Third Party Payment Policies: Design & Impact

T

h e impact of a prescription benefit plan may be greatly affected by the design ofthe payment policies for the plan. Proper design of payment policies is easier if planners understand: (1) the intentions of payment policies, (2) the effects of payment policies, (3) the realities of the pharmaceutical market, (4) the role of nondispensing pharmacy services, and (5) the forces influencing both drug and total program expenditures for a defined population .

Intentions of Payment Policies he payment policies of third party prescription benefit plans should be designed to achieve three specific objectives: payment, propriet y, and purpose. • Payment The payment objective concerns payment of a reasonable reimbursement to the deliverer ofcovered products and service s for the ti me and materials consumed in providing the insured benefit. The word "re imburse" literally means "to pay back for costs incurred or lost time." In the case ofpre scription drug benefits, the pharmacist's compensation should include reimbursement for:

1.penthe cost of the drug product dissed, 2. the costs of operation in delivering th e pre scription , 3. a reasonable return on investment, and 4. the costs of collecting reimbursement for the products and services delivere d to beneficiaries.

This last component of the reimbursement includes consideration of the personnel time and materials required for filing claims, as well as an accounting for the time value of the money that is reimbursed to providers some time after the actual product or service was delivered. Total pharmacist compensation under any third party program, regardless of the reimbursement meth od, should equal or exceed the sum of the four components described above. If the compensation to each pharmacist or pharmacy does not equal or exceed the four components listed above, we may witness the erosion of the current drug distribution system in this country. The present system provides nearly all consumers, whether in

Third Party

PaTITIent Policies:

Design &

urban or rural areas, direct and easy access to a health care professional, the pharmacist, who can safely and effectively serve their medication needs. Pharmacists are the cornerstone of one of the most efficient and effective distribution systems in any industry within our society. There is an inherent social, though intangible, value to the widely distributed network of pharmacists in the United States. Pharmacists provide a check against the human error that can occur in the physician's writing of or the patient's interpretation of a prescription order. Pharmacists also serve consumers as a valuable source of in form ation for deciding whether self-care and self-medication are appropriate or referral to a medical practitioner is necessary. The wide distribution of access to pharmacists will be disrupted if third party payment systems intenti onally-or unintentionally-drive certain providers out of the market by not compensating for their full costs with proper return-on-investment incentives for providing pharmacy services. (In a later section, several unintended or negative effects of third party payment policies will be addressed.) A key requirement for program administrators and sponsors is that program payments be predictable and controllable over a specified period of time. For proper program planning;expenditures under a prescription drug benefits plan must be estimated a year or more in advance. To predict the expenditures for a prescription benefits plan, the number

By Stephen W. Schondelmeyer American Pharmacy, Vol. NS26, No.8, August 1986/582

41

and types of enrollees, and their expected utilization rates for prescription drugs during the period under consideration, have to be estimated. In addition, one must estimate the rate of change or inflation in the costs, as outlined above, of providing such benefits. Third party payment policies for pharmacists may not be effective for controlling inflation in each of the various cost components of the total drug program expenditures.

Propriety. The propriety objective concerns protection against fraud and abuse in the delivery of, and payment for, insured benefits. Only covered program benefits that are delivered to eligible beneficiaries are to be reimbursed. Both beneficiaryand provider-level audits of reimbursement claims may be required to assure that only legitimate claims are paid to either beneficiaries or providers. Audits should be conducted in a manner that does not burden the beneficiary or .the provider with extensive requests for records-without reasonable cause. An effective drug utilization review (DUR) program can greatly reduce the need for provider and beneficiary audits. Inappropriate billings or utilization will show up during routine DUR and can be audited when warranted. Beneficiary fraud or inappropriate benefit utilization may include obtaining products for the use of persons other than an insured person, obtaining products not covered by the plan, obtaining products not needed for achieving the purposes of the plan's coverage (such as abuse of controlled substances), overutilization of covered products, or obtaining products after enrollee eligibility has elapsed. Providers should be encouraged to monitor for beneficiary fraud, and the provider who finds a case ofbeneficiary fraud (such as the use of a benefit card by an ineligible person) should be rewarded. Provider fraud or inappropriate benefit provision may include claims for products and services not actually delivered, claims for persons known not to be

42

covered by the plan, and billing for products, services, or quantities different from those that were actually delivered to the insured.

The real value and benefit of prescription drugs comes from their impact on expenditures for other, more expensive health care services such as physician visits, hospitalizations, • Purpose. Purpose, as an objective surgeries, and nursing home care. for payment policies, focuses on as- In other words, reductions in needed surance that the products and ser- prescription benefits may result in vices delivered achieve the purpose marginal savings in the drug expenfor which they were designed. Third diture budget, but the ripple effect party payment policies may have un- may induce a considerable increase intended impacts on the effective- in the need for other, more expensive ness of the products and services services. Conversely, a modest inthat are delivered. Mere delivery of crease in drug expenditures, if reproducts and services does not as- lated to the delivery of needed and sure that such activities will produce effective products and services, may the desired health outcomes. Regu- actually pay for itself many times lar review of the intended outcomes over through reduced expenditures of insured coverage should be con- for other, more expensive, health serducted to make certain that the pay- vices. Consequently, prescription benement policies have not had unintended repercussions on the effec- fit payment policies should be contiveness of the insured benefits. De- structed so that they achieve the livery of benefits should be both effi- maximum potential reduction in overall program expenditures cient and effective. Payment policies should encourage the use ofthe least through effective use of prescription drugs and pharmacy services. cost products necessary to achieve desired health outcomes. Caution must be exercised, however, in that Effects of Payment Policies products that are not effective for he payment policies of various their intended purpose are of no benprivate and government third efit, no matter how little they cost. party programs have resulted in a Another major consideration, number of rather significant consewith respect to assessing the pur- quences, many of which have been pose and effectiveness of a prescrip- unintended, negative, or both with tion benefit plan, is the fact that ap- respect to pharmacists, pharmacies, propriate drug therapy is one of the and their patrons. Many of these efmost cost-effective forms of therapy fects have resulted from a lack of unknown to modern medicine. Proper derstanding, or even misconcepdrug therapy in the ambulatory set- tions, among program administing can greatly shorten-or elimi- trators, ofthe structure and function nate-the need for hospitalization of the community pharmacy preand can, in some cases, eliminate scription market. the need for surgery.ll! NonSeveral of these unintended or compliance with therapy was found negative effects will be briefly to contribute to 21% of the admis- explored, including: cost shifting, insions to general medical services at effective control of drug product cost two metropolitan hospitals. 12 In par- inflation, biases toward specific ticular, effective use of maintenance types of pharmacy providers, and medications for chronic conditions in economic incentives to dispense inefambulatory patients may reduce the fective, unneeded, or inappropriate number of physician visits and hos- medications. pital admissions necessary for Cost shifting proper control of chronic conditions. 3 Program administrators must ost shifting is the practice of 'keep in mind that prescription benecharging more to one group of customers because another group of fits are only one component of a larger system of health care services. customers is not paying the full price

