Spending More on Drugs

Current projections show that employers will continue to face double-digit premium hikes, with prescription drug costs serving as the biggest driver of increased costs.¹ Predictably, employers are restive and are considering dropping their pharmaceutical benefit.

In response, HMOs have erected costly and uniformly ineffective cost containment strategies. Their prior authorization requirement is expensive and labor-intensive. Many plans quote costs of $10 to $25 per authorization request, with more than 80 percent of requests being approved. Upon review at six months, the approval rate approaches 100 percent.

Pharmacy's role in health care
In reality, an employer-sponsored group health insurance product without a pharmacy benefit is a shortsighted and non-viable option. Drug therapy is now the cornerstone of modern medicine. It is the primary mode of treatment for over 85 percent of conditions that would otherwise result in hospitalization of the patient.

Employers generally under-estimate costs of employee health conditions by as much as 80 percent, by overlooking disability absences and lost productivity. From this broader perspective, medical treatment costs comprise less than 20 percent of what employers spend on health-related costs.

Lost productivity, or the cost of replacement staff for employees absent from work due to short-term disability, account for the remaining 80 percent of the total cost.² In reality, strategies that optimize employee productivity through access to adequate medical care best serve the goals of the employer in reducing overall employee costs. Adequate medical care dictates access to pharmaceuticals.

What should we spend?
One of the biggest problems facing the healthcare system today is patient non-compliance with treatment. Approximately 50 percent of prescriptions written for chronic disease states are never picked up and over 66 percent of patients fail to comply with their doctors' orders to take medications.³

Poor compliance is a leading cause of failed medical treatment. Even skilled professionals often miss detecting it in treatment failures. Poor compliance occurs in virtually all fields of medical care, including organ transplant management, oral contraception, hormonal blockade to prevent recurrent breast cancer, anti-viral treatment of AIDS, and blinding glaucoma - fields where many assume that strong motivation would ensure good compliance.⁴

Patients who poorly comply substantially under-spend on prescription drugs. They tend to delay prescription refills, are predisposed to early discontinuation of medicines intended for life-long use, and incur costly medical complications that could be avoided by correctly taking prescribed drugs. Pharmaceutical products that can reliably minimize these problems have a substantial unrealized market potential.

The annual cost of pharmaceutical noncompliance by patients in the United States is well documented.⁵ Included are the financial cost of deaths, workdays lost, hospital and nursing home admissions, and the cost to treat the resulting adverse drug reactions. These costs are conservatively estimated at $100 billion or more per year in the United States.⁶

How much should America allocate for pharmaceuticals in its health care system? A conservative answer: at least twice the amount now spent. With current spending for pharmaceuticals in the U.S. at more than $135 billion,⁷ that represents a current underpayment of $135 billion per year. With compliance rates of 50 percent or less and the cost to treat result

A Dose of Reality
In reality, the inflationary trend for pharmaceuticals in health care represents a primal market self-correcting force. This trend cannot be moderated by current or yet unconceived insurance company cost containment efforts. Even though spending increases for pharmaceuticals in the U.S. outstrips hospital and physician spending growth by 4-5 times, the role of pharmaceuticals in the U.S. is still relatively small compared to European and Japanese systems (see Figure 2).

Until the U.S. health care system brings its resource allocation into conformity with other leading industrial economies, the inflationary trend for pharmaceuticals will continue unabated. Thus, it is reasonable to assume that the current spending level of 10 percent will continue to increase, until it reaches its natural level of 15 to 20 percent for overall health care resource allocation.

This is without factoring in the costs for genetics, biologicals and biopharmaceuticals on the horizon. These agents will drive the costs associated with pharmaceuticals even higher. Figure 3 provides a glimpse into the future. It shows the predicted percent increase in spending for pharmaceuticals vs. total national health care spending, projected out to the year 2010.

From the perspective of relative health care spending allocation, two inescapable realities become apparent. First, America does not need to increase projected total health care spending. We spent $1.2 trillion (13.6 percent of the Gross Domestic Product, or GDP) in 1999. Spending will continue to grow through 2008, at an average rate of 6.8 percent annually, and will reach $2.2 trillion (16.2 percent of the GDP).

The second reality is more unpleasant for health care service providers to contemplate. Current trends dictate that we will accommodate the growth in spending for pharmaceuticals by decreasing the percentage of resources we currently allocate to pay for medical services. Redistributing current spending in health care will generate the $135 billion in increased pharmaceutical spending over the next few years.

davidjgibson@email.msn.com

1. Watson Wyatt, employee benefit survey, 2001
2. Integrated Benefits Institute (IBI) in partnership with CORE INC. and the MEDSTAT Group; Considering a New Employer Healthcare Strategy: Linking Medical Care to Productivity
3. Task Force for Compliance. Noncompliance with Medications: An Economic Tragedy with Important Implications for Health Care Reform, A Report of the Task Force for Compliance. April, 1994.
4. Bond WS, Hussar DA. Detection methods and strategies for improving medication compliance. AJHP, 1991; 48: 1978-1988.
5. Hart JT. Rule of halves: Implications of increasing diagnosis and reducing dropout for future workload and prescribing costs in primary care. Br J General Practice, 1992; March: 116-119.
6. Berg JS et al. Medication compliance: A healthcare problem. Ann Pharmaco, 1993; 27(suppl):2-19.
7. IMS Health