US bulk buyers slashing cost of medication

LAST year Hannaford Brothers, a chain of New England food stores, saved almost dollars 1m ( pounds 671,000) in staff medical costs as a result of using a 'pharmaceutical benefit manager' or PBM - the healthcare business phenomenon that has swept America over the past three years.

A chain of 95 supermarkets with 8,000 insured employees, Hannaford, with typical annual healthcare costs of dollars 2,400 per person - 63 per cent of the national average of dollars 3,800 - is doing quite well. But total healthcare costs of around dollars 19m are still a hefty burden for a company that makes annual profits of only dollars 50m.

Peter Hayes, its benefits director, has several choices if he wants to cut costs. These range from enrolling Hannaford's employees in health maintenance organisations (which limit a patient's choice to a short list of treatment centres), to making employees pay a greater share of the cost, or hiring more contract staff who enjoy no benefits at all.

Employers trying to avoid the latter have turned to aggressive monitoring of their healthcare costs. That is why PBMs, which have the buying clout to negotiate discounted bulk-purchase deals with drug companies, and which monitor and limit the use of expensive branded drugs when cheap generic substitutes are available, have been such a success.

The dollars 900,000 Hannaford saves on drugs alone each year by using Diversified Pharmaceutical Services, the PBM SmithKline has just bought, will be even more important if, as predicted, its annual healthcare bill doubles. This will happen if the Clinton reform package, which obliges businesses to provide minimum levels of insurance cover for all their employees, is adopted in its current form.

PBMs operate a highly sophisticated system. Each Hannaford employee is given a plastic 'drug card', which can be used at any one of 30,000 pharmacies in the DPS network. The card entitles them to pay a flat rate of dollars 9 per brand- name prescription (which usually costs an average of dollars 30), or dollars 3 for a generic substitute.

The purchase is also entered into an online database that both monitors the individual patient's treatment history and compiles vast amounts of statistical data on prescription patterns, drug efficacy and therapy strategies. Diversified then processes the insurance claim for the balance of the price of the drug - or, if it is supplying a 'capitated' service, shoulders the cost itself.

For Hannaford, one major economy is immediate: because DPS orders drugs in huge volumes - dollars 2bn worth for 11 million people last year - it gets a discount of between 10 and 17 per cent off the retail price.

DPS passes along a further discount it receives from manufacturers for including products in its 'voluntary formulary', the list of preferred drugs it recommends to subscribers.

But at least as important for Mr Hayes is the information DPS amasses through its system. Hannaford says it has used 'disease management' data to cut visits to doctors by 20 per cent and hospital emergency rooms by 30 per cent.

The bulk buying and brand-name management the PBMs engage in is squeezing drug manufacturers such as SmithKline, who worry about being excluded from the formularies of the big PBMs.

'There are just too many redundant drugs out there, and too much excess capacity,' says Terry Wills, chief executive of DPS's current parent, United Healthcare.

Having drug manufacturers owning drug dispensers clearly creates potential conflicts of interest. 'Everyone in the industry flinches a little at that,' Mr Wills concedes. However, Chinese walls will exist within the firms, and he doubts SmithKline will provide more than 6 per cent of its formulary.

The big drugmakers are far more interested in the 'outcomes' data the PBMs generate, than the pure distribution side, he argues. Disease-management statistics give them the proof they need to press their arguments about 'total medical cost'.

Drugs are in fact a very cost-effective form of therapy; even a relatively expensive self- injected migraine drug, for example, costs the system considerably less than a day spent in an emergency room.

The industry needs to act quickly, though. The pharmaceuticals share of the healthcare spending pie in the US has fallen to 7 per cent.

The final irony about this young industry is that many believe that few of today's booming benefits managers will exist in a few years. All are likely to be absorbed into health-care 'alliances' and other structures evolving in the US under pressure for insurance reform.

On the other hand enormous opportunities exist for extending this sort of approach to countries that have public healthcare schemes whose costs are escalating rapidly.

'I think it will soon be unimaginable to try to run a single-payer health system without these kinds of controls,' Mr Wills says.

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