Drug Cost Capitation in US Managed Care

Drug Cost Capitation in US Managed Care

List of Tables
List of Figures
1. Executive Summary
2. Introduction
3. The Emergence of Managed Care
4. The Problem of Pharmaceutical Costs for Managed Care Organizations
5. Drug Companies Prosper While Managed Care Struggles
5.1 Scientific issues
5.2 Policy and strategic issues
5.3 Pharmaceutical industry strategy
6. Managed Care Must Respond
7. Employers' Viewpoint
8. Potential Approaches to Controlling Pharmacy Costs
8.1 Techniques involving primarily benefits design
8.2 Techniques involving primarily patient-based interventions
8.3 Techniques involving primarily pharmacist-based interventions
8.4 Techniques involving primarily physician-based interventions
9. Approaches Used Outside the US
10. HMO Structure and the Role of Capitation
11. Risk Sharing and Capitation for Pharmaceuticals
12. Advantages and Disadvantages of Capitation
13. Medicare Managed Care
14. Pharmaceuticals in Medicare Managed Care
15. Attempts to Control Pharmacy Costs in the Elderly
16. Medicaid Managed Care
17. Setting Capitation Rates
18. Techniques that Physicians Can Use to Control Drug Utilization
18.1 Generic Substitution
18.2 Branded to Branded Switches
18.3 Substitution Between Related Therapeutic Drug Classes
18.4 Stepped Care
18.5 Stopping Chronic Therapy
19. Potential Impact on Manufacturers of Tighter Utilization Controls
20. Implications of Capitation and Risk Sharing for Manufacturers
21. Conclusions 54
References
Acknowledgments

list of tables
Table 1 Percent of all employees with health benefits by type of plan, 1993 and 1997
Table 2 Blockbuster results
Table 3 Drugs produced during the 'Golden Age' of drug innovation
Table 4 Incentives used to encourage generic utilization, 1995-1998(e)
Table 5 Important prescription to over-the-counter drug switches, 1995 and 1996
Table 6 Medicare managed care penetration: May 1997
Table 7 Overall utilization: Medicare, Non-Medicare

List of figures
Figure 1 Annual growth rate in total health-benefits costs for active and retired employees
Figure 2 Examples of disappointing quarterly earnings and stock values of for-profit HMOs
Figure 3 Pricing pressure
Figure 4 Percentage of HMO enrollees having a pharmacy benefit, 1995-1998(e)
Figure 5 Total US prescription costs (in $ billions)
Figure 6 Evolution of managed care and managed pharmacy
Figure 7 HMO physician incentives for managing the pharmacy benefit (%)
Figure 8 Past and projected population of persons 55-plus years of age
Figure 9 Per member per month pharmacy cost, before TennCare and after its implementation

1. Executive Summary
This report documents the movements towards risk sharing and capitation at the physician level as a method or reimbursement for ambulatory pharmaceuticals in the United States. The impetus for transferring financial risk for pharmaceuticals to physicians stems from the steady double-digit growth in US pharmaceutical expenditures at a time when managed care premiums have been stagnant and overall inflation in health care costs has moderated. As a result, drugs now account for approximately 10 percent of overall managed care costs but 50 percent of cost increases. These trends are not sustainable. This is underscored by the fact that pharmaceutical firms are enjoying record profits while, at the same time, profits and share values for US managed care organizations have dropped.

There are many historical reasons for HMO's failure to control drug costs, mostly related to their previous focus on controlling hospital and physician expenditures. However, the unrelenting escalation of drug costs is causing managed care organizations to pay attention. To a large extent, the increasingly stringent approaches they are using to control these costs parallel the successful steps taken by health plans to control medical expenditures. In many cases, the end result of these efforts has involved shifting financial risk from health plans to providers, often through capitated arrangements in which physicians receive a fixed per-member-per-month fee to cover all or most medical expenditures.

The implications of these trends for both physician groups and pharmaceutical manufacturers are profound. Manufacturers will continue to extol the value of new branded products, invest heavily in promotion to physicians and consumers, and argue that higher pharmaceutical expenditures will create favorable cost offsets in other parts of the health care system. Whether these approaches will be successful with physicians who are directly responsible for pharmacy costs remains to be seen.

Drug Cost Capitation in US Managed Care

Recent changes to risk sharing and cost capitation in the US have enormous implications for the profitability of drug companies. They also affect physician incomes and care patterns in managed care.

This report is produced in conjunction with Lewin TAG Inc, a leading US outcomes research company. It provides you with a comprehensive overview of the current trends towards pharmacy cost capitation and financial risk sharing with physicians in the US managed care industry.

Scrip's Industry Alert provides you with an up-to-date overview of this topical issue, enabling you to: understand the important issues involved in financial risk changes, review the current action being taken by your competitors, plan for the evolution of drug provision towards risk sharing and capitation, understand the threats or opportunities for your organisation, take positive steps to address financial risk changes.

PUBLISHED: MAY 1998
REF: BS924E
PAGES: 60+
PRICE: £190/$399/¥46,000