Firms Try Wean Employees from Brand-Name Drugs

By Jeremy Smerd

Jul. 1, 2006

Executives at Caterpillar Inc. call their employees’ penchant for costly brand-name drugs the “purple pill syndrome,” a condition that burns a hole in company pockets.

    Google the words “purple pill” and up pops the Web site, advertising Nexium. The medicine relieves the heartburn symptoms of acid reflux disease. Though generic versions are available, the seductiveness of the ads has led to high costs for companies like Caterpillar, where employees are running up expensive tabs at the drugstore with their preferences for more expensive brand-name drugs instead of a generic or over-the-counter equivalent.

    “Someone sees an advertisement for a brand-name prescription drug and they think, ‘Hey, that could be the answer,’ and they go for that instead of an over-the-counter drug,” says Caterpillar spokeswoman Rachel Potts, echoing a lament voiced recently by Sidney Banwart, the company’s vice president for human services.

    Often the goals of the pharmaceutical companies—promoting their brand-name drugs—come at the expense of companies looking to keep their costs down, especially when cheaper alternatives are available. Companies, helpless to take pharmaceutical advertising head on, are changing their health plans to make employees pay more if they want a brand-name drug when a generic is available. Employers are also putting an end to rebates received by pharmacy benefit managers for pushing brand-name drugs.

    Pharmaceutical companies spend nearly as much on promoting their drugs as they do on developing them. In 2003, money for research on new drugs dropped to $30.2 billion from $31.6 billion a year earlier. Spending on promotion of drugs, meanwhile, rose to $25.3 billion from $21.2 billion, according to the Pharmaceutical Research and Manufacturers of America, a pharmaceu­tical industry group, and IMS Health, a market research company covering the pharmaceutical industry.

    IMS considers promotion to include direct-to-consumer marketing, which accounted for $4.2 billion in 2005, up from $2.6 billion in 2001. It also includes the retail value of samples, journal advertising, and office and hospital promotion. Employers, meanwhile, are spending an increasing amount on prescription drugs. In 2004, U.S. companies spent $188 billion on pharmaceuticals, up from $174 billion in 2003 and $20 billion 20 years ago.

    Caterpillar, which spent 25 percent of its total health care costs, or $156 million, on prescription drugs in 2005, moved to a two-tiered co-pay system to make buying brand-name drugs more expensive for employees. After that failed to bring down costs, the company created a three-tiered co-pay system in which co-pays for brand-name drugs were higher. According to research by Hewitt, 78 percent of large companies use a three-tiered approach to lower prescription drug costs.

    “In many plan designs there is a perverse incentive,” says Gary Kushner, an employee benefits consultant and president of Kushner & Co. “Though it should cost the employee less to buy an over-the-counter drug, it costs more.”

    While the rate of increase in the cost of drugs slowed for Caterpillar, it did not slow enough. Beginning in September, Caterpillar will institute a “step therapy” program, the latest model for reducing prescription costs. Employees will have to pay the full cost for brand-name drugs if a cheaper alternative is available, unless doing so contradicts a doctor’s prescription.

    Some argue that the cost containment strategy can boomerang. Compliance with cholesterol-lowering drugs dropped 6 to 10 percentage points when co-pays were increased from $10 to $20, says Lori Reilly, a vice president for policy at the Pharmaceutical Research and Manufacturers of America, citing a Rand Corp. study published in January. She says higher co-pays may deter drug usage and lead to more expensive hospitalization down the road for improperly treated health problems.

    “It may be a short-term gain but a long-term cost to the health care system and to the employer,” she says.

    Luke Szymanski, a senior consultant with Hewitt’s pharmacy practice, says step therapy may be most effective in breaking the powerful hold pharmaceutical advertising has on consumers. Another way he says companies are reducing costs is by asking pharmacy benefit managers to pass on to companies the rebates pharmaceutical manufacturers offer to the PBMs for using brand-name drugs.

    But beware that “the PBM has a right to renegotiate the contract because you are taking that revenue away from them,” Szymanski says.

    Despite shifting more costs onto the consumer, perceptions are hard to change. When the allergy drug Claritin became available over the counter several years ago, Caterpillar noticed that employees and dependents stopped using it, preferring a generic prescription drug instead. Cost had something to do with that trend, but Potts believes attitudes were also at play.

    “Perhaps people feel if it’s over-the-counter it must be inferior,” she says.

Workforce Management, June 26, 2006, p. 6Subscribe Now!

Jeremy Smerd writes for Crain’s New York Business, a sister publication of Workforce Management.

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