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The School Employees Retirement System of Ohio's prescription for cost-effective health care.

For the 49,000 retirees of SERS, an innovative program puts the brakes on the rising costs of prescription drugs and for the retirement system's administrators, it dramatically reduces paperwork and processing costs.

Editor's note: Each year the Government Finance Officers Association awards its prestigious Awards for Excellence to recognize outstanding contributions in the field of government finance. The awards stress practical, documented work that offers leadership to the profession and promotes improved public finance. This article describes the 1992 winning entry in the retirement administration category.

At a time when overall health care costs are increasing at a staggering rate, a new program that saves retirees and their pension fund more than $2 million a year is a significant victory in the cost-containment battle. The innovative program detailed and illustrated in this article has proven highly successful for the School Employees Retirement System (SERS) in putting the brakes on a key component of health care costs. It is also having a positive impact on the quality of life enjoyed by more than 49,000 retirees of SERS, most of whom rely almost entirely on the system for their health care benefits. SERS provides its retirees with a full array of health care benefits including major-medical coverage, a mail order prescription program for maintenance drugs and the revolutionary Preferred Pharmacy Program for prescriptions that need to be filled immediately.

The Problem

Americans today are living longer and more productive lives, due in large part to the many medical discoveries of recent decades. But there is a price attached to these advances--a price that is threatening the very health care system on which Americans rely.

Of particular concern to older Americans and the pension funds that provide for their well-being is the dramatically rising cost of health care, especially the prescription drugs that are so vital to maintaining a good quality of life in one's later years. Prescription drugs account for more than 25 percent of the total cost of retiree health care, and the price of prescription drugs is rising faster than other health care components, as illustrated in Exhibit 1.

Rising prescription drug costs hit retirees especially hard. Prescription drug use of retirees is six times greater than that of nonretired persons. The obvious explanation for this higher prescription drug use is that many retirement-age individuals are afflicted with one or more of the many ailments common to older Americans, and thus are often taking more than one medication.

As the costs of these life-supporting drugs continue to rise, a growing number of seniors are unable to pay for them. Not only is their health endangered, but their mental well-being is threatened as they cope with the stress of struggling to pay for drugs they need but cannot afford. SERS, faced with drug costs rising at a double-digit pace, was not satisfied with merely passing these costs on to retirees and to the Ohio school districts which pay a substantial part of the cost of post-retirement health care. In 1987, SERS determined to use its experience and purchasing power to find a solution.

The Solution

Realizing that alleviating the financial burdens of retirees and their pension funds would require reducing prescription drug costs and monitoring usage, SERS developed its Preferred Pharmacy Program to combat the problem. The Preferred Pharmacy Program is the result of more than two years of research and development conducted by SERS staff for the purpose of constructing a cost-effective retail prescription drug program for retirees. A pilot project tested and implemented in two Ohio counties proved to be successful, and SERS awarded a contract to an insurance company for an expanded program. More than 49,000 SERS retirees nationwide now benefit from the program, and the SERS innovation is serving as a model for other retirement organizations across the country.

The program negotiates with drug retailers who provide drugs to retirees at discounted prices for a total savings of more than $300,000 per year. It provides retirees the following benefits:

* an average reduction of almost $2 on each prescription;

* elimination of most claims processing forms, greatly reducing SERS' administrative costs;

* counseling on the most cost-effective way to purchase drugs; and

* monitoring each retiree's prescriptions to reduce overuse and prevent noncomplementary drug combinations.

How the Program Works

Each month, SERS sends a magnetic tape, which contains information on all retirees and dependents who are eligible to use the Preferred Pharmacy Program, to the insurance company that is SERS' major-medical plan manager. The eligibility information is transmitted to the program's medical information database manager and to the company's claims office.

When a retiree presents his or her prescription and identification card to one of more than 16,500 participating pharmacists, the pharmacy confirms program eligibility through a computer connected to the database manager. Once the computer confirms eligibility, it responds with the maximum price the pharmacist may charge the retiree for the prescription. The prescription is filled and is paid for by the retiree. Unless a physician indicates "dispense as written," pharmacists are required to dispense generic drugs in order to substantially reduce costs to the retiree. The retiree retains the freedom, however, to reject the generic substitution.

The transaction is completed, and the pharmacist transmits the prescription information through the medical information database manager to the local insurance claims office. The claims office applies the deductibles under the major-medical program and issues an "Explanation of Benefits" statement to the retiree. If the retiree has satisfied his or her $250 major medical deductible for the year, a reimbursement check for 80 percent of the cost is issued simultaneously. If the retiree had rejected the generic substitution, only 50 percent of the prescription's cost would be eligible for reimbursement. There are no claim forms for the retiree to fill out--the entire transaction is conducted automatically.

