Hard to swallow: companies seek strategies to control pharmacy benefit premiums.

Is it a matter of give or take?

With the cost of health care, and prescription drugs in particular, rising faster than just about any other expense, business owners are grappling with two widely divergent approaches in providing drug benefits.

Consider Verizon Communications Inc., which is seeking to rein in costs by pushing employees to try Motrin or other over-the-counter remedies to relieve their arthritis before taking pricey drugs such as Vioxx.

But at DirecTV Group Inc., it's just the opposite: employees willing to pay slightly higher co-insurance are not only free but encouraged to use Lipitor to keep their cholesterol down, if that's what it takes to keep them healthy.

"There are two sides to the coin," said Peter Lee, chief executive of the Pacific Business Group on Health, a benefits coalition of large California employers to which both businesses belong. "The real issue is what does it do to (total) health care costs?"

The problem of rising drug costs will only get worse. Pharmacy benefit costs have risen an average of 17.2 percent for each of the past five years, according to Mercer Human Resource Consulting, and those numbers are likely to increase as super expensive biotech drugs get introduced.

All of which has resulted in a full-fledged national debate, spurring the issue to the forefront of the presidential campaign, prompting Congress to pass a Medicare drug benefit, and even sending older folks to Canada to buy drugs at a fraction of the U.S. price.

Employers are grasping for solutions, too.

Some are moving to more restrictive drug benefits, such as the so-called step therapy that Verizon requires its employees to undergo before they can access some brand names. But a handful of others are loosening drug restrictions on the theory that keeping patients healthy and out of the hospital is a better long range solution, even if it costs more up front.

"As more and more medical costs are moving into pharmacy, it's catching the attention of upper management," said Lee Exton, vice president of healthcare for Keenan & Associates, a commercial insurance brokerage.

Tighter restrictions

By far the most common new approach that employers are pursuing is the further tightening of drug "tiering" policies that have become popular as overall health care costs have accelerated.

A decade ago it was not uncommon for employees to pay only a single $5 co-pay to get any type of prescription drug, generic or brand name. But that policy was abandoned as prescription drug costs have risen more than 15 percent annually for the last five years.

Employers first responded by tiering prescription drugs into three categories--generic, preferred (and cheaper) brand name, and non-preferred brand name--and requiring progressively higher co-pays.

As drug costs have continued to rise, employers have raised the average co-pay from a range of $7 to $17 in 2000 to $9 to $29 in 2003, according to the Kaiser Family Foundation annual survey of employer health costs.

But now some employers are trying even more radical plans.

Their solution? Step therapy and more aggressive prior authorization policies, especially with chronic illnesses such as heart disease, asthma and diabetes, where many generic and over-the-counter remedies are available.

Verizon, which has 16,500 employees in California, is using a carrot and stick approach. Medco Health Solutions Inc., which manages the company's pharmacy benefits, tracks employee prescription drug usage and attempts to move them to cheaper ones.

Someone taking a non-preferred statin that lowers cholesterol, receives letters encouraging a switch to Zocor or Lipitor, preferred brands that provide Verizon with rebates. Better still would be a switch to generic lovastatin, which the company pushes by offering six months of free coverage.

For those who don't want to switch, Medco requires the employee's doctors to call in for a coverage review to show why a cheaper drug wouldn't work. "We are out there testing to see if people will work with us to switch, but if you continue on you need a note from your doctor," said Jim Astuto, a regional healthcare manager for Verizon.

The policy can be even tougher for employees just starting treatment for conditions like arthritis, where non-steroidal remedies such as ibuprofen are available over the counter for pennies and cheap generics are abundant. Under the Verizon coverage, a doctor cannot write a prescription for a brand name without prior approval from Medco, which wants the patient to "step up" from over-the-counter and generic drugs first.

Verizon, which has been gradually implementing these policies, saw its drug benefit costs rise by 19 percent last year, better than an astronomical 27 percent increase in 2002. "I think it is helping," Astuto said.

The city of Ventura is also tentatively trying step therapy. Last year it stopped buying its health benefits through the California Public Employees Retirement System and signed up with Kaiser Permanente and PacifiCare Health Systems Inc.

Among its top drug expenses are Lipitor, the widely prescribed anti-cholesterol statin, and Nexium, the heavily advertised pill for heartburn and acid reflux disease--for which there are both many generic equivalents.

Employees who take these and other brand names are receiving letters from PacifiCare encouraging, but not requiring them, to switch. City administrators are waiting to see the results before considering a more aggressive approach.