American Pharmacy, Vol. NS26, No.8, August 1986/583

(cost ) for a particular product or service. A recent nationwide analysis ofcost shifting revealed that privatepay pharmacy patrons of independent community pharmacies pay, on average, an additional $0.48 per prescription due to inadequate third party reimbursement rates.l? This analysis was done using an all-payer rate structure similar to that used by the Health Insurance Association of America and others to estimate cost shifting in hospital prices. 15 -25 The procedure estimated the true average prescription price and the degree to which reimbursement from each type of payer was in excess of, or inadequate with respect to, the calculated all-payer rate. Medicaid programs were found to be the single largest contributor to the private-pay cost shift for prescriptions.P accounting for about 74% of the cost shift effect. Blue

on community pharmacies and a particularly significant economic burden on their private-pay patients. Furthermore, the percentage of private-pay consumers continues to decrease in relation to the percentage of consumers with third prescription coverage. This trend means that as more and more consumers have prescriptions covered by third parties that provide less than adequate reimbursement, there.will be fewer and fewer private-pay consumers who must make up the increasing deficit in reimbursements to the pharmacy through such cost shifting. This cost shift burden is particularly troublesome when one realizes that the elderly (retired, fixed-income consumers) are those most likely to be paying for prescriptions out-of-pocket. Therefore, without proper reimbursement rate policies, the cost

Ineffective control of drug product cost inflation otal program expenditures for prescription drugs under most third party programs increase each year for a number of reasons, including changes in:

1. the number of enrollees, 2. the prescription utilization rate per enrollee, 3. wholesalers' and manufacturers' prices for drug products, 4. pharmacists' dispensing fees, 5.Program physicians' prescribing habits. administrators have tried to use dispensing fee reimbursement policies to control inflation in total prescription drug expenditures. However,this approach is an

Individual ....4 t - - - - - - - A - - - - - - General Population ....4 t - - - - - - - - C - - - - - - Corporations , Pharmacies B • (Pharmacy Customers) D • Business, or Other employers A Individual presents prescription to pharmacy of choice and pays cash for it. S Pharmacy dispenses the prescription and immediately collects the full cash price for the prescription. C Employer pays worker wages or salary. D Worker earns salary or wage.

Private Pay Market Structure

Cross and Blue Shield, PCS, PAID, MediMet, and other government programs accounted for another 22%. These findings suggest that inequitable third party reimbursement rates result in cost shifting, not cost containment. Cost shifting on community pharmacy prescription prices has been shown to be clearly related to inadequate reimbursement rates from government and other third party prescription programs. This "de facto redistribution" of the costs of prescriptions from those persons who are covered by third parties to those persons who pay out-of-pocket represents an "unintended burden"

shifting burden is expected to accelerate exponentially as the proportion of private-pay consumers diminishes, and the elderly will be among those hardest hit by cost shifting.

Recommendation 1:* The Associa tion should oppose any third party reimbursement method that encourages cost shifting to private pay patrons, or any other group of consumers, and the Association should monitor and report to pharmacists and the public press the amount of cost shifting resulting from those third party programs that do contribute to this phenomenon.

American Pharmacy, Vol. NS26, No.8, August 1986/584

ineffective means of controll ing drug program expenditure inflation because control of, or reductions in, the pharmacists' dispensing fee (about 30% of the total drug program's costs) has no relationship to the pharmacists' ability to
* - - - - - -- - - - - - -

In the full text of Schondelmeyer's working paper; this recommendation was preceded by 28 others.

43

I

4...-------1

~ Third Party Claims • , - - - - - - - Administrator

I -------Traditional Health ..... J ~ Insurance Plan - - - - - - -

+1

I+

Participating . . .. . ..----- M Pharmacies N

~

Enrolled Population ...... . . - - - - - E - - - - - - Corporations, Unions (Pharmacy Customers) F -----.~ or Other Purchasers of Health Care

E Employer provides health and prescription benefit plan in lieu of wages or salary. F Worker earns benefit the same as if it were wages or salary. G Corporation or union contracts with insurer to provide employees with a health benefit plan which includes prescription benefits. H Insurer determines benefit premium based on experience (usage) rate and periodically adjusts premium, usually on an annual basis. Insurance company either administers the program directly or contracts with a third party administrator to provide claims processing and provider reimbursement.

J Third party administrator provides a single, periodic statement to the insurance company and is reimbursed for paid claims plus administrative costs. K Participation open to all pharmacies (independent and chain) according to common conditions of participation. Participating pharmacies submit claims for each third party prescription filled. L Third party administrator periodically (usually 15 to 45 days) reimburses pharmacy for eligible claims submitted. M Enrolled individuals present prescription to participating pharmacy of choice and present plan or personal identification number or card. N Participating pharmacies dispense the prescription to enrolled persons and collect the capay fee, if in effect for the enrollee's plan.

Traditional Third Party Market Structure

generic and therapeutic formula ries, copays to control consumer utilization, and DUR-as a means of providing feedback to physicians on their prescribing choices and habits. Inflation in prescription drug product prices at the wholesaler and manufacturer levels has been higher than inflation in general medical expenditures in the past few years (e.g., inflation in 1984 saw prescription drug prices increase at a rate of 9.6%, while hospital rates increased at 8.6%, and physicians' fees increased at 7.2%.26 In contrast, the rate of increase in pharmacists' dispensing fees has been extremely low, compared to all other components of health care. Figure 1 shows total inflation in various health-care costs between 1975 and 1984. Although prescription drug prices kept pace with the overall inflation rate for all medical care items in the Consumer Price

44

Index (CPI) , pharmacists' dispensing fees under Medicaid increased at about half that rate over the same period. Figures 2 and 3 display the average annual percent change in certain health care costs. Particularly notable is the fact that as prescription drug price increases grew, the rate of change in pharmacists' Medicaid dispensing fees was on the decline. Tables 1 and 2 provide supporting data for the increases in CPI for various health care components and for the rate of change in prices, respectively, over the period 19751985. Between 1975 and 1985, Medicaid dispensing fees increased at an average annual rate of only 4.7%, and the annual increase for the years 1984 and 1985 has been declining: rates were 3.5 and 1.9%, respectively. Clearly, the major portion of the increase in community pharmacy prescription drug prices during the

past ten years was not from pharmacists' dispensing fees. In actuality, controls on pharmacists' dispensing fees and attempts at controlling drug product cost reimbursements have squeezed pharmacists' margins on prescriptions, while manufacturers' drug product cost inflation has continued, or even accelerated, and remains unchecked. In other words, squeezing dispensing fees and the drug product cost reimbursement rate provided to pharmacists does not seem to have any impact on control of drug product cost inflation at the manufacturers' level.

