Rx for costs: health insurers are finding generic, over-the-counter and mail-order drugs are the right prescription to help reduce the nation's soaring prescription drug costs.

Following the U.S. Food and Drug Administration's relaxation on direct-to-consumer advertising in 1997, prescription drug ads have taken television and magazine advertising by storm. From "the purple pill" to "the patch," direct-to-consumer pharmaceutical advertising is reaching into the homes of millions of consumers and, along with increased usage and price inflation, has caused a significant increase in most people's prescription drug spending.

Milliman USA estimates that in 2003, year-over-year per capita spending on prescription drugs rose nearly 94% since 1998.

Health insurers, engaged in a war against rising drug costs, are fighting back with promotions of generic drugs, mail-order drugs and brand name drugs recently converted from prescription to over-the-counter sales. The results, they say, are saving considerable dollars for members and plans.

A Large Battlefield

Health care remains the largest sector of the U.S. economy, and prescription drug costs are the leading culprit in this trend. While some studies point to a leveling off of costs this year, other groups say the trend continues upward. For the first time, prescription drug sales in the United States exceeded $300 billion in 2003, and Milliman USA expects the number of prescription drug sales will rise by 14% this year.

Nearly 3.3 billion prescriptions were dispensed in the United States in 2002, according to the Kaiser Family Foundation. The national average is now 11.6 prescriptions per capita per year. The AARP said that between 1998 and 2000, prices for all prescription drugs rose at more than triple the rate of inflation, and brand-name drug prices rose nearly four times as fast.

Increased direct-to-consumer pharmaceutical advertising continues to drive up drug prices by increasing consumer demand for brand-name products. For instance, Nexium, which is used to treat heartburn and acid reflux, has $193 million in annual advertising spend and outspends other consumer brands including Budweiser, Pepsi and Nike. A study by Harvard University and the Massachusetts Institute of Technology found that every $1 the pharmaceutical industry spent on direct-to-consumer advertising in 2000 yielded an additional $4.20 in drug sales. The advertising was responsible for 12% of the increase in prescription drug sales, or an additional $2.6 billion, during that same year, according to the study.

The Boon of Generics

The increased availability, of generic drugs, however, along with changes to drug benefit plans that encouraged generic use, "took the edge off rising drug prices" in 2003, according to a national study by pharmacy benefit manager Express Scripts. The average cost per prescription rose 7.9% last year to $51.76, compared with a 13.1% rise in 2002, according to the study. Increased generics sales, with reductions offset somewhat by the cost of new injectable drugs R)r such conditions as cancer, psoriasis and arthritis, drove the trend.

Premera Blue Cross, which serves members in Washington state and Alaska, found that in cases where a brand-name drug has an identical generic alternative, physicians are prescribing the generic version to the plan's members in nearly 93.6% of cases. In 2002, the savings from generic use put nearly $70 million in out-of-pocket costs back into members' pockets.

Premera's not alone. Another Blues plan, Blue Cross and Blue Shield of Kansas, noticed a 5% spike in its generic use over the past several years. The company estimates for every 1% increase in generic usage, it saves about $816,000--savings that help control the costs of premiums members are paying, said company spokesperson Mary Beth Brutton.

Insurers are hopeful that as patents lot brand-name prescriptions expire in the next several years, even more generics will appear on the market. Nearly 40 key drugs--worth more than $30 billion--are slated to lose patent protection by 2007, according to Express Scripts. Some of these drugs include acid reflux disease medication Prevacid and anti-depressant Paxil, which will expire in July 2005, and Zocor, which is set to expire in June 2006.

Insurers are ready for increased generic use. WellPoint Health Networks Inc., for instance, is piloting automatic generic dispensing machines in physicians' offices to "make generic dispensing seamless with a doctor's office practice and workflow so they can embrace all of the best evidence-based solutions for the initiation of drug therapy," said Rob Seidman, chief pharmacy officer. Physicians can dispense a 30-day supply of what the company defines as gold standard generics, and the company waives the copay for the patient's first prescription. The machines can also generate a new prescription for patients, who are then given the option to receive their next refill either through the mail or at a retail pharmacy. Some examples of WellPoint's gold standard generics, which Seidman said are in the drug classes that have the potential to threaten healthcare affordability, include generic Tenormin (Atenolol) for high blood pressure, generic Mevacor (Lovastatin) for cholesterol and Prozac (Fluoxetine) for depression.

