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Follow the Money

Follow the Money

Scott Hensley
Dow Jones & Company, Inc. - May 2004

Employers Use Co-Payments To Keep Drug Costs In Line

When it comes to prescription-drug costs, many employers seem to hire all their workers in Lake Wobegon.

In that mythical Midwestern town where all the children are above average, all the employees appear to be so healthy they don't need prescription medicines.

That's one explanation for why more than half of 100 employers surveyed early this year said they expect their pharmaceuticals costs to be flat or rise only a single-digit percentage over 2003.

They survey's findings are at odds with most forecasts that prescription-drug spending will increase by double digits in 2004. The rosy outlook may help explain why some human-resources execs are reluctant to take tougher action to rein in drug costs.

"The results show an incomplete understanding of the reasons drug costs are increasing," says Chris Robbins, president of Arxcel, Inc., a consulting firm that commissioned the research. Mr. Robbins, who advises employers on drug-benefit strategies, expects the average employer will spend 14% more on prescription drugs for workers this year than last. Express Scripts Inc., a pharmacy-benefits manager in St. Louis, forecasts that drug costs will rise about 14% this year for employers that don't take steps to contain them.

The annual employer survey is the third conducted by Arxcel, of Hamburg, N.Y. The respondents were private and publicly traded companies with at least 1,000 employees. The findings have a margin of error of plus or minus 10 percentage points, Arxcel says.

For the third year running, 40% of bosses fingered direct-to-consumer advertising as the major culprit behind the rise in drug spending. Employees "see the brand name advertised, and they think that's what they have to have," says Susan Bjork, human-resources director at Lancet Software Development Inc., of Burnsville, Minn. Such ads make it harder to persuade employees that generics could be just as good - and cheaper - for many conditions, she says.

Only 10% of the employers surveyed said changes in drug use were the most important factor. Mr. Robbins says benefits managers overlook this ingredient in the drug-cost mix at their own peril. "People are using more drugs - and higher doses, too," he says. Doctors have lowered the thresholds for treating many conditions, such as high cholesterol and hypertension. Those changes, Mr. Robbins says, are even more important than drug ads in building the ranks of patients treated and the amount of medicine they consume.

Many employers have applied the blunt instrument of co-payments to spiraling prescription-drug costs. But according to the Arxcel survey, three-quarters of employers feel that a worker's share of the cost per prescription should be 20% or less.

While Mr. Robbins acknowledges that every company struggles to balance the cost of benefits with their attractiveness to employees, he advisers employers to raise co-payments to reflect a quarter or a third of a typical prescription's cost. He figures that would mean out-of-pocket costs of $10 to $15 for generics and $20-$27 for name-brand drugs.

Hefty co-payments aren't popular, but "that's where you can have the most bang for the buck," says Todd Surline, vice president for human resources at the Michigan State University Federal Credit Union in East Lansing. "I advocate going to the highest level of co-pays you possibly can."

He reckons that a $3 increase in co-payments decreases drug-spending increases by 5 percentage points. In the credit union's health plans, a prescription for a generic drug costs an employee about $10 out of pocket, while preferred name-brand drugs can run $20. Other name-brand medicines have a co-payment of about $30, he says.

Mr. Surline introduced this tiered co-payment system two years ago, to replace co-payments of $7 for generics and $10 for name-brand drugs. He feels it was fairer than raising health premiums paid by all 300 employees of the credit union.

"When you raise co-pays that's at the point of purchase, and it makes the people who are using the product pay the bulk of the burden," he explains. "If you're not a heavy prescription user, you're not paying a penalty."

To cushion the blow of higher costs to workers, Mr. Surline touts tax-free flexible-spending accounts.

Last year, area insurers proposed 27% premium increases, he says, but by being more aggressive with co-payments, he cut the increase by half to 13%.

There's a danger in shifting such costs. If employees who need medicines to treat or prevent health problems fail to get them, the costs of treatment down the road could overwhelm the short-term savings.

Mr. Robbins acknowledges that risk. But as many employers tell their workers these days, the money for health benefits, unlike demand for them, isn't infinite.