Recommendation 2: The Association should explore ways in which a third party plan can control, or at least predict, drug product cost inflation at the manufacturer and wholesaler levels. Recommendation 3: The Association should monitor and analyze the

American Pharmacy, Vol. NS26 , No.8, August 1986/585

1--

Non-participating .. CC - - - - - - Enrolled Population . . . 1 . -----Pharmacies - - - - - - - - DO ---/. -j • (Pharmacy Customers) I

AA

- ---------1

Participating . . . . :---------1·~ Pharmacies

1

I

~ I

L

o

•

SS

I .

~

0

I

P

Corpbra~ions,

Unions or Other Purchasers of Health Care

Pharmacy ... - - - - - - S HMO or PPO . . . . f - - - - - -_ _ Network - - - - - - T-------.... Health Plan - - - - or y hal n

W X

L..--

t

_

d

~ I

......J

U V

...

~ I Pharmacy Services Administrative Organization (PSAO)'

Employer provides health and prescription benefit plan in lieu of wages or salary.

P Worker earns benefit the same as if it were wages or salary. Q Corporation or union contracts with HMO or PPO to provide its employees a health benefit plan which includes prescription benefits and pays the HMO or PPO a predetermined capitation rate.

R HMO or PPO organizes and manages a system of health care providers to deliver the health benefits (including prescriptions) needed by the enrolled population in exchange for the predetermined capitation rate. S HMO or PPOcontracts with a single entity (pharmacy network or chain) to provide the prescription needs of the enrolled population and pays the single entity a predetermined capitation rate. T Pharmacy network or chain organizes and manages a system of pharmacies which deliver the prescription benefits needed by the enrolled population in exchange for the predetermined capitation fee which is deposited in an escrow account for making payments to providers. U Pharmacy network or chain either performs administrative services internally, or contracts with external PSAOs to perform these services. Such services may include claims processing, drug utilization review, cost containment programs , group purchasing, and other such functions. V The PSAO may operate as an internal department of the pharmacy network or chain; or the network or chain may contract with external PSAOs to perform the necessary administrative services. External PSAOs are paid expenses plus an administrative fee. W Participating pharmacy submits claim to PSAO on each prescription filled for enrolled population. X PSAO periodically (usually 15 to 45 days) reimburses pharmacy from capital reserves in the escrow account for each eligible claim submitted. Y Pharmacy networks offer a loosely organized structure for contracting with HMOs, PPOs, or other organized health plans to provide prescription services to enrolled populations and for providing other cooperative services to member pharmacies such as group buying. Chain pharmacies represent a more formal business relationship which is organized under a centralized management and ownership structure and which may contract with HMOs, PPOs, or other organized health plans to provide prescription services to enrolled populations. Z Individual pharmacies pay a membership fee to participate in the pharmacy network and to have access to the cooperative services and privileges of the network, but remain as independently controlled business entities. Individual stores in a chain of pharmacies are owned by and subjected to the control of a single administrative structure. AA Enrolled individuals present prescription to participating pharmacy of choice and present plan or personal identification number or card. BB Participating pharmacies dispense the prescription to enrolled persons and collect a copay fee, if in effect for the enrollee's plan. CC Enrolled persons are limited to participating pharmacies, in other words they lose some freedom of choice, in selecting a pharmacy to dispense prescriptions covered by their health benefit plan. DD Non-participating pharmacies lose that part of their customer base which becomes covered under an enrolled health benefit plan.

_ _ organized Health Plan Market Structure

American Pharmacy, Vol. NS26, No.8, August 1986/586

45

from their price differential, because they are reimbursed for product costs at the EAC established according to average wholesale prices (AWP) for community pharmacies, rather than at their AAC. This Recommendation 4: The Associa- windfall profit may provide sufficient excess revenue so that these tion should monitor and analyze the facilities do not have much incentive factors that lead to prescription price inflation, and the findings, includ- to be particularly efficient. Large chain pharmacies also deing the relative contribution of varirive a significant advantage from ous factors to the total rate of inflation, should be reported to pharma- use ofthe EAC mechanism employed cists, employers, insurers, and other by most third party programs. Large chains are able to purchase products interested parties. at about 20-25% below A~ while Biases toward specific types of independent pharmacies, even with pharmacy providers prudent purchasing procedures, average AACs about 10-15% below hird party program payment policies often result in biases to- AWP. Overall, chain pharmacies avward specific types of pharmacy pro- erage actual product acquisition viders. For example, drug product price differentials that are about 810% of AWP better than the average cost reimburs ement rates are usually set by a single estimated acquis- actual product acquisition price paid by independent and small chain ition cost (EAC) method, so that all pharmacies. 28 ph armacy providers receive the There is a fundamental difference, same amount of reimbursement for however, between the price differenthe same prescription product, even tials achieved by large chains and though the actual acquisition cost (AAC) for such products are known those available to institutions such as HMOs, hospitals, and other select to differ quite considerably among pharmacy provider types. Hospital s, providers. Price differentials to chains are largely a function of volHMOs, and other select providers (often not-for-profit institutions) re- ume. purchasing and direct-fromceive prescription drugs at manufacturer purchases, with wholesale and manufacturer prices warehousing in the chains' own dissubstantially below the prices that tribution centers. In contrast, the community pharmacies, either price differentials to HMOs and hoschain or independent, must pay for pitals appear to result more from a the same products. desire to acquire sales in these inPrice differentials from manufac- stitutions as a form ofproduct promoturers and wholesalers to this select . tion. This institutionalized form of group of provider types may include loss-leader promotion creates an unproducts sold for as little as 10o/0-0r fair advantage in favor of such even 1o/0-0fthe product cost to other facilities. community pharmacy providers. 2 7 Although government and private When these institutions dispense third party programs may not intend such medications to third party pa- so, their standardized reimbursetients on an outpatient basis, they ment policies create windfall profits are in competition with community for large institutional pharmacies pharmacies. The competitive advan- and, to a lesser degree, for chain tage realized here has nothing to do pharmacies. The other effect of such with either more efficient or more policies is another source of effective operation and, in fact, may economic pressure and unfair comencourage waste and poor use of re- petition for many ofthe stand-alone, sources by such facilities. community pharmacies in the These favored institutions may United States. The business failure realize a significant windfall profit rate and theac quisition rate of indefactors that lead to increases in third party drug program expenditures, and the findings should be reported to pharmacists, employers, insurers, and other interested parties.

48

pendent pharmacies by large corporate organizations, such as pharmacy, department, and grocery chains, has accelerated in recent years. Differential product pricing and standardized product cost third party reimbursement rates are, in part, responsible for this trend. Government and private third party administrators, as well as pharmaceutical manufacturers, must examine the impact of the disappearance of the community pharmacy. Does society really benefit by the elimination of these small businesses dedicated to the delivery ofpersonalized health care services? .