Many health plans also have generic sampling programs in place. Anthem Prescription Management's "Think Generics" program, which began in 2002, provides network physicians with sample request cards to distribute to their Anthem members. The cards, which members may use at retail network pharmacies, allow them to receive a complimentary sample of selected generics, along with a new prescription for one of the eligible generics. Members receive a complimentary supply of their first prescription order for the prescribed generic medication. Anthem Prescription Management is the pharmacy benefits manager for many Anthem health plan members.

OTC to the Rescue

The recent move of several leading brand-name drugs to over the counter is also offering members, payers and health plans some solace from rising prescription drug costs.

The past two years were an exciting time for the OTC market with the introduction of Claritin (Loratadine) and Prilosec (Omeprazole). Plan sponsors saw their drug expenses for antihistamines decline significantly in 2003, and initial results of an Express Scripts study on antihistamine use showed a decline in drug spend between 11% and 32%, depending on the type of benefit design in place.

In 2002, Claritin--the most-prescribed nonsedating antihistamine now on the market--was approved for OTC sales for allergic rhinitis symptoms. Prior to 2002, Claritin accounted for about $2.7 billion of the $4 billion U.S. market for prescription nonsedating antihistamines. The move slashed costs from about $80 to $95 for a one-month supply of the prescription version to around $24 for the OTC product.

WellPoint was a driving force behind the Claritin push in 1998 when it filed a petition with the FDA for the drug to move over the counter. In a May 11, 2001, hearing, the FDA recommended that Allegra and Zyrtec also be approved to go over the counter. Two years later, Schering-Plough, the maker of Claritin, bowed to the pressure of the FDA and agreed to take the medication over the counter. Since that time, WellPoint has been able to maximize the value of the conversion with a 65% decrease in the number of members accessing prescription antihistamines, which equals 3% of WellPoint's annual drug spend, said Seidman. "The deceleration in antihistamine prescription expenditures makes it easier for WellPoint to provide broad access to affordable pharmaceuticals," he said.

Claritin's move to over the counter also has meant huge savings for Horizon Blue Cross Blue Shield of New Jersey. The decrease in prescription nonsedating antihistamine use by its members gave the company a total net savings between $6 million and $7 million in 2003.

More recently, Prilosec became the first proton pump inhibitor to be made available for OTC treatment of frequent heartburn. Wellmark Blue Cross and Blue Shield estimates that more than 60 million Americans experience heartburn at least once a month and 7% experience the condition daily. The proton pump inhibitor class of drugs was a huge spend for most insurers. For instance, Wellmark members filled 266,000 proton pump inhibitor prescriptions in 2003, compared with 75,500 in 1999. At the same time, proton pump inhibitor reimbursements reached $35.4 million--a fourfold increase from $8.3 million in reimbursements in 1999.

While health plans say it's too early to measure what savings they will find from the decrease in prescription proton pump inhibitor use, they are expecting significant reductions. Since a box of Prilosec OTC now costs just under $20, or 71 cents per pill, that is substantial savings from the average cost of $133.08 per prescription, or $4.44 per pill, for brand names such as Prilosec, Prevacid and Nexium. Wellmark, along with most health plans, does not cover OTC products. Most health plans have moved prescription proton pump inhibitors onto the benefit plans' third tier, in which members pay higher copays for preferred nonformulary drugs.

Last year, Aetna launched an extensive educational campaign around the release of Prilosec into the OTC arena. The company mailed nearly 100,000 pharmacy members educational information about Prilosec OTC, including a $10 coupon, which, in most cases, covered the entire cost of a 14-day supply and provided a 50% savings off a 28-day supply. Since that time, Aetna has seen a significant reduction in prescription proton pump inhibitor use.

New drugs are expected to move over the counter in the next several years. Some groups are now advocating the push for some emergency contraceptives to move over the counter. In addition, some insurers predict the FDA might follow suit with Britain's recent announcement of moving some cholesterol-lowering statins over the counter. The FDA is also looking at Mevacor, a cholesterol-lowering drug, for possible OTC use. In July 2000, Merck, the maker of the drug, requested that a 10-milligram dose of Mevacor be made available without a prescription. The request was denied at that time, however.

'You've Got Mail'

While some insurers are finding added cost savings generated from mail-order

prescriptions, others see it more as a convenience benefit to members and a "break-even" in terms of saving health plans money.

Independence Blue Cross is able to save money with the substantially better discounts it receives because of the automated processing and volume that goes through mail order. Members also benefit because they have to pay only two copays for each three-month supply of medication they order via the mail. About 8% of the company's prescriptions are now ordered through the mail, which the company says results in about 12% of its total prescription costs.

