cost of common conditions treated with specialty drugs:

Traditional Drugs
In the traditional drug category, spending increased by 6.4 percent in 2014, with an average cost per member of $669. For the second year in a row, medications to treat diabetes comprised the largest spend in this category. The following details the average before-insurance-coverage cost of common conditions treated with traditional drugs:

 The price paid of a drug can vary significantly from one consumer to another for the same prescription. This is due to a number of factors, but most notably whether or not a consumer has a drug insurance plan – but even then the member's deductible, co-pay, level of coverage, and where the drug lands on the insurer's drug formulary has a significant impact on out-of-pocket costs. Other factors that impact prices include:

• Type (brand name drug or generic)
• Time on market (newer brand name and generic drugs can be pricier than older ones)
• Geographic locale where drug is purchased (prices can vary by region and setting – urban or rural)
• Dosage, in terms of milligrams
• Dosage, in terms of instruction (e.g., two per day)
• Delivery source (chain pharmacy, specialty pharmacy, big-box store, online, mail-in, etc.)

Ways Members Reduce Drug Costs
Asking for a generic version of a drug has long been the most effective way to reduce the cost of a prescription. In recent years, dozens of brand-name drugs have lost their patents, making way for a new crop of lower-cost generic drugs. When a drug manufacturer introduces a newly patented drug, it is granted exclusive rights to sell that brand-name drug for up to 20 years, after which generic versions may be produced and sold for significantly lower prices. A generic is considered as effective as the brand-name drug and has the same active ingredient, strength, and dose. While it may look different from the brand-name version in size, color or shape, the U.S. Food and Drug Administration (FDA) requires generics to be just as safe and effective as brand-name drugs.

As the patents for many brand name drugs have expired in recent years, we've witnessed substantial savings in prescription drugs thanks to the proliferation of new generics that have entered the market.

A Sample of Drug Patents Scheduled to Expire in 2015-2016

Clinically Equivalent Drugs
Clinically equivalent drugs differ from generics in that they are comprised of different ingredients, but are proven to work as well as others in treating the same health condition. The following are drug categories that have clinically equivalent medications:

• Non-sedating antihistamines (NSAs) for seasonal allergies/hay fever
• Allergy eye drops used to treat eye irritation caused by allergies
• Indigestion medicines (a.k.a., proton pump inhibitors or PPIs) for acid reflux, peptic ulcers
  and other digestion problems caused by stomach acid
• Some drugs used to treat attention deficit hyperactivity disorder (ADHD)
• Statins used to treat high cholesterol

Ways Drug Plans Reduce Costs
Drug plans continue to innovate ways to control cost-sharing of prescription medicines, including multiple tiers with different pricing structures.

Formulary Tiers
Most insurers have developed a tier system to categorize drugs in terms of value. These tiers are reviewed periodically and medications can be moved among the different tiers based on market factors. The basic formulary has four tiers.

1. Tier 1 drugs generally have the lowest cost share and offer the greatest value compared to others that treat the same conditions.
2. Tier 2 drugs have a medium cost share and include preferred drugs based on their effectiveness and value as well as newer, more expensive generic drugs.
3. Tier 3 drugs have a higher cost share and may cost more than others used to treat the same condition.
4. Tier 4 specialty drugs typically have the highest cost share and tend to include specialty drugs used to treat complex chronic conditions and those that need special handling.

Reference Based Pricing
Another technique used by drug plans is reference based pricing. With this strategy, an employer or health plan establishes a price it deems a reasonable value for a medication to represent that entire class of drugs. The plan then will reimburse only up to the cost of that referenced drug for the entire class. Usually the drug selected is a lower cost option, so this strategy suffers from the perception that the plan only covers the cost of the cheapest drugs.

A similar strategy is therapeutic reference pricing, in which a drug plan reimburses only up to the cost of a reference drug that is considered an appropriate substitute within each drug class.

Utilization Management
Express Scripts conducted a study of various utilization-management and cost-management strategies used by plan sponsors to control drug costs in 2014. Each plan sponsor was categorized into one of three groups based on the type of network-management and utilization-management programs they implemented as part of the pharmacy benefit:

• Unmanaged – Plan sponsors implemented no or only one cost-management program
• Managed – Plan sponsors implemented two or three programs
• Tightly managed – Plan sponsors implemented four or five programs

The study found that "unmanaged" plans experienced an annual average increase in per-member-per-year (PMPY) spend for traditional medications of 4.1 percent in 2014, whereas "tightly managed" plans' traditional drug spend increased only 0.3 percent. Moreover, tightly managed plans spent 27.6 percent less on traditional drugs per member compared to unmanaged plans in 2014.

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