Recommendation 5: The Association should oppose reimbursement and compensation plans that are unduly biased toward a particular type of pharmacy provider. II Recommendation 6: The Association should use all legal means to oppose unfair competition created by differential product pricing at the pharmaceutical manufacturer level. Economic incentive to dispense nother unintended effect of third party prescription reimbursement policies relates to the economic incentive to dispense. Incentives to dispense that may adversely affect drug program costs include the incentive to dispense:

1.propriate unnecessary, ineffective, or inapinedications; 2. high-cost vs. low-cost multisource products; and 3. prescription medications instead of equally effective nonprescription medications. Pharmacists' reimbursement from third parties has traditionally been tied to the delivery of the product. There are circumstances, however, when pharmacists should not dispense or refill a prescription-for the patient's own good, such as:

American Pharmacy, Vol. NS26, No.8, August 1986/589

1.cations therapeutic duplication of medidue to prescriptions from one or more physicians,

2. significant drug interactions, 3. prescription of drugs to which the patient has an allergy or sensitivity,

4. 5. the prescribed medication has been shown to be ineffective. development of serious adverse effects from medication use, or

29

Pharmacists usually have to call the prescribing physician and recommend some alternative to resolve these problems. This often requires significantly more time than the dispensing of a prescription, and yet there is no compensation from most third party programs for the pharmacist's efforts on the patient's behalf. A suitable standard form for reporting certain non-dispensing services that benefit both the patient and the third party program should be developed by pharmacists and utilized by third party plans. Once such a form is developed, the cost impact of this type of service can be monitored in a pilot program until there is definitive evidence of the economic value of the service.

• Recommendation 7: The Association should work with pharmacy practitioners and third party insurers to develop one or more model benefit plans to cover,and suitable forms for reporting, the pharmacist's interventions in changing a prescription order, even when a prescription is not dispensed. Pharmacists are in the best position of any health professional to judge the price and quality differences among multisource drug products. However, third party reimbursement policies often penalize the pharmacist for dispensing a less expensive, therapeutically equivalent product. It is therefore no surprise to find that the rate of generic

dispensing is far below its potential. In part, the lower rate of generic use is due to third party reimbursement policies that create economic disincentives for the pharmacist who could, with proper incentives, reduce drug product costs to the program. Some third party programs have begun to experiment with economic incentive policies that encourage pharmacists to choose less expensive products, when available.

Recommendation 8: The Association should work with pharmacy practitioners and third party insurers to develop one or more model benefit plans with incentives for the pharmacist to select effective and economical drug products when filling third party prescriptions for multisource drug entities. Pharmacists are often asked by patients to recommend a course of action for a specific complaint or ailment. When medical advice and treatment are warranted, pharmacists should, and do, refer patients to their physician. However, in many cases, the problem is minor and amenable to self-treatment by nonprescription medications. The pharmacist could recommend products that would effectively resolve the patient's symptoms, but patients know that such self-medications, even if effective, are not covered by their drug benefit plan. Therefore, the patient may make a physician visit which, in turn, frequently results in a medication being prescribed. Prescription medications usually cost more than self-medications for the same complaint, and the third party plan incurs the cost of an additional, perhaps unneeded, physician visit. Pharmacists, too, may be hesitant to recommend nonprescription medications to enrolled patients because their health insurance plan does not provide compensation for the pharmacist, either. This disincentive is similar to the reimbursement policies that required inpatient status before certain diagnostic and surgical procedures could be covered by a health benefit plan. Many third party health planners

American Pharmacy, Vol. NS26, No.8, August 1986/590

are beginning to realize the cost-saving impact of providing coverage for certain outpatient diagnostic and surgical procedures. Similarly, coverage of certain nonprescription medications in a drug benefit plan could cut not only drug product costs, but also the physician visit utilization rate and costs. Pharmacists must have some incentive other than prescription dispensing fees to encourage the use of nonprescription medications, when appropriate. Again, pharmacists must devise a suitable form for documenting such events, and they must test the cost impact of recommending alternative nonprescription products when appropriate. Third party programs should work with pharmacy to establish and evaluate such incentives to reduce drug benefit and other program costs. Especially as more--and more effective--medications are being switched from prescription to nonprescription status, the provision of nonprescription drugs in drug ben efit programs holds promise for significant savings in the costs of the overall health benefit program, and for the total cost of health care to society. 30

Recommendation 9: The Association should work with pharmacy practitioners and third party insurers to develop one or more model benefit plans for the coverage ofnonprescription medications, along with incentives for pharmacists to recommend such products when appropriate. • Recommendation 10: The Association should conduot a study to estimate the cost savings that could be achieved through pharmacists' counseling of patients on the appropriate use of nonprescription medications. Market Realities here are certain realities in the pharmaceutical marketplace that must be recognized and considered in designing payment policies for drug benefit plans. Such realities include:

49

resulting complexity of third party 1.partyadministrative costs of third and prepaid health plans has led higher administrative costs as comprescription programs, pared with the simpler private-pay market. Increased administrative 2. differential pricing structures, costs derive from time spent in: 3. different provider types, 1.partygathering and verifying third plan coverage information; 4. different levels of service, reading and disseminating plan 5. Medicaid and the Office of In- 2. spector General DIG) report, and information other pharmacy employees; 6. the role of non-dispensing phar- 3. explaining plan coverage and macy services. Most of these realities have been mentioned previ- exclusions recipients; ously, in context, but deserve further description and discussion here. 4. contacting physicians' offices about quantity limitations, non-cov-

6.

contacting program offices regarding procedural questions, eligibility, overdue payments, and disputed claims;

to

to

to

Administrative costs of third party prescription programs he market for prescription services has changed dramatically, as depicted in Figures 4-6. The

T

ered prescribing, claims;

and

5.

rejected

calling plans for prior authorizations;

7. 8. completion of a separate claims form for each prescription dispensed; 9. posting of paid claims and resolution of rejected claims; and 10. many other miscellaneous activities.P! review of contracts for each of the many plans at a given pharmacy;

In 1979, APhA and the National Association of Chain Drug Stores (NACDS) commissioned Health Information Designs, Inc., to identify the range of administrative costs uniquely attributable to participation

210 195 180.4

180 165 150 135 0::

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+J

120 105

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oS

..c a> ol0-

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92.7 90 75 60 45 30 15 0 AIICPI Items

Medical Care Items

Hospital Room

Physician 's Services

Dentist's Services

PrescripPharmacist's tion Drugs Fees - Medicaid

Inflation Rate of the Consumer Price Index for Selected Health Care Categories: 1975-1984

50

American Pharmacy, Vol. NS26 , No.8, August 1986/591

in third party programs. Sixteen different third party administrative functions were identified at all 96 pharmacies surveyed-in five different geographic areas. There was a normal distribution of administrative costs: most pharmacies fell in the range of $0.51-$0.70 for added costs per claim processed. 31 This cost-from 1979-must be updated using the inflation rate between 1979 and 1984; it can be conservatively estimated (with the inflation of the Consumer Price Index, CPI, for all items) at a range between $0.74 and $1.01, in 1984 dollars. Neither Medicaid nor any other third party programs formally recognize this added cost to pharmacies.