"There's a common misunderstanding in the industry about mail order," said Ed Wong, director of pharmacy for Premera Blue Cross. "In general, mail order is less costly to payers because it's highly automated and they can purchase products in large bulk." Mail order also provides unprecedented accuracy, he said. "Mail-order facilities have a nearly 99.9% accuracy rate, which is vastly different from community pharmacies filling thousands of prescriptions."

Other insurers believe that while mail order is a great convenience benefit to its members, it's not driving down prescription drug costs. "While a 90-day supply may save about $12 to $15 per prescription, how much of savings is attractive to members in order to get them to use mail order?" said William Fleming, vice president, pharmacy management and clinical integration for Humana Inc. "The opportunity is to find the sweet spot that saves both the members some copay dollars and the employer some drag costs dollars."

Specialty Rx

Overall, the drugs that insurers believe may have the greatest impact on their pharmaceutical spend in the next several years are specialty pharmaceuticals, biotech therapies and specialty injectables.

A report by health improvement company AdvancePCS said that specialty pharmaceuticals account for $22 billion in national drug spend, representing 15% of the $150 billion pharmaceutical market.

These high-cost, sophisticated drugs, which include injectables and other specialized drugs, are used now where such drug regimes often didn't exist previously. They are used to treat diseases and conditions such as psoriasis, multiple sclerosis, cancer, rheumatoid arthritis, hemophilia and growth hormone deficiency.

Specialty/biotech drugs are expected to become a $50 billion marketplace by 2005, said Dr. Gary Owens, vice president, medical management and policy, for Independence Blue Cross. "Most benefit plans were fairly silent on these drugs in the past, and they weren't consistently covered under either pharmaceutical or medical benefits." Many health plans, however, are now adding these drugs to special benefit designs. Independence Blue Cross recently created a biotech and injectables benefit in its flex series plans, creating two tiers on injectables--one for routine, short-term, intermittent use with a low copay or no copay and another for long-term chronic care that requires a member copay.

Insurers agree that the drugs are a saving grace for many patients. "They will be one of the gifts medicine is going to give to the next couple of generations with the ability to bio-match the right drug with the right disease process," said Owens. In the long-term, insurers believe the drugs may help save money by eliminating the need for additional long-term health-care services, hospitalizations and prescription costs.

These pharmaceuticals now are coming at a cost. For instance, a specialty drug to treat psoriasis can cost approximately $18,000 to $20,000 a year, said David Clark, vice president of pharmacy services for The Regence Group, with which Regenee Blue-Cross BlueShield is affiliated. They are more effective, however, than older therapies, which averaged around $500 for severe cases.

"It's important to realize these drugs are not a panacea and don't treat everything for everyone," Clark said. Biotech drugs for rheumatoid arthritis, for instance, work in only about 40% to 50% of patients. "Therefore it's important for insurers to have criteria set up to help physicians understand where the drugs work and where they don't," he said.

The AdvancePCS report said that although specialty pharmaceuticals are used to treat small numbers of patients with rare, chronic conditions, the expense accounts for a disproportionately large share of total healthcare costs. Patients with chronic diseases requiring specialty drug care comprise just 1% to 5% of a typical health plan's population, yet account for 25% to 50% of the plan's total medical costs, according to the report. The drugs can annually cost anywhere from several thousands of dollars to upward of $1 million per patient, according to AdvancePCS.

"Every time you use biotech drugs, that insinuates a higher price drug and we see dollar signs running wild," said Burton Orland, vice president of pharmacy for Oxford Health Plans. Oxford tries to limit the specialty network to about four or five different providers and purchases drugs directly from them, he said. Providers then ship the products directly to members or their physicians, and Oxford pays providers a dispensing or administration fee, while members pay a copay. That has taken the profit incentive out of the hands of physicians, he said, who were initially paying for the drugs themselves and then billing the health plan directly. "We've given them a higher administrative fee to dispense these drugs which not only reduces the administrative burdens placed on physicians, but also means that the physician no longer has to carry an inventory or wait to get paid if the bill is questioned."

Filling the Rx for Savings

Despite the cost savings, health plans, members and payers are finding from the use of generics, OTC and mail-order pharmaceuticals, there will be continued upward pressures on prescription drug costs.

Direct-to-consumer advertising that is expected to meet or exceed $4 billion this year will likely drive increased demand for prescription use, said Regence's Clark. In addition, an aging population, increased demand for products and the addition of about 120% more drug representatives since 1995 will also drive the trend. Programs that focus on appropriate use will be effective, however, in bringing down cost increases to single digits, he added.

