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UNDERSTANDING
TODAY’S PHARMACY |
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COST
CONTAINMENT STRATEGIES |
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| Exhibit B.1
DP/Rx 11/9/99 |
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Fraud, Abuse and Waste were the conditions that best described the
primary sources of excessive costs in pharmaceutical benefit
programs prior to 1985. Fraud was virtually eliminated in the USA
when the real-time POS computer systems commenced operations in
1985. Losses were estimated to be as large as 20% of total
expenditures at that time. Intercepting fraudulent
prescriptions before dispensing was the key to this major cost
reduction. This savings area remains a potential saving for South
American countries because of the absence of POS (Point of Sale)
systems. |
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Further inroads were made in the USA, after eliminating the fraud
problem, to reduce excessive costs by intercepting other
inappropriate conditions prior to dispensing at the POS. These
dispensing intercepts reduced large amounts of Abuse and Waste. The
early 1990s introduced some strategies to influence lower costs in
addition to employing programmed limits to curtail excessive
utilization by eligible members of benefit plans. There may another
20%-25% unnecessarily spent due to Waste and Abuse. |
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After successfully solving the Fraud Abuse and Waste excesses, drug
benefit planning then added another savings area to their list of
goals to achieve. The benefit administrator then looked to
substituting inexpensive comparable drugs for the more expensive
drugs. Typically, Brand drugs are far more expensive than Generic
drugs. Surveys indicate that using an average cost for Brands of $35
per Rx and $8 for Generics is reasonable for projecting the impact
of generic strategies. |
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Today’s popular strategies and controls to reduce costs are listed
below in their approximate order of greatest savings impact: |
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GENERIC INCENTIVES. Mandatory generic substitution can be
employed but many benefit managers are cautious about using
inflexible approach. Since the difference between generic and brand
costs is so great it is desirable to provide an incentive to create
more than a 50% voluntary substitution rate. Brands average over $35
per Rx while generics average below $10 per Rx. If the plan is
designed to impose a high co-pay against the co-pay for the
equivalent generic, one can expect a considerable voluntary
acceptance of the lower co-pay. For instance, a co-pay of 50% of the
ingredient cost for brands and a 20% co-pay for generics results in
a $17.50 versus $2.00 decision for the buyer’s choice. In this
case, the benefit sponsor saves $9.50 or over 50% of the brand cost.
This scheme is operative in an "open" formulary. |
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| Lives
= 1,000,000 |
100%
Brands |
50%
Brands |
100% Generics |
| Cost
of Brands @ $35 |
$227,500,000
100% |
$113,750,000
50% |
$0
0% |
| Cost
of Generics @ $10 |
$0 |
$32,500,000
14% |
$65,000,000
28% |
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By the annualized table shown above, it can be seen that a complete
conversion to generics may reduce costs 72%. A 50% conversion to
Generics results in an estimated reduction in costs of 36%. |
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CLOSED FORMULARY (EXCLUSIONS). Formularies are lists of drugs
grouped by therapeutic classification so that a substitution of a
therapeutically equivalent drug can be made from that list. The
purpose is to substitute a lower cost drug, which results in a lower
cost for the benefit sponsor. This list can be constructed with more
expensive brands omitted. The plan can be constructed require a
selection from the abridged Formulary as mandatory. This is called a
"closed" formulary. In this strategy, the member/patient
is not provided any choices unless a specific over-ride is performed
by the administrator. This approach is not universally used because
of the no-option mandate. The "open" formulary is not a
mandatory dispensing list and it is ordinarily used to apply
incentives (for Generics) or disincentives (for Brands) based on the
drug selected. The 100% Generics figures given in the table above
are applicable based on the use of a closed formulary that excludes
all Brands. |
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DEDUCTIBLES. This is a form
of cost sharing that is not universally used by benefit managers. It
is the equivalent of 100% co-pay (member pays entire cost) until a
designated minimum cumulative dollar amount is reached in
out-of-pocket expense by the patient. If the deductible, usually an
annual amount, is chosen wisely the effect on total cost is
substantial. The lowest utilizing members are more adversely
effected and this approach results in the disaffection of the group
more desirable to the sponsor. |
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The impact of two different deductibles is used for two scenarios.
The first is for an average population using 7 Rx’s per year and
the second is for a typical older population using an average of 15
Rx’s per year. The dollar figures calculated is for a 1 million
lives group and for using only Brand drugs with no co-pay. The
savings are a substantial 61% and 82% for the normal group using a
deductible of $100 and $200, respectively. The older group, as you
would expect has a lower impact which indicates that a higher
deductible should be chosen for greater savings. |
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MAXIMUMS. This approach is
one that triggers a 100% co-pay when the patient-member’s
utilization reaches an aggregate dollar maximum amount. This maximum
can be applied annually or for a lifetime. It has the more desirable
effect of affecting the highest utilizers. It also has the benefit
of limiting total exposure of the benefit sponsor. Like deductibles,
this strategy is not universally used by benefit administrators. |
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| Lives = 1,000,000 |
No Maximum |
$200 Maximum |
$300 Maximum |
| 7 Rxs/yr, Brands
@$35 |
$245,000,000 100% |
$200,000,000 82% |
$245,000,000 100% |
| 15 Rxs/yr, Brands
@$35 |
$525,000,000 100% |
$200,000,000 38% |
$450,000,000 86% |
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The impact of two different
Maximum amounts for two different groups is used in the table above.
