A remedy for rising drug costs: Health insurers can mitigate the ever-increasing cost of prescription drugs with careful attention to business. (Life/Health).

Prescription drug spending continues to grow at a faster pace than any other component of health care in the United States, and it is expected to continue for at least the next several years. While health insurance companies have always monitored drug spending, it's become even more important to monitor and predict the impact of drug costs in relation to other higher health-care costs. Ultimately, the key to keeping costs down and competitive is to be proactive in plan designs and clinical program offerings. Educating members about using the appropriate drug at the appropriate time and being fully engaged in how buying decisions impact future drug costs will make a big difference.

Drivers of Increased Costs

There are two primary reasons drug spending has increased: higher use and a higher average cost per prescription. Our research indicates that each year, drug spending will account for 18% to 25% of overall healthcare spending. Prescription drug costs have increased from less than 10% of total health-care costs to 15%-plus of the total health-care bill--and could approach 20% of total health-care costs in the future. There are several key drivers of these cost increases:

* There will be a significant increase in the elderly population over the next decade. People tend to use more drugs as they grow older to treat chronic conditions and, on average, tend to use drugs that cost more.

* We continue to see more drugs released, with additional drugs in clinical trials. In 2000, the Food and Drug Administration approved 27 new molecular entities plus many enhanced versions of existing drugs. Right now, more than 1,000 drugs are in the pipeline.

* AdvancePCS, a pharmacy benefits manager, analyzed the top 100 drugs by spending in 2000 compared to 1999. The average increase in ingredient cost per prescription was 12.9%, and the average price increase per prescription was 6.7%. The increases in generics were higher than the increases in brand-name drugs.

* Drug companies have invested heavily in advertising directly to consumers for the latest allergy, migraine, arthritis or pain medication, to name a few. What we have in the end is a nation of consumers entering their doctors' offices with a drug in mind that they think will cure their ailment.

* The thresholds for determining diabetes and high cholesterol were lowered within the last two years. As a result, more than 38 million additional people fell under he guidelines for treatment. While this should have a long-term, positive impact on patients' health, the short-term impact on drug spending is significant.

Underwriting Implications

Projecting a drug trend is even more difficult in an economic downturn. Why? As employers downsize, the impact will be a notable increase in the use of medications related to mental and physical stress relief. The result is an increase in drug spending.

A key part of managing health-care costs is for members to be financially engaged in buying decisions. For prescription drugs, this means higher copays and plan designs that encourage the use of generic alternatives and preferred brands that result in a lower net cost. By integrating medical and drug data, members can be identified who are candidates for disease-management or case-management interventions.

Future Considerations

There are some positive effects to this trend to consider:

* Many key drugs will lose their patent protection in the next couple of years, providing an opportunity to switch patients to generics. While the initial cost of the generic alternatives for some of these drugs may be expensive, it does provide for a more competitive environment.

* Many of the drugs being introduced will improve the health of patients. Patients who continue to comply with drug therapies will improve their health for the long term.

* The Human Genome Project will have a profound effect on health care. Biotech companies are working to develop new diagnostic tools based on genomics. Some day, we could have new generations of drugs to increase immunity to some diseases and new versions of drugs that better treat specific types of gene combinations. We're years away from the reality of this impact, so trend projections do not include these factors, but some day, they will have a significant impact on costs.

Ultimately, plan design and management programs will need to be continually re-evaluated to determine if/when changes should take place to reduce the impact of cost increases. A focused strategy for health care with specific emphasis on prescription drugs will allow us to better predict future costs.

Gary Cain, a Best's Review columnist, is senior vice president, Group Life and Health, at the Principal Financial Group, Des Moines, Iowa.