Health insurers say they plan to constantly re-evaluate their benefit plan designs to meet consumers' needs, in addition to educating consumers, physicians and payers about the safety and efficacy of drugs and the cost-effective approaches to help drive down mounting costs. "If we can drive transparency into the market in terms of what things cost and relative to some biases that PBMs have in place, such as rebates and manufacturer contracts, and if the transparency model can be established at the consumer level, we'll see prescription drug costs come down," said Humana's Fleming. Without transparency, he doesn't believe prescription trends will mitigate over the next several years.

Possible passage of drug reimportation legislation may also have some impact on prescription drug spending in the future. One such example is the recent proposal by Sen. Byron Dorgan, D-N.D., of a Senate bill (S.B. 2328) that would allow U.S. residents to reimport as much as a 90-day supply of prescription drugs from FDA-approved Canadian pharmacies for personal use. The legislation would also allow licensed pharmacists and prescription drug wholesalers to reimport medication from Canada after 90 days. Also, American residents who travel to Australia, Japan, New Zealand, Switzerland or current European Union nations could return with as much as a 90-day supply of prescription drugs for personal use.

Leading
Over-the-Counter Brands

Brands are ranked according
to 2003 sales.

($Millions)

Brand-Name Drug                        Sales

 1) Nicorette anti-smoking gum           $138.0
 2) Tylenol pain relief--tablets         $129.4
 3) Advil pain relief--tablets           $116.6
 4) Depends adult incontinence            $89.0
 5) Claritin allergy--tablets             $86.9
 6) Aleve pain relief--tablets            $65.4
 7) Nicoderm CQ anti-smoking patch        $65.0
 8) Claritin-D allergy--tablets           $61.0
 9) Nature Made 1 & 2 letter vitamins     $59.5
10) Benadryl allergy--tablets             $56.8
22) Prilosec OTC                          $40.8

Source: Information Resources Inc.

Key Points

* The recent conversion of leading brand-name prescription drugs to generics and over-the-counter pharmaceuticals, in addition to the use of mail-order drugs, is helping save health plans and consumers from rising prescription drug costs.

* Nearly 3.3 billion prescriptions were dispensed in the United States in 2002, according to the Kaiser Family Foundation.

* After the release of Claritin to over the counter in 2002, plan sponsors saw their drug expenses for antihistamines decline significantly in 2003.

* Insurers believe specialty pharmaceuticals, biotech therapies and specialty injectables may have the greatest impact on their pharmaceutical spend in the next several years.

Learn More

Aetna Health and Life Insurance Co.

A.M. Best Company # 08189

Distribution: Brokers, consultants, retail networks (pharmacy products)

Anthem Health Plans Inc.

A.M. Best Company # 68044

Distribution: Independent agents, consultants, direct

Blue Cross and Blue Shield of Kansas

A.M. Best Company # 60070

Distribution: Captive sales force, brokers

Horizon Healthcare Services Inc.

A.M. Best Company # 64022

Distribution: Brokers, benefit consultants, direct

Humana Health Plan Inc.

A.M. Best Company # 68898

Distribution: Agent/brokers, direct to employees, direct

Independence Blue Cross

A.M. Best Company # 64553

Distribution: Direct sales representatives, brokers, association administrators, consultants, direct

Oxford Health Insurance Inc.

A.M. Best Company # 60022

Distribution: Independent agents and brokers, direct sales force

Premera Blue Cross

A.M. Best Company # 60076, 64764

Distribution: Agents and brokers

Regence Blue Cross Blue Shield Cos.

A.M. Best Company #60074, 60199, 60266, 64412

Distribution: Agents and brokers, direct

Blue Cross of California

(WellPoint Health Networks Inc.)

A.M. Best Company # 68970

Distribution: Independent agents, brokers, benefits consultants, direct

Wellmark Inc.

A.M. Best Company # 68347

Distribution: Independent agents and brokers, consultants, direct

For ratings and other financial strength information about these companies, visit www.ambest.com

Joining the Fight

U.S. corporations are also joining the front lines in the battle against rising prescription drug costs.

In June, 50 of the largest U.S. employers announced they were forming a pool to directly negotiate with pharmaceutical companies to try to reduce drug costs for their 5 million active and retired employees and dependents. The group said it plans to discuss pricing for the 50 drugs on which its members spend the most money, including heartburn medications Nexium and Prevacid; painkillers Celebrex and Vioxx; cholesterol-lowering drugs Zocor and Lipitor; antidepressants Zoloft, Paxil and Effexor; and allergy drug Allegra.

The companies will continue to work with pharmacy benefit managers, which will continue to manage the employers' payments for generics and other less expensive drugs, set copayments, direct members with chronic health problems to mail-order pharmacies and manage other aspects of the companies' prescription drug plans, according to an article in the New York Times.