Taking charge of prescription drug costs.

• Author: Grossman, Ned

Prescription drug costs have risen dramatically over the last several years, gobbling up an increasingly larger percentage of state and local government budgets. In Ohio, a group of school districts formed the Employee Benefits Cooperative to minimize these costs through group purchasing. The program success to date offers a ray of hope to other governments.

As sagging revenues and increasing demand for things like security and Medic aid continue to squeeze state and local government budgets, reducing the costs (or at least slowing increases) of prescription drug coverage has become more important than ever. Thanks to skyrocketing health care costs--prescription drug costs in particular--employee benefits are gobbling up an ever-larger share of government budgets. Unfortunately, the demand for quality prescription drug plans is not likely to diminish. Almost half (46 percent) of Americans take at least one prescription drug each day, and more than 25 percent take multiple prescription drugs. (1)

Over the last several years, prescription drug care costs have increased dramatically. The Health Care Financial Administration has projected continued double-digit growth in drug spending through 2010, with annual drug costs tripling between 2000 and 2010. (2) The Blue Cross Blue Shield Association and the Health Insurance Association of America have suggested that drug spending will grow by more than 15 percent annually for the next several years. (3) Because the costs of prescription drugs continue to rise, they are occupying a growing proportion of total health care costs. As Exhibit 1 shows, prescription drugs' share of total health care costs is expected to increase to 13.9 percent by 2010.

Regardless of how employers structure their prescription drug benefits, they will face significant future cost increases. While the reasons for this trend are many and varied, the primary culprits are increased utilization of prescription drugs, an aging population, manufacturer price increases, direct to consumer advertising, the replacement of brand-name drugs coming off patent with new brand-name drugs, and the introduction of new biotech drugs for obscure diseases. A recent survey showed that employers are trying a variety of strategies to control the growth of drug benefits. In the last year, for example, 33 percent of the respondents increased employee premiums, 31 percent increased co-payments, 29 percent implemented educational programs, 14 percent mandated the use of generic drugs, and 5 percent mandated the use of mail-order drugs. (4)

These tried and true cost-containment strategies may no longer be adequate. One cutting-edge solution is participation in a prescription drug purchasing cooperative. Most local governments do not have enough employees to qualify for maximum discounts and other volume-based negotiating advantages on their own. A large cooperative offers the opportunity to leverage increased negotiating power to generate cost savings and other creative cost-cutting solutions.

This article describes how a group of Ohio school districts banded together to create a program that has yielded significant cost savings to the participating districts without necessitating changes in their prescription drug plans. Known as the Employee Benefits Cooperative, or EBC, the program has repeatedly exceeded member expectations. Participating school districts have maximized their retail and mail-order pharmacy discounts, as well as their brand-name manufacturer rebates (many plan sponsors are not even aware of these rebates). They have eliminated all insurance company and third party administrative expenses, overhead, retentions, margins, and profits. The rebates have actually exceeded the...