Consequently, the administrative costs go uncompensated and put extra pressure on pharmacists' prescription drug gross margin and net profit. Estimates of the lost value from uncompensated administrative costs due to 1982 Medicaid claims alone range from $113-$133 million (Table 3). A second major administrative cost incurred by pharmacists who participate in third party programs arise from the time value of money lost while waiting for third party reimbursement. The time value of prescription charges is particularly important to the pharmacy, since about 70% or more of the amount due represents product costs. Unpaid

Average Annual Percent Change 15.0 in CPI

Average Annual Percent Change 15.0 in CPI

14.0

14.0

13.0

13.0 12.0

12.0 11.0

11.0

10.0

10.0

9.0

9.0

8.0

8.0

7.0

7.0

6.0

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5.0

5.0

4.0

4.0

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product costs result in increased drug inventory carrying costs to the pharmacy. Few other health providers have charges that include such a high percentage of product costs. With private-pay cash transactions, the pharmacist is paid for the prescription at the time ofproduct sale. Third party programs used to have difficulty providing payment to pharmacies within a 60-90-day period, because of the sheer volume of prescription claims in relation to the volume of other types of third party claims processed. Today, most third parties have achieved a pharmacy payment system with a 30-day turnaround, although there are still notable programs that stand as annoy-

Pharmacist's Fees Under Medicaid

0.0 L-~_.....L---=~~~~~",,:--~--=-=-~-=--~ 75

Average Annual Percent Change in Consumer Price Index for Selected Health Care Categories: 1975 to 1984

American Pharmacy, Vol. NS26, No.8, August 1986/592

~ All Medical Items

1.0 0.0 75

76

Average Annual Percent Change in Consumer Price Index for Selected Health Care Categories: 1975 to 1984

51

ing exceptions. This 30-day carrying cost for unpaid claims is another uncompensated cost of operation attributable to third party programs. The time value of money for smalland moderate-sized businesses can range from 10%-22% or more, depending on the source of the funds. The lost value from 1982 Medicaid claims alone is (conservatively) estimated at $13-$21 million-or more (Table 1). Pharmacy third party claims processing and administration is a very time-consuming and paper-laden process. For example, pharmacy claims accounted for 57.6% of Medicaid claims processed .in Indiana in 1984 (Table 4) but only 6.9% of the dollar value of claims. Pharmacists must process, on average, 92.6 claims to collect $1,000 in reimbursements, while nursing homes and hospitals require only 1.5 and 2.7 claims, respectively, to collect $1,000 in reimbursements. The low dollar value and high claims volume of prescription benefits make this benefit the most expensive health benefit to administer, for both the insurer and the provider. This distinction requires special consideration and compensation for administrative overhead costs for all parties involved with the processing ofthese claims. The use of computers to automate the claims processing function can greatly improve efficiency in the administration of a pharmacy benefit plan. Pharmacy, the third party programs, and pharmacy computer software and hardware firms need to cooperate to facilitate the development of standard data file formats and data collection and transfer methods that can improve the efficiency of this process.

• Recommendation 11: The Association should work with pharmacy practitioners and third party programs to identify and implement measures that will ease the administrative burden of claims processing or the financial burden of delayed claims payment.

52

Functions of Pharmacy Networks

A. Network Administration Functions 1. Network Incorporation 2. 3. 4. 5. 6. 7. 8. 9.

Various Legal Services and Counsel Membership Services Administration Member Communications Relationships with Other Networks Network staffing Network Planning and Management Management Information Systems and Database Management Legislative and Regulatory Affairs

B. Purchasing Functions 1. 2. 3. 4. 5. 6.

Volume Buying Plans Bid Purchasing Plans Standard Generic Line Plans House Brand Vitamins and Other Nonprescription Drugs Prime Vendor Arrangements Product Distribution and Warehousing

C. Benefit Contracting Functions 1. contract Negotiation with HMO or PPO Groups 2. 3. 4. 5. 6. 7. 8. 9.

General HMO/PPO Contract Management and Administration Benefit Packaging and Benefit Design Claims Processing and Pharmacy Reimbursement Paperless Claim Submission for All Third Party Claims Enrollee Eligibility Verification Actuarial Determinations of Benefit Utilization Benefit Pricing and Rate Setting Drug Utilization Review a. By drug , physician, patient, plan, HMO, areawide, nationwide b. Cost and quality control standards 10. Cost Containment Management for Pharmacy Benefit Plan a. Generic Incentives b. Formulary Development and Maintenance c. Non-Prescription Benefit Option d. Copayment Provisions e. Prior Authorization Programs 11. Peer Review of Pharmacy Reimbursement Levels

D. Marketing Functions 1. 2. 3. 4. 5. 6. 7. 8. 9.

Network Image Among Pharmacy Providers Network Image Among Other Providers Market Awareness and Opportunity Identification Network Opportunity Assessment Market Research and Feedback for the Network Network Identity Mechan isms Coordinated Member Marketing Campaigns Promotional Media Services (Direct Mail and Print Media) Co-op Advertising Program

American Pharmacy, Vol. NS26, No.8, August 1986/593

ese

State

1982

1983

1984

1985

Alabama Alaska Arizona' Arkansas Californi Colorado Connecticut Delaware;;* DC Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky'" Louisiana Maine Maryland Mass. Michigan Minnesota Mississippi Missouri Montana Nebraska' Nevada New Harnp, New Jersey New Me~i~o " New York''' N. Carolina North IDakotcj Ohio Oklahoma

2.75

2.75

2.75

3.00

3.58 3.60 3.40 3.11 3.20 3.27 3.33 3.15 3.22 3.00* 3.00 2.50 3.53 2.92 * 2.35 3.67 3.20 3.25 2.85 2.6 5 3.15* 3.17 2.50 2.88 * 3.07* 3.78 2.70 2.6 5* 3.15 2.60 3.00 3.57 2.60 3.55 0 3.11 2.25 2.90 2.53 3.00 3.25 3.30* 3.05 2.50 2.85 3.07* 2.75 3.40

3.87 3.60 3.40 3.11 3.20 3.95 3.33 3.61 3.22 3.00* 2.78 2.50 3.74 2.92* 2.35 3.67 3.20 3.25 2.92 2.65 3.15* 3.17 2.50 2.88* 3.17* 3.78 2.70 2.88* 3.15 2.60 3.22 3.75 2.60 3.550 3.27 2.50 3.00 3.03 3.00 3.25 0 3.63* 2.50 2.50 2.85 3.18* 2.75 3.40