No co-pays are used in this example but the effect on the
curtailment of costs is illustrated in degree. This strategy is most
beneficial for high utilizing groups such as populations whose ages
are all over 50 years. The lower the maximum amount, the greater the
impact. The $200 annual maximum for the old group would probably be
difficult to sell to the group if there was no relief in prices
because of the Brand intensity. A Maximum strategy combined with the
Generic Incentive strategy could probably provide an acceptable plan
for the older population since very few members’ aggregate-usage
would rise to either maximum ($200 or $300) if Generics were
accepted for the majority of drugs dispensed. |
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REFILL-TOO-SOON.
This is less a strategy than it is a control mechanism. It is
used to prevent over utilization of drugs beyond the designated rate
of consumption ("dosage") ordered by the physician. A
maximum days-supply of the drug is arbitrarily selected and
additional dispensing is allowed by the "refill". Thirty
(30) days-supply is the most widely-used maximum quantity. The POS
intercept will deny a refill when the patient requests one in less
than the designated maximum duration. The TeleCLAIM system uses a
parameter for flexible treatment of the rule by allowing a
percentage reduction in the maximum duration. The system also
accommodates a variance from the rule if authorized by an
"over-ride" option. |
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| Lives = 1,000,000 |
30 days average refill |
25 days average refill |
20 days average refill |
| 100% Maint.
@$35/Rx |
$420,000,000 100% |
$511,000,000 122% |
$639,000,000 152% |
| 50% Maint. @$35/Rx |
$420,000,000 100% |
$466,000,000 111% |
$530,000,000 126% |
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One of the more costly abuses is usually over utilization of drugs
unless the POS system is directed to intercept and limit abuse of
this kind. Without such controls, experience has shown that patients
tend to increase their usage with maintenance therapies rather than
reduce use. The figures in the table above give a sense of how
expensive this abuse would be if not intercepted by the POS system.
Some plans will dispense when intercepting such abuse and add a
penalty to deter the abuser. The majority of administrators prevent
dispensing unless the patient provides a means of securing an
over-ride (PAR – Prior Authorization) by the Pharmacist. These
administrators; however, will allow some latitude by a few days
early to placate those that can not get a refill on exactly the 30th
day. |
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MAINTENANCE DRUGS BY MAIL
ORDER. Chronic disorders ordinarily are treated with drug therapies
that may create a continuing stream of refills. Oftentimes
considerable savings can be achieved by dispensing larger quantities
of the drug that results in a much longer duration. (e.g. – 90
days-supply instead of 30 days-supply). This is a strategy that
saves money in the USA because it eliminates the multiple dispensing
fees of the pharmacy. While dispensing fees are non-existent in the
South American community due to packaged dispensing, there may be a
savings to the sponsor because of the elimination of the pharmacist’s
larger profit. Mail order facilities can provide lower prices for
drugs due to high volume purchases and the mechanized methods of
filling drug orders with non-pharmacist, lower cost personnel. The
cost of delivery in these circumstances must be significantly lower
than the savings attained by lower prices and lower-cost labor as
described. This is a popular strategy for an older population of
members who are more likely to have greater utilization patterns and
chronic disorder drug therapies. |
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OTHER CONTROLS. There are a
number of other control features that are employed by
administrators. One that accounts for a significant reduction in
excess expenditures is the Duplicate Therapy intercept. In
this case the system checks the therapeutic intent of a prescribed
drug against others in use by the patient. When they are identical
in therapeutic capability, the new drug is denied. The prescriber
may have been a different prescriber from the original drug and
possibly intended the drug for a different purpose. In that case the
prescribers may collaborate and decide on another more universal
drug to treat both problems. |
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DUR (Drug Utilization Review) analyzes a number of issues that,
absent investigation, may contribute to abuse and waste. These
include Dosage Check (high/low levels), gender mismatches, age
dispensing disparities, and others. Problems with these issues exist
but are not major in cost terms when compared to the issues
described above but are still worthy of scrutiny and intercept. |
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| SUMMARY. |
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Without POS systems, as is the case in South America, where ever
there exists a pharmacy benefit program there is likely to be as
much as 50% savings possible. We know by experience that Fraud alone
can account for 20% excessive expense. Major elements of Abuse and
Waste can account for another 10 to 20%. These items alone are
easily eliminated with the POS solution. |
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After these items are cured, then there are further reductions
possible by various strategies that are easily implemented. Generic
substitution, of course, can have the greatest impact for great
savings. The preponderance of benefit plans use incentives or
penalties, rather than outright banning of more expensive drugs, to
influence selection of Generics by the patient member. A conversion
of even 10% has a dramatic savings effect due the large differential
between Brands and Generic (e.g. - $35 vs. $10). |
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Clearly the use of formularies sets the basis for using exclusions
of certain drugs and equipment that are questionable as means of
curing disease and disorders. Such peripheral products would include
OTC drugs, weight reduction drugs, smoking abatement aides, birth
control drugs, beauty aides and many other similar purpose drugs. |
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Deductibles and maximum limiting controls are
also strategies and tools that can have a substantial effect on
reducing costs. These used cautiously due to the negative impact it
can have on the most needy of medical patients. Marketing
professionals will testify to the difficulty of selling these
premium reducing techniques. |
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It is the opinion of DP/Rx that savings of great amounts are
possible when employing fundamental and sophisticated tools and
techniques already proven effective in the USA market. |
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