How management of medical costs is revolutionizing the drug industry.

• Author: Dunne, Kevin J.
• Position: Health Care and the Law

OVER THE YEARS, the cost of prescription medications has become an increasingly larger percentage of total health care expenditures in the United States. Until about 1973, prescription pharmaceuticals were not usually covered by health care benefit plans.(1) Before pharmacy benefits became commonplace, patients and their physicians made most prescription drug purchasing decisions without giving much consideration to the cost of the drugs or the availability of less expensive, therapeutic substitutes. The pharmaceutical industry was profitable during this period because consumers were not cost conscious, many drugs were protected by patents, and there was no significant price competition.

But now that third parties, such as insurers and employers, are increasingly paying for pharmaceutical care through prescription benefit plans, these buyers are aggressively seeking to control not only the cost but also the quality of prescription drugs. This phenomenon is known as "managed pharmaceutical care."

The third-party payers "manage" pharmaceutical care by gathering large numbers of individuals ("plan participants") into prescription benefit plans usually run by prescription benefit managers ("PBMs"). The management of pharmaceutical care has created unprecedented price competition(2) and has generated innovative responses from pharmaceutical companies. Recognizing that managed pharmaceutical is here to stay, the companies are trying to maintain control over drug distribution systems by purchasing or entering joint ventures with PBMs. This activity is widely referred to as "vertical integration."

How might the pharmaceutical industry and society benefit from this vertical integration? What will be the likely impact of vertical integration and managed pharmaceutical care on products liability exposures? What can be done to minimize those exposures in a vertically integrated system?

BACKGROUND

Pharmaceutical manufacturers historically have developed new prescription medications under controlled clinical conditions. After receiving marketing approval from the Food and Drug Administration, however, clinical controls are relaxed in many instances, and manufacturers have less ability to monitor the safety and efficacy of their products in the market place. Because post-market conditions sometimes delay the discovery of adverse reactions associated with approved drugs, the FDA has become more cautious in approving the marketing of new drugs. As a result, it generally takes more time for potentially beneficial medications to be made available to the public, and when they ultimately reach the market place, they are grossly more expensive. The cost of prescription drugs thus has become a larger share of the health care dollar.

Vertical integration between drug companies and PBMs enables the control of pharmaceutical costs and the achievement of a vastly improved post-marketing surveillance mechanism. Enhanced post-marketing surveillance should translate into fewer drug-associated injuries and fewer products liability lawsuits. Even state-of-the-art post-marketing surveillance will not eliminate all adverse drugs incidents, however, and vertically integrated pharmaceutical companies and PBMs will still face some products liability exposures. These can be minimized through intelligent integration and management of pharmaceutical care.

WHAT PBMS DO

Third-party payers have prescribed PBMs to cure the epidemic of rising pharmaceutical costs. PBMs manage prescription drug costs chiefly by negotiating discounts from the manufacturers, pharmacies and distributors in return for agreeing to purchase pharmaceuticals in volume.

Negotiating volume-based discounts is only the first step. Next, PBMs design plans that encourage or require plan participants to take advantage of the discounts. For example, PBMs usually develop networks of pharmacies authorized to dispense prescription drugs to plan participants. The networks may or may not be exclusive, in that plan participants may or may not have the option to purchase drugs outside the network.

PBMs also develop "formularies," which are comprehensive lists of "covered" prescription drugs from which physicians either are encouraged or required to prescribe. Consistent with the goal of controlling prescription drug costs, PBM formularies typically favor generic drugs over brand-name drugs, which tend to be more expensive.