3.87 3.71 3.40 3.1 1 3.20 3.95 3.33 3.61 2.90 3.00 * 3.30 2.50 3.78 2.92* 3.25 3.67 3.20 3.45 3.09 2.75 3.15* 3.33 2.50 2.88* 3.44* 3.78 2.85 3.27* 3.65 2.60 3.36 3.75 2.60 3 .55 0 3.40 2.75 3.10 "3 .03 3.25 3.25 0 3.63 * 3.25 2.50 2.85 3.35* 2.75 3.50

3.87 3.89 3.40 3.11 3.20 3.95 3.33 3.61 2.90 3.00* 3.46 3.00 3.74 3.21* 3.25 3.67 3.20 3.45 3.09 3.00 3.90* 3.33 2.50 2.88 * 3.52 * 3.78 2.85 3.39* 3.65 2.60 3.36 3.75 2.60 3.55 0 3.57 2.75 3.1 0 3.40 3.25 3.25 0 3.29* 3.25 2.50 2.85 3.35* 2.75 S.50

3.10

3.21

3.27

-3.07 !1i;L,', 3:06i'

Tenness Texas Utah Vermont Virgin' Washing W. Virgin'

3.19 3.60 \, 3.40 2.77 " 3:03' 3.02 2.75", 2:93 3.22 · 2:78* 3.00 2.50 3.35 2.66* 2.35 3.67 2.70 2.95 2.90 2.65 3.38* 2.94 2.50 2.88 * 2.97 * 3.78 2.70 2.65* 3.15 2.60 2.80 3.57 2.60 3.55 0 3.11 2.25 2.90 2.53 2.75 2.75 3.20* 3.05 2.15 2.85 2.85* 2.75

WisCofj'si

3~25 ,

ttl

2.90' 2.52 " 2'~ 75\1;:

2.59 2 ~"Z5:

2'.35

<",

,i'1 •"Z.s ,>

1.50

:1."Z5 1.75

Oregd~ " " > '

Pennsylvania RhodeHsland S. Carolina ' So~th,}~ako

,;,:;,

Wyoming hI \};"

-~f

3.04

periods during which there was no

>'1! American Pharmacy, Vol. NS26, No.8, August 1986/594

53'

54

American Pharmacy, Vol. NS26, No.8, August 1986/595

Differential pricing and diversion

spawned a diversionary drug distribution system. Drug diversion allows a number of "middlemen" to profit from the reselling of drug products purchased for specific institutions, but which are diverted to other brokers, wholesalers, or retail outlets. A Congressional report states that the "diversion market prevents effective control over, or even knowledge of, the true source of merchandise. American consumers cannot purchase prescription drugs with the certainty that the products are

safe and effective...the integrity of the U.S. distribution system is insufficient to prevent the introduction of substandard, ineffective or counterfeit pharmaceuticals."32 Differential pricing structures are a divisive force in pharmacy and appear to be causing more harm than good to the overall drug distribution system. 33,34 True competition comes from giving all actors in a market similar access to goods and services and allowing consumers to make choices based on preferences and

rug diversion and profiteering have emerged as a consequence of the differential pricing policies of major pharmaceutical companies. Pharmaceutical manufacturers claim that differential prices, which may be as little as 100/~r even 10/0-0f AWP for community pharmacies, are offered to hospitals in consideration of the not-for-profit status they hold. The widely variant pricing structures seen today may well have originated for those reasons, but in practice the pricing Sample Pharmacy Services Listand structures today have a different apReimbursement Scheculeplication and impact on the marReimbursementb ketplace. Product or Service Type Schedule HMOs and hospitals are becomProduct Costs ing much more involved in the delivCost per AWP Products <$20.00 ery of prescription services to outpaCost per AWP Products ~$20.00 tient, community-based clients. This +10% new venture for HMOs and hospitals places them in direct competition Dispensing Services with community chain and indepen- . 1.0 (DF) Dispensing multi-unit outpatient prescription dent pharmacies. The great differenDF+0.3 Dispensing extemp. compounded prescriptions tial in prices, in this context, beDF+0.3 Dispensing controlled substances DF+O.4 Dispensing specially prepared injections comes a source of unfair competition DF+0.6 Dispensing chemotherapy injections due to the favored drug purchasing DF+0.1 Dispensing unit dose solids/liquids status of some institutions with reDF+O.O Dispensing bulk medication spect to others. Furthermore, tesDF+0.1 Dispensing PRN medication timony from a pharmacist at recent DF+0.1 Dispensing bulk medication supplies to nursing unit Congressional hearings on drug di10.0 (IVDF) Dispensing stock IV solutions version and price differentials stated IVDF+1.0 Dispensing IV admixtures that "Contrary to popular belief, per additive most drug companies do not offer 12.0 (TPNDF) Dispensing standard TPN solutions TPNDF+2.0 lower institutional prices for the Dispensing specialized TPN solutions per additive 'public good' or only to charitable orDispensing over the counter medications (in lieu ganizations. To meet competition, 0.8 (OTCDF) of Rx) most drug manufacturers bid the DF+0.2 Selection and dispensing of a generic product exact same low price to both forDF+0.1 Bulk to unit dose packaging profit and nonprofit hospitals.">? 0.5 Routine delivery of specific product or service The magnitude of the price differen3.0 Emergency delivery of specific product or service tials and the lack of discretion in choosing the type of institutions to Administrative Services be afforded preferential pricing indi0.3 Third party prescription claim processing 1.5 cate that the low prices are being Prior authorization third party prescription 0.5 Clarification of prescription order with MD or RN offered to meet competition, not as 0.5 Non-formulary order clarification a public service. 0.3 Credit unused prescription medications Buying groups (among hospitals and other types of institutions) have Clinical Services sprung up around the country over 0.4 Medication counseling w/Rxe the past ten years to further enhance 1.5 Medication counseling w /0 Rxe the buying power of hospitals, 1.5 Complete patient profile, initial interview HMOs, and other participants. The 0.6 Medication profile only, initial interview enormous price advantages derived 0.2 Profile updating and monitoring (per visit) 1.5 through buying groups have Direct patient care servlces"

American Pharmacy, Vol. NS26, No.8, August 1986/596

55

value received for the price paid. Competition stimulated by differential prices, if there is any, is attracting fast-profit seekers who do not appear to hold the interests of patients or the integrity of the U.S. health care system in very high esteem. Recommendation 12: The Association should use all legal means to oppose differential pricing of drug products and to oppose drug diversion in any form.

