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Efficient employee Rx services need careful study; some shopping around.

Efficient Employee Rx Services Need Careful Study; Some Shopping Around

Health concerns are assuming increasing importance in the workplace. Managing their costs can lead to company savings and employee satisfaction.

During union negotiations several years ago, Dalton Foundry agreed to a new prescription drug co-payment plan for its hourly and salaried employees via a prescription card service (PCS). It authorized the purchase of prescription (Rx) drugs by employees and dependents at any participating pharmacy, with a small deductible charge per drug issued. The new plan replaced a similar medical health care program under which the company covered 80% of the cost of prescription drugs after the employees had met the annual health coverage deductible of $100 per individual or $300 per family.

Table 1 shows the cost breakdown for the 1987 medical plan that the company predicted would rise under the new prescription card service program because 43% of employees had not met their deductibles and were paying for their drugs themselves or were not turning in prescription drug bills for reimbursement. The foundry's insurance carrier estimated total costs to increase to about $150,000 under the new service plan which included higher administration costs based on all employee claims being filed.

Cost Increases--The actual cost of the next year (1988) was $210,503. The actual drug costs were $165,907 and administrative costs totalled $44,596. As predicted, total costs increased $158,503 over the 1987 charges ($52,000) paid under the 80/20 plan, a 305% increase. The cost of the PCS as projected by the insurance carrier ($150,000) was exceeded by 28.7%.

1988 Cost Breakdown--PCS, during the year, billed the company $3.05 for every Rx issued. The employee paid the $1.00 deductible to the pharmacy, which applied that as a credit against the $3.05. The company was then billed $2.05. In turn, PCS charged the company's insurance carrier $0.78 per Rx to cover PCS's expenses for reporting cost figures to the carrier. The insurance carrier then charged the company monthly 6.97% of the total cost of the drugs ($2.05 + $0.78) as an administration charge.

Labor and management representatives, after reviewing the increased cost for Rx drugs, decided jointly to address the problem. The committee decision was to use a local Preferred Provider Organization (PPO) similar to already existing company PPO programs for providing employee vision and hearing aid benefits. The vision PPO had reduced costs for equal or improved service by 58%, and hearing aid costs by a third. Subsequently, bids were sent to local pharmacies requesting those interested in bidding to become the company's PPO to submit drug ingredient and administrative costs.

The committee required the pharmacies to quote the Average Wholesale Price (AWP) that pharmacies were paying pharmaceutical companies or wholesalers for purchasing brand-name drugs in the local area. The bidders were told that the lowest drug and administration costs needed to be supported by superior service in order to get the company's business, which amounted to 700 employees and 1800 dependents. Returned quotes were then merged with the PCS drug prices charged for 1988.

Choice of Pharmacy B

In reviewing the lowest two quotes received, pharmacies A and B had lower ingredient prices compared to PCS. Pharmacy A quoted a discount price of 10.9% and B was 11%, plus ingredient costs. Both pharmacies offered two locations, superior service and provided home delivery in medically-necessary cases. Pharmacy B employed four registered pharmacists (more than A) plus two registered nurses who were available for home care services. B also agreed to drug courier service to the plant in special cases and 24-hour Rx service. In addition, B also agreed to inform all employees of generic substitutes and encourage patients to discuss generics with attending physicians.

Pharmacy A quoted administrative costs of $2.75 per Rx (compared to $1.75 for pharmacy B) or 10% below PCS ($2.75 vs. $3.05). B's discount was also 43%, but, once the employee paid the $1.00 deductible, its discount increased to 75%. Both suppliers agreed to monthly billing to the company, broken down to include patients' names, types of drugs (regular or generic) issued, strength, quantity and price of each Rx. This was a key to regular price audits to assure that cost reduction goals were being met. Table 3 breaks down the cost comparison between PCS and pharmacies A and B.

Cost Discounts--In 1988, employees were issued nearly 11,000 prescriptions at an ingredient cost of $165,907 and an administration cost of $44,596. As noted previously, charges to the company were $2.05 plus $0.78 plus the carrier's 6.97% administration charge.

Cost Analysis--Administrative costs for pharmacy B, compared to PCS, decreased 81.6% for an annual projected saving of $36,412, and drug ingredient costs dropped by 11%. Total annualized costs clearly favor pharmacy B's PPO program over PCS. Projected over the life of the company's bargaining agreement (due to end January 1992), the four years the new PPO program will have been in force will save the company $218,644.

Employee Service--In January 1988, employees and their spouses were issued an individual PCS card, and they chose which pharmacy to utilize when obtaining drugs. Employees viewed the card as a family convenience and all local pharmacies in town and in the surrounding communities accepted its use.

In late 1988, employees were informed that the PCS would be discontinued and replaced in January 1989 with the Preferred Provider Organization card. Complete cost figures were revealed to clarify why the change was being made, and employees were encouraged to use the new program. They were given the option, however, of using any pharmacy and submitting their bills to the company for reimbursement every month.


In the first quarter of 1989, 96.4% of employees had accepted the new plan to help control the rising cost of prescription drugs. Annual projections for 1989 indicated that some 1200 employee prescriptions would be filled by pharmacies other than pharmacy B, and that changed the projected savings figures in a minor way.

Essentially, the PPO plan proved less costly than the prescription card service despite the less than 100% usage. The initial annualized savings of $54,661 was reduced to $49,153 because of increased administrative and higher ingredients costs of non-PPO users, reducing the total four-year cost saving to $197,000.

In the final quarter of 1989, the PPO with pharmacy B was reviewed by the labor/management committee, and it reached the conclusion that the savings produced by the program and the satisfaction of the employees using it warranted continuing the plan. The agreement with pharmacy B was renegotiated and will run until labor negotiations begin in 1992.

The savings realized by the company during a period when all health care costs are rising rapidly, recognizes the intra-company cooperation required to keep them under control. It also recognizes the importance of keeping a watchful eye on even those programs that seem to be functioning well. Management efficiency relates directly to cost awareness at all levels of foundry operations. [Tabular Data 1 to 4 Omitted]
COPYRIGHT 1990 American Foundry Society, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Dalton Foundry's prescription drug co-payment plan
Author:Daffara, John C.
Publication:Modern Casting
Date:Mar 1, 1990
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