Formularies may be either "open" or "closed." Compliance with open formularies usually is voluntary, with benefits being equally available for off-formulary drugs. In contrast, compliance with closed formularies may be either mandatory or encouraged through the use of financial incentives--for example, imposition of higher co-payments or deductibles with respect to off-formulary drugs. Presumably because they are more effective in controlling pharmaceutical costs, closed formularies are becoming more popular than open formularies.(3)

PBMs promote the medications on their formularies by providing physicians and pharmacists with information about their efficacy and cost relative to other comparable medications. Some PBMs also promote the medications on their formularies by paying pharmacists a fee each time the pharmacist persuades a physician to alter a prescription from an off-formulary to a formulary drug.

Pharmaceutical manufacturers compete for representation on formularies. The competition is fierce except with respect to drugs for which no generic or therapeutic substitutes exist. Because of the overabundance and interchangeability of many drugs, pharmaceutical manufacturers are willing to provide discounts or rebates on those drugs in exchange for favorable positioning on formularies. The ability of PBMs to choose and promote the medications that will be covered under prescription benefit plans and the sources from which those medications may be purchased provides them with purchasing leverage.

After designing prescription benefit plans and negotiating discounts, PBMs administer the plans by performing one or more of the following functions:

* Prescription benefit claim processing. Processing prescription benefit claims typically entails verifying eligibility for coverage, precertifying the availability of prescription drug benefits and paying claims for covered prescription drugs.

* Drug utilization review (DUR). DUR refers to the process of monitoring drug prescribing, dispensing and use patterns to promote appropriate and cost-efficient use of medications. DUR can be performed on prospective, concurrent or retrospective bases and usually involves the electronic review of prescription records to (1) determine the propriety or "medical necessity" of particular prescriptions, (2) evaluate patient compliance with prescription drug protocols and (3) detect existing or potential prescription problems--for examples, inappropriate doses, over/under utilization, adverse reactions and interactions, and duplicate drug therapy. DUR also may entail review of patient medical records. By integrating medical and pharmaceutical data on a concurrent or prospective basis, DUR strives to be a positive influence on medical treatment and to enable earlier intervention, if necessary, to prevent adverse drug incidents. DUR also is employed to evaluate the efficacy of drug therapies and formulary compliance by physicians and pharmacists.

* Pharmacy services. Some PBMs dispense prescription drugs through their own facilities, including mail orders.

Many PBMs now provide other services beyond designing and administering prescription benefit plans, such as:

* "Outcomes" research. PBMs may use the data they generate through DUR and formulary development and enforcement to assess the efficacy or "outcomes" of particular drug therapies. PBMs also may sell this information to pharmaceutical manufacturers to further the manufacturers' own "outcomes" research.

* "Disease management." Disease management involves combining drug utilization data with medical data and other medical resources to improve existing protocols or to develop new protocols for treating certain diseases. Disease management programs target diseases that are treated primarily through long-term, expensive drug therapy, the success of which is highly dependent on patient compliance. Disease management programs may be conducted independently or through joint ventures with pharmaceutical companies or managed care organizations. Disease management usually involves making comparative prescribing suggestions and employing or establishing networks of physicians and pharmacists.

Disease management also may be conducted as part of an insurance arrangement, under which the PBM agrees to provide total health care services, including prescription drugs, to plan participants with specified diseases.(4) Providing patients with the most effective drug therapy theoretically keeps patients healthier and may reduce the need for more expensive medical treatment.

* Capitation and other risk-sharing arrangements. PBMs and other pharmaceutical industry players, including pharmaceutical companies, are increasingly assuming some of the financial risk associated with the provision of prescription drug benefits under capitation or other risk-sharing arrangements. In a capitation agreement, the PBM essentially undertakes to provide unlimited amounts of certain prescription drugs in exchange for a fixed monthly fee paid by or on behalf of each plan participant. Capitation agreements put the PBM at risk of losing money if the plan participants require more medication than anticipated.

Critics of these programs point out that PBMs can make more profit if plan participants take less medicine. This criticism ignores the rationale underlying capitated drug programs, which is that patients' compliance with prescription drug protocols often lowers their over-all need for more medicine or medical treatment. Consistent with this rationale, capitation...