Differences in pharmacy provider types arious types of pharmacy providers exist in the U.S. retail drug distribution market. Singleunit community pharmacies, affectionately known to many as the "corner drugstore," represent about 66% of all community pharmacy outlets in the United States.i" Multiunit community pharmacies control the remaining 34% of the outlets. Pharmacy chains (multi-unit corporations) may differ substantially, ranging from corporations with only four or five pharmacies to corporations with more than 2,000 outlets. Multi-unit pharmacies may be integrated with department or grocery stores; they may be discountoriented drug and general merchandise stores; or they may be a part of a franchise of professional prescription shops. One should be careful not to stereotype all multi-unit pharmacy corporations. Multi-unit pharmacies do have in common, though, a greater opportunity to achieve economy-of-scale efficiencies that are difficult for the stand-alone single pharmacy to match. Centralized management, administration, purchasing, and marketing make it easier for the multi-unit pharmacy to hire and use highly qualified specialists in these areas of management. Community pharmacies may also differ widely according to the marketing orientation and market position they hold within a geographic area. Some chains have many pharmacies, but are spread across a wide area. Other chains may have positioned themselves so as to ac-

56

quire significant market shares in certain metropolitan areas through a variety of means including:

1. building new outlets, 2. acquiring existing outlets, and 3. pricing wars to achieve target market penetrations. This last practice-price wars to drive out the competition and gain substantial market shares-has surfaced within pharmacy in recent years. Low prices in the short run should

not be confused with true price competition. In fact, such predatory pricing, as observed in other markets such as the retail grocery industry, may actually be anticompetitive in the long run. 36 Some multi-unit pharmacies view the pharmacy department merely as a means for building traffic. Prescription prices are set to serve as loss leaders intended to attract customers into the pharmacy -for purchasing other items that produce a better margin or net profit. Alcontinued on page 63

Services List and Reimbursement Scheoule'{continued) Product or Service Type

Indirect patient care servicesDrug information request from providers Drug information request from patients Drug information response, verbal Drug information response, written Drug information literature review, verbal report Drug information literature review, written report Patient rounds on ward or unit Pharmacokinetic dosing consultation Pharmacokinetic dosage monitoring (per level) Quality Assurance and Educational Services Checking emergency boxes Inservice education program (% hour) Nursing station quality assurance inspection

Reimbursementb Schedule

0.7

0.8 0.8 2.0 4.0 9.0 14.0 10.0

5.0 10.0 1.5/box

8.0 4.0

a

This sample reimbursement structure is based in part on a relative value scale presented in outline by Levin, R.H., "Patient-care Unit System for Measuring Clinical and Distributive Pharmacy Workload," Am Journal Hospital Pharmacy 37(1 ):53-61, January, 1980

b

Reimbursement schedules are based on dispensing fees (DFs) which are set in proportion to the time and resources consumed in delivering the good or service. The DF is the basic dispensing fee for providing a typical multi-unit outpatient prescription. Other dispensing fees include the IVDF (IV admixtures=10DF), TPNDF (total parenteral nutrition=12DF), and the OTCDF (over-the-counter meds=0.8DF).

C

" Medication counseling " in this context implies a formal service which goes beyond the normal information provided at the time of dispensing. For more detail on a formal medication counseling program see Schondelmeyer, S.W. and C.E. Trinca, "Consumer Demand for A Pharmacist-Conducted Prescription Counseling Service," American Pharmacy NS23(6):321-324, June 1983.

d

" Direct Patient Care" is a patient encounter in which the pharmacist has a provider's expressed, delegated authority and in which the pharmacist exercises independent judgment in the performance of a specific function. Such functions may include, but are not limited to: (a) managing a patient's medications or regimens; (b) initiating or changing a patient 's medications or regimens; (c) administering parenteral medications; and (d) delegated authority for determining the appropriateness of refilling a prescription.

e

" Indirect Patient Care" is a patient encounter in which the pharmacist converses with the patient regarding a medication, medication history, medication allergies, or other response to drug therapy. Such encounters may include, but are not limited to: (a) observing or assessing an adverse reaction; (b) answering a patient-initiated drug question; (c) monitoring or assessing the effectiveness of drug therapy; and (d) clarifying specific drug information on which the patient is unclear.

American Pharmacy, Vol. NS26, No.8, August 1986/597

continued from page 56

though this approach is viable for a certain segment of the multi-unit pharmacies, not all pharmacies derive equal or significant benefits from it. Again, the lower prices offered through these outlets should not be confused with competition, and they should not be allowed to destroy, through unfair price competition, the level and quality of services provided to pharmacy patients at other pharmacy outlets. Third party contracts awarded exclusively to certain outlets, solely on the basis of price for product without regard to level and quality of services, will soon relegate health plan enrollees to sale as a commodity to the lowest bidder, rather than preserving their

dignity as persons being served by a caring health service delivery system. Contracting for prescription medications based on loss leader pricing for building traffic in the pharmacy, or for any other reason, should be avoided as a strategy for reducing program costs. As third party programs grow and begin to negotiate prescription benefits programsfor large blocks of the market in a single contract, they should consider the long-term quality, viability, and accessibility of pharmacy services in awarding of contracts and in setting program and payment policies.

Differences in level of service

P

h armacies also differ widely in the level and types of services

offered. Some pharmacies focus on customer satisfaction and service; others target their marketing through price competition by providing the bare minimum in service to hold down prices or maximize profit. It is extremely important for third party administrators to realize that the current third party reimbursement policies guarantee only the minimum level of service from the pharmacy, namely, dispensing ofthe product with proper labeling and directions. Certain pharmacies provide other pharmacy services, such as delivery, 24-hour emergency coverage, extensive patient profiles and medication histories, or indepth patient education and counseling, but these services are provided

_ _ Consumer Price Index for Selected Health Care Categories: 1975 to 1984 Consumer Price Index CPI Category All CPlltems All Medical Items Hospital Room Physician's Services Dentist's Services Prescription Drugs Pharmacist's Fees Under Medicaid

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

161.2 168.6 236.1 169.4 161.9 109.3

170.2 184.7 268.6 188.5 172.2 115.2

181.5 202.4 299.5 206.0 185.1 122.1

195.4 219.4 332.4 223.1 198.1 131.6

217.4 239.7 370.3 243.6 214.8 141.8

246.8 265.9 418.9 269.3 240.2 154.8

272.4 294 .5 481.1 299.0 263.3 172.5

289.1 328.7 556.7 327.1 283.6 192.7

298.4 357.3 619.7 352.3 302.7 213.8

310.7 378.0 662.0 377.1 326.2 233.5

109.3

115.2

131.2

134.4

140.8

150.9

156.2

162.1

165.3

171.1

a Pharmacists'

fees under Medicaid were converted to a CPI-type index by setting the fee for 1975 ($2.05) equal to the 1975 CPI for prescription drugs.

