Medicare Part D is giving drug plans an opportunity to use more restrictive pharmacy benefit designs that had previously not been palatable to the commercial sector.

"Medicare, for as crazy as it has been, is a tremendous opportunity in the commercial sector," Advanced Pharmacy Concepts President Kimberly McDonough said at the Pharmacy Benefit Management Institute Prescription Drug Utilization Management Conference in Scottsdale, Ariz. April 26-28.

"This Medicare program is every potential management initiative you have ever heard of: closed formularies...prior authorizations all over the board, step therapy edits - they are part of the program."

The use of drug utilization management tools in Part D plans will create the conditions for the acceptance of such cost-saving measures on the commercial side by raising patient understanding of plan design and utilization management tools, McDonough suggested.

"You're seeing people have to deal with formularies. Three years ago I don't think most people walking down the street had any clue what a formulary is, and now every senior citizen in America is aware of Medicare," she said. "They're all talking about their formulary - is this drug covered? How do you do a prior authorization?"

Public familiarity with plan designs will facilitate reintroduction of cost containment tools that were previously discarded due to patient pushback, McDonough predicted.

In the early 1990s health maintenance organizations "had closed formularies, but those went by the wayside in the mid-1990s because there was so much pressure from the news media. Even though from a clinical perspective it was a sound thing to do...rolling it out was just too hard, and there was just potential for adverse publicity," she said.

With the implementation of Part D, "those types of tools...now kind of come back into the mainstream," McDonough said. "Because Medicare is doing it, it is very hard to say to an employer or health plan you can't do this."

The adoption of more restrictive plan designs and utilization management techniques by the commercial sector could be accelerated by the need for plans to find new sources of savings, she said. Previous sources of revenue such as rebates and pharmacy discounts are beginning to be tapped-out, she noted.

"There is a point below which a pharmacy, a PBM, a mail-order operation...cannot buy drugs for a lower price" because "if the manufacturer passes that lower price to anyone in the commercial sector, they have to also give that price to Medicaid," she explained.

Consequently, "the levels of discounts that you can get from a retail or mail-order pharmacy are starting to plateau" as prices approach Medicaid best price.

"The same thing is true for rebates....You might feel like you can pit two pharmaceutical companies against each other and get them in a room and have a very aggressive bidding war between them, but unless you're bigger than Medicaid...they can't, from a realistic standpoint, go any further on a price decrease."

"At this point in time we have to start thinking beyond just those items," McDonough said.

The foundation of the best price floor itself could be cracking. The Bush Administration is proposing to replace the policy with a flat rebate, and the plan could gain momentum if Medicare drugs plans, which are exempt from best price calculations, are successful in gaining substantial discounts from manufacturers (¹ Also see "Lilly Sees Benefit From Medicare Rx In Short Term, But Risk For Zyprexa" - Pink Sheet, 2 January, 2006., p. 17).

In addition to employing medication management techniques and closed formularies, plans may turn to innovative formulary designs to capture savings.

"Changing how we think about tiers is a good thing. How you choose to structure your tiers is entirely related" to what "you want to achieve with your benefit, but we don't have to make the tiers related to formulary any longer," McDonough said.

For example, "we've had clients...where instead of having three tiers related to the formulary, they've decided to have the three tiers related to trying to keep people out of the hospital," she noted.

Under such a formulary design, generics would be on the first tier and on the second tier "are those drugs that are really important to keep a patient out of the hospital - stuff you want people to be taking: their diabetic medication, their hypertension medication and things like that."

The third tier would include "those drugs which people like to take, but they're probably never going to have an impact on whether the person has to seek other healthcare or not," she added.

Drugs that reduce symptoms, but do not reduce hospitalizations do not provide "a return on the investment for that drug," McDonough said. They'll "make you feel better and that's okay and we want to make it available, but we really want to focus our money where it's going to keep you healthy."

Humana has reported success in reducing drug costs under a formulary structure tiered according to how drugs impact medical events (² Also see "Humana RxImpact Formulary Lowers Drug Costs 45% Vs. Four-Tier Plan" - Pink Sheet, 21 March, 2005., p. 21).

Plans need to decide whether they are providing a drug benefit or insurance, Catalyst Rx President Kevin Hooks agreed, comparing health insurance to homeowner's insurance.

"I have crabgrass out in the front. So I am going to call my insurance agent and say 'do I have coverage for the crabgrass?' Well, no, that's more of a lifestyle kind of problem. Same thing with a lot of employer groups getting back and saying 'hey, let's call this insurance now and really cover what the purpose of drugs and medication cover.'"

According to the PBM exec, plan designs limiting access to lifestyle drugs may be gaining in popularity (see ³ Also see "Lifestyle Drugs Require High Copay Differentials to Curb Use, PBM Exec Says" - Pink Sheet, 15 May, 2006.).

Another departure from the traditional "first tier generic, second tier preferred drugs, third tier non-preferred drugs" formulary design could result from the loss of patent exclusivity of key products, McDonough said.

Depending on plan drug usage, there may be categories in which a brand drug with a rebate costs the plan less than a similar generic product, and thus warrants preferential formulary placement, she said.

The patent expirations of Bristol-Myers Squibb's Pravachol and Merck's Zocor could create one such scenario, she suggested. Pravastatin generics have launched and Zocor generics are set to enter the market in June (⁴ Also see "Failure To Launch: Pravachol, Zocor And The Future Of 180-Day Exclusivity" - Pink Sheet, 8 May, 2006., p. 13).

"You've got an issue [of] is it better to have [Pfizer's] Lipitor as your preferred product with your rebate or is it better to use Zocor and Pravachol, which will be generic but you won't get a rebate. So the value of rebates may change because of these dynamics of generics and brands."

Old Tricks In New Designs: Part D Increasing Commercial Plan Design Options

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