"They are basically saying there is a generic available and you might want to discuss it with your doctor. We don't know what the impact will be," said Nancy Rasmussen, a city human resources analyst.

Ed Feaver, president of Prescription Solutions, PacifiCare's pharmacy benefit management unit, said policies that restrict brand name use and encourage generics have been in place for well over a decade but the trend has been to use them more aggressively. "The only thing that really changes is how the market adopts these practices now that we are seeing costs go way up again," he said.

Better solution?

Proponents of step therapy and tighter prescription policies note that generics are not only cheaper and effective but often have more established safety records than new brand name drugs, which sometimes get pulled from the market.

But critics, including many doctors, complain that the restrictive policies can make it difficult to craft a drug therapy that is optimal for individual patients, who may respond to some drugs better than others, even if they are considered equivalent.

"PacifiCare will decide that one high blood pressure pill is the one on theft formulary and the other needs prior approval, but Health Net has another drug," said Dr. Dan Cusator, medical director of St. Joseph's Hospital Affiliated Physicians, an Orange County physician group. "The doctor cannot keep up."

That concern, as well as fears that patients may be less likely to take medications they are forced into by cost pressures, has pushed a few companies to try an alternative approach.

Among those is Pitney Bowes Inc., the Stamford, Conn.-based mailing services company, which hired former White House physician Jack Mahoney to oversee its health benefits.

The company, which has 2,000 California employees, has an aggressive tiering policy that requires workers to pay just 10 percent of the cost of cheap generics but 50 percent of the cost of expensive brand names.

But it has a very relaxed policy for those with some chronic illnesses. Studies show that a minority of employees with heart disease, diabetes and other chronic conditions can account for well over half an employer's health care costs--and not just because of drug usage, but often because their diseases are uncontrolled and they are hospitalized.

After studying its costs, Pitney Bowes moved all drugs, even brand names, that are used to control asthma, diabetes and hypertension into its first tier with the 10 percent co-insurance.

The company is still studying the data but says that initial calculations show that median total health care costs for those patients are down by about 10 percent, as emergency room visits and hospital stays dropped.

"It's a somewhat different paradigm but what I have tried to tell people is that it is our job to make it easy for the employee to do the right thing," Mahoney said.

DirecTV in El Segundo has tried a similar, though not quite as aggressive approach through its self-insured preferred provider organization.

It maintains only two drug tiers, one for generics and one for brand names, and specifically does not require its employees to get pre-authorizations for medications so they can take the ones they want.

"You don't want to limit people to a certain formulary. That is where you get non-compliance," said Dr. Pam Hymel, who led the benefit design but has since left the company and is now advocating it as a senior vice president at Sedgwick CMS, a claims management firm.

"I don't think a lot of companies try to look at it. They say, 'I lowered my pharmaceutical costs.' But they don't do the full circle look at what it did to medical claims experience," she said.

Last year, the company saw only a 4 percent rise in its PPO costs, much less than the double-digit increases from its eight HMOs, separately administered by outside insurers.

Slow change

Lee said that more companies are exploring approaches like those of Pitney Bowes and DirecTV as some of the disadvantages of tighter drug policies become apparent.

A recent study by the Rand Corp. published in the Journal of the American Medical Association found that rising prescription drug co-payments led to a rise in emergency room visits and hospital stays as patients with three chronic conditions became less compliant in following drug regimens.

"Prescription drug costs are 13 percent of premium costs. It's not insignificant but it pales in comparison to hospital costs," he said.

But many employers do not have the data management tools needed to measure the relationship between drug and hospital costs. Moreover, it often takes two years to get any results, which can be a long time frame in the world of health benefits.

"Your initial costs on pharmacy have to go up as you identify patients that are under-treated or undiagnosed. Your return on your investment doesn't come back that initial year," said Dr. Sophia Chang, director of chronic disease management at the California Healthcare Foundation, a think tank.

Moreover, those who advocate step therapy and other aggressive policies to hold down costs note that it doesn't have to be an either-or approach.

Verizon may make it difficult for patients to get brand name drugs, but it also launched a program in which it had its pharmacy benefits manager search for employees who had suffered heart attacks and were not taking their beta blockers, medication that can stave off future attacks but which can cause sexual dysfunction and other side effects.

"We went out and found 1,500 people who had heart attacks and put them back on beta blockers," Astuto said. "We are looking at new programs. We are looking at ways to enhance personal responsibility."

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