Moreover, marketing and advertising by pharmaceutical companies have also contributed to higher drug prices. According to Fontanetta, there has been a “very direct correlation between the increased spend that employers are witnessing and the promotional efforts” of the pharmaceutical manufacturing industry. A study prepared for Kaiser by researchers at Harvard and MIT estimates that direct-to-consumer advertising accounted for 12 percent of the growth in spending on prescription drugs between 1999 and 2000.
The biggest obstacle to managing drug costs is that neither employers nor consumers have a handle on the real prices of drugs. That lack of pricing transparency presents challenges as employers go beyond the flat co-payment approach to plan design. If employers are asking employees to pay a percentage of a drug’s price through a co-insurance arrangement, or all of it through a health reimbursement account or health savings account, “we have to be comfortable [that we know] the real cost,” says Kenneth Sperling, health-care market leader at Hewitt Associates. The problem is, “nobody really knows what drugs cost,” adds Sperling.
One reason is that the most common compensation model for pharmacy-benefit managers (PBMs, third parties that administer prescription-drug plans for large employers and for insurers) can complicate drug pricing. The PBMs often don’t charge large employers a fee for administering their pharmacy benefits, but instead are compensated by drug rebates from drug makers.
For some employers, that model raises doubts about whether the financial incentives of the PBM and the plan-sponsoring employer are aligned, says Sperling. “There’s a question as to whether PBMs are driving toward the lowest net cost to the employer and the employee, or whether they’re chasing the largest rebates,” he says.
Greg Folley, director of compensation and benefits at Caterpillar Inc., estimates that the Peoria, Illinois-based manufacturer spends about $150 million per year on prescription drugs. Like many employers, Caterpillar has been adjusting its pharmacy-benefit plan design. Folley says the company has raised co-payments for salaried and management employees (and for retirees). Also, Caterpillar has introduced a plan design that requires employees and their doctors to try less-expensive treatments for some ailments—to use over-the-counter treatments for heartburn, say, before moving to prescription drugs like Prilosec or Nexium.
Folley sees increased drug-pricing transparency as a necessary step to making employees savvier consumers. Pricing in the drug-purchasing arena is “kind of a black box now,” says Folley, and people don’t understand how the pricing arrangements work among the pharmaceutical companies, the PBMs, and the consumer, he says.
To shed more light on pricing, Caterpillar and other large employers have joined a coalition to explore the possibility of direct pharmaceutical purchasing, under the umbrella of the HR Policy Association. The coalition consists of 53 large firms that together spend about $3.7 billion per year on prescription drugs, says Sperling. As a group, the coalition intends to evaluate its aggregate usage data and negotiate drug prices, net of rebates, with pharmaceutical companies, according to Sperling. Ultimately, the group hopes to develop a model in which drug prices are more transparent to the company and the patient.