Guest Article

(From the June 19, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Capping Drug Benefits May Lead to Unintended Consequences, Study Concludes

Capping prescription drug benefits may result more in cost shifting than in cost saving, according to a recent study published in The New England Journal of Medicine (NEJM)./1/ Even if caps lower a plan's pharmacy costs, those savings may be offset by increases in other health care costs associated with emergency room visits and hospitalization. The study focused on Medicare+Choice beneficiaries, but its conclusions should be of interest to all health plans -- including employer-sponsored health plans.

Background

Prescription drug spending has been one of the fastest growing components of health care spending for the past decade. The increase has been fueled mainly by expanding utilization of prescription drugs. According to the Kaiser Family Foundation (KFF), from 1994 to 2004 the number of prescriptions purchased increased 68 percent while the U.S. population increased only 12 percent. This, in turn, has contributed to a surge in prescription drug prices. During the same period retail prescription prices increased an average of 8.3 percent per year, faster than overall inflation (2.5 percent per year) and even health care inflation (5.6 percent per year).

The share of prescription drug expenditures by private health insurers has grown dramatically during this period. In 1994, private health insurance was responsible for 32 percent of total national prescription drug expenditures. The majority of the burden was shouldered by individuals (48 percent) and government programs (20 percent). By 2003, the share paid by individuals had fallen to 30 percent while that paid by health insurance and government programs had increased to 46 percent and 24 percent, respectively.

Group health plans and health insurers have taken a variety of steps to control prescription drug spending. The most common approaches include introducing tiered cost-sharing formulas to encourage participants to use cheaper generic drugs and increasing cost-sharing requirements. According to the Kaiser Family Foundation, the percentage of group health plan participants subject to three or four tier cost-sharing arrangements increased from 27 percent in 2000 to 74 percent in 2005. And during that same period average copayments increased from $17 to $35 for nonpreferred drugs and from $13 to $22 for preferred drugs.

The new Medicare Part D prescription drug benefit uses a slightly different approach. After a beneficiary meets an initial deductible (up to $250 in 2006), Part D pays 75 percent of his or her next $2,000 in prescription drug costs. After that, coverage stops until the beneficiary's total out-of-pocket costs for prescription drugs reaches $3,600. Then Part D begins paying again. This gap in coverage is typically referred to as the "doughnut hole" in Medicare Part D.

Still other health plans and health insurers have gone even further by placing a specific dollar cap on their prescription drug benefit. Once the cap is reached, the beneficiary bears full responsibility for additional prescription drug spending. This perhaps is more extreme than the tiered-formulary or Medicare Part D approaches, but all three are designed to accomplish the same objective, i.e., achieve cost savings by creating financial incentives for participants to become careful consumers of prescription drugs.

The study published in NEJM analyzes the effects of a prescription drug benefit cap on participants' health and total medical costs. However, its findings also may be relevant for plans with tiered formularies and Medicare Part D.

What Did the Study Find?

The study followed a group of approximately 200,000 Medicare beneficiaries enrolled in a Medicare+Choice plan in 2003. All beneficiaries were subject to a two-tier cost-sharing arrangement, with copayments of $10 for generic drugs and $15 to $30 for branded drugs. However, slightly more than 151,000 beneficiaries (79 percent) in the study group were subject to a $1,000 annual cap on prescription drug benefits, while the rest (21 percent) were not subject to any cap. Of those subject to the cap, 13 percent exceeded the cap during 2003.

As would be expected, total pharmacy costs for beneficiaries subject to the cap were 28 percent lower than for beneficiaries not subject to a cap. Additionally, the capped group's office visit costs were four percent less than the non-capped group's. However, the capped group's hospital costs were 13 percent higher and emergency room costs were nine percent higher than the non-capped group's. As a result, total medical costs for beneficiaries subject to the cap were only one percent lower than for beneficiaries not subject to the cap.

Also, the cap appeared to have adverse effects on beneficiaries' health. Those beneficiaries subject to the cap had higher rates of emergency room visits, nonelective hospitalizations, and death.

The study also analyzed the effect of the cap on beneficiaries who had been receiving long-term drug therapy since 2002. These beneficiaries had higher odds of nonadherence to antihypertensive drugs, lipid-lowering drugs, and antidiabetic drugs if their prescription drug benefits were capped. Thus, it should come as no surprise that the capped beneficiaries were more likely to have high blood pressure, high cholesterol, and elevated glycated hemoglobin.

What Does it all Mean?

One reasonable criticism of this study is that it compares a population subject to a very low cap ($1,000) on prescription drug benefits to one with unlimited benefits. The results might have been different if the cap had been higher. Nonetheless, health insurers and health plans that cap their prescription drug benefits, or are considering doing so in the future, should be aware of the possible effects on total medical costs and participants' health.

But what of tiered formularies, the more common approach to controlling prescription drug costs? The study does not address the economic and health effects of this approach. However, it does suggest the danger of unintended consequences lurks when health plans use incentives to change behavior. Clearly, caution is always in order.

1 Hsu, John, et al., "Unintended Consequences of Caps on Medicare Drug Benefits," N. Eng. J. Med. 354; 22 (June 1, 2006). The article is available on the Internet, at www.nejm.org.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2006, Deloitte.