To explain the program to retirees so that they can make the best possible use of it, SERS provides a retirement manual, a monthly newsletter and other informational materials on a regular basis.

Retiree Benefits

All SERS retirees are eligible for the Preferred Pharmacy Program through their major-medical insurance plan. More than 70 percent of all Ohio pharmacies have joined in partnership with SERS, ensuring that all of the system's retirees have convenient access to the program. Unlike many prescription programs that require prescriptions be filled by mail order or at a limited number of pharmacies, SERS retirees are almost always able to use the pharmacy of their choice. Furthermore, they receive a substantial discount on each prescription as a result of SERS' negotiations and partnerships with drug retailers.

In addition to these discounts, retirees will benefit greatly from the safety and convenience of a nationwide, automated information network, currently under development, which will provide pharmacists with an immediate, up-to-date prescription drug history of each retiree whenever a prescription is ordered, thus preventing costly mistakes and potentially dangerous drug conflicts. The network will be significantly enhanced in 1992 when utilization data from SERS' mail-order prescription program are made available to participating retail pharmacists. Network data also will be available to the mail-order pharmacists.

The program also reduces customary paperwork by keeping a log of all prescription expenses incurred by each retiree and automatically either adding the charge to his or her deductible or issuing an 80-percent reimbursement check once the deductible has been met. SERS retirees enjoy not only the advantages of receiving prescription drugs at reduced costs, but also the "hassle-free" health care claims processing.

Impact and Results

The average cost of prescription drugs in the U.S. rose from $22.57 in 1988 to $26.74 in 1990 as seen in Exhibit 2. Rather than allowing these price increases to affect SERS retirees, the Preferred Pharmacy Program has reduced the average cost of a prescription to $21. Part of this reduction is due to the substantial discounts available from retail pharmacists; the largest part is attributable to the attainment of a 40 percent generic substitution rate under the program. Based on analysis of SERS retirees' drug use, the average generic drug prescription costs about one-fifth its brand-name equivalent--$6 versus $30.

One of the most important factors in managing health care costs is the ability to capture and analyze data. A primary consideration during the development of the Preferred Pharmacy Program was the ability to obtain detailed information that previously was available only in conjunction with the mail-order program. Obtaining and coordinating the data from the mail-order and retail programs permits SERS to communicate directly with retirees in order to maximize their purchasing power while maintaining the lowest possible cost to the system.

Administrative costs to process retail drug claims have been dramatically reduced by 81 percent, from $4.25 to 81 |cents~ per claim. The substantial reduction comes from the development of the computerized data base, which eliminates the need for forms and processing procedures. To date, the program has saved the system and its retirees a total of more than $2.1 million.

Beyond the millions of dollars saved by the program, there is an equally important feature that directly affects SERS retirees' health, safety and quality of life. Many retirees use the services of more than one physician, and each doctor may prescribe different drugs. Since SERS will soon be able to analyze and track all prescriptions ordered by program participants, there will be substantially less chance that retirees will be given duplicate or contra-indicated prescriptions that could result in dangerous overdoses or interactions. Since 15 percent of all hospitalizations of the elderly are drug induced, this feature of the program will result in fewer hospitalizations and lower overall major-medical costs. But more importantly, it will provide a better quality of life for SERS retirees.


The Preferred Pharmacy Program has been well received by retirees, most of whom perceive it as a benefit enhancement. And it has been praised in legislative hearings as a fair and cost-effective way to allow retail pharmacists to compete with mail-order drug programs. The program's success has encouraged three other major public employee pension funds to begin the process of adopting it.

Today, public employee pension funds are facing unprecedented financial challenges as they endeavor to provide the level and quality of benefits and services that their retirees need and have come to expect. The funds also share a responsibility with health care providers and insurers to assume a leadership role in addressing cost-containment issues that directly affect the funds and their retirees.

SERS' Preferred Pharmacy Program exemplifies the inventive and effective new approaches pension funds must strive to develop if they are to continue to fulfill their many commitments to their retirees. Indeed, each dollar saved by the Preferred Pharmacy Program is one more dollar maximized and returned to either a retiree or to SERS to help it provide for retirees' needs today and for many years to come.

THOMAS R. ANDERSON is the executive director for the School Employees Retirement System of Ohio and ROBERT HARTSOOK is deputy director.
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Title Annotation:Preferred Pharmacy Program
Author:Anderson, Thomas R.; Hartsook, Robert
Publication:Government Finance Review
Date:Dec 1, 1992
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