--

Average Annual Percent Change in Consumer Price Index for Selected Health Care Categories: 1975 to 1984 Average Annual Percent Change in Consumer Price Index

CPI Category

75-76

76-77

77-78

78-79

79-80

80-81

81-82

82-83

All CPlltems All Medical Items Hospital Room Physician's Services Dentist's Services Prescription Drugs Pharmacist's Fees Under Medicaid

5.8 9.5 13.8 11.3 6.4 5.4

6.5 9.6 11.5 9.3 7.5 6.0

7.7 8.4 11.0 8.3 7.0 7.8

11.3 9.3 11.4 9.2 8.4 7.8

13.5 10.9 13.1 10.6 11.8 9.2

10.4 10.8 14.8 11.0 9.6 11.4

6.1 11.6 15.7 9.4 7.7 11.7

3.2 8.7 11.3 7.7 6.7 10.9

5.4

13.9

2.4

4.8

7.2

3.5

3.1

2.0

-

83-84

75-84

4.0 6.1 . 8.6 7.2 7.8 9.6

92.7 124.2 180.4 122.6 101.5 113.6

3.5

56.6

a Pharmacists'

fees under Medicaid were converted to a CPI-type index by setting the fee for 1975 ($2.05) equal to the 1975 CPI for prescription drugs.

.

.

.::

': .

...

..

'

.

-

American Pharmacy, Vol. NS26, No.8, August 1986/604

' . .

.'.

"..

..

~.

63

at the pharmacist's discretion, and he may charge the patient for those services that exceed the basic dispensing act. Pharmacists and third party programs should experiment with reimbursement methods and explore the cost impact of covering certain additional pharmacy services because they may help in containing costs by obviating the need for other, more costly services. Pharmacists may provide counseling for a newly diagnosed patient with diabetes or hypertension based on their use of the many self-care products available to assist in monitoring these chronic diseases. Delivery services may be critical to the elderly or handicapped person whose mobility is limited. Patient medication profiles can serve as a "point of purchase" DUR screening device for the detection of a variety ofmedication problems, such as drug interactions or duplication of medication types. Third party programs that limit pharmacy reimbursement to dispensing services may be wasting a valuable health care resource that can have a significant impact on both drug and overall program expenditures. Pharmacists need to identify the ron range of services that may be offered through a community pharmacy, and they should define minimum standards for the performance of each service identi fied. Medicaid and the OIG report ederal financing of health care for the elderly increased substantially in 1960 with the advent of the KeIT-Mills program; that program was broadened considerably by the introduction of Medicaid in 1965. Health care services under Medicaid are offered to low-income elderly and welfare recipients who are medically needy. In 1983, 13,678,801 of the 19,905,688 Medicaid recipients (68.7%) used the drug benefit program. Vendor drug payments accounted for $1.77 billion (5.5%) of all vendor medical payments-$32.2 billion .27 -37 Medicaid prescriptions constituted nearly 11.6% of all prescrip-

64

tions dispensed in community phar- the practice of using AWP as the means for estimating acquisition cost. macies in 1983. The Medicaid program, in aggre- The DIG's study, findings, and conclugate, is the single largest purchaser sions deserve comment and critique. In selecting the 60 pharmacies to of community pharmacy prescriptions in the United States. Con- be audited in the state of Arkansas, sequently, the program and reim- the OIG considered Medicaid volume, type of ownership, geographic locabursement policies of Medicaid have a major impact on community phar- tion in the state, and size of town. macy and on the actions ofother third Similar criteria were considered in' party providers. Medicaid's drug prog- choosing 48 other providers across five states for the second phase of the ram is often emulated by other third study. The DIG's first observation was party providers, despite its unique that most states use AWP as their client base, the inadequacies of its drug claims management system, means for determining EAC. Second, the OIG determined that-pharmacies and the poor to nonexistent DUR purchase products at an actual price program. A number of significant problems . averaging about 15% below AWP. Based on these observations, the exist with the current Medicaid drug OIG recommended that AWP pricing benefit program, including: no longer be used by states as a basis the inflexibility of the fixed fee-for- for estimating drug product costs. OIG estimated that this change in service system, method for determining EAC could the inability of the reimburse- produce an annual savings of $128 ment system to account for differing million in 1982. The OIG report suggests that disproduct costs at various pharmacies, counts are available to all retail phara lack of compensation for the in- macies, and therefore concludes that creased administrative costs of proces- the same rate of discount from AWP can be applied across the board to all sing third party prescriptions, types of pharmacies. A 1984 study of inadequate fee-for-service reim- 211 randomly selected Indiana pharbursement for high-cost prescription macies found, indeed, that pharmacists' AACs are significantly less than items, and Awp'38 However, there was a clear tying of private third party drug difference in AACs between chains and independents. Chains averaged program fee structures to the Medicaid rate, despite differences in about 22.4% off of A~ while indethe benefits offered and in the client pendents averaged only 14.5% off of AWP. bases. Pharmacists do not argue that The federal government, in its exer- their actual net cost for the product cise of fiscal responsibility with re- is lower than AWP. The reason for spect to the administration of the difference from AWP, however, is Medicaid funds, has discovered appar- a function of earned discounts that ent inconsistencies in the way many pharmacists argue they are entitled states set their reimbursement policy to as prudent and efficient business of prescription drug benefits. The Of- persons. fice of Audit in the Office of Inspector There are several omissions from General (OIG)has conducted an audit the OIG report and analysis. First , of the prescription product purchases the DIG does not take issue with the concept of Medicaid paying the drug and Medicaid reimbursements of a ingredient cost plus reasonable dissmall sample of pharmacies." The OIG determined that certain dis- pensing fees to cover overheld and counts obtained by community phar- profits. However, the dispensing fees macies are not being passed on to the provided under Medicaid, in general, are not adequate as evidenced state and federal governments, due to

1. 2.

3. 4.

5.

American Pharmacy, Vol. NS26, No.8, August 1986/605

by the nationwide study of cost shifting cited earlier.P The study demonstrated that, in fact, inadequate Medicaid fees were responsible for about three-fourths of all cost shifting to private-pay customers; this portion adds about $0.36 to everyprivate-pay prescription dispensed in the United States. Further evidence of the inadequacy of Medicaid fees can be found in Table 5. Only 11 of 48 participating states increased the dispensing fee during 1985, and the average increase was a mere 2.0%. Nearly three-fourths (31 of 48) of the states with Medicaid coverage of prescriptions have frozen pharmacists' dispensing fees in at least four of the last ten years. Medicaid dispensing fees increased only 56.6% between 1975 and 1984. During this same period, the CPI for all items increased 92.7% and the CPI for all medical items advanced 124.2%. These meager changes in Medicaid dispensing fees over the past decade stand in support of the premise that pharmacists' dispens-

ing fees have probably been the most stable and controlled health care cost for Medicaid programs. Also, however, this poor track record of keeping up with inflation serves to document the growing inadequacy of Medicaid dispensing fees. Another inadequacy with respect to Medicaid reimbursement for prescriptions is the failure of Medicaid to acknowledge, or compensate the pharmacist for, the high cost of claims processing for the rather large volume of low-dollar claims. Table 3 estimates the cost of processing these claims, based on a conservative figure of $0.68 per prescription, and shows that the uncompensated claims processing costs to pharmacists for 1982 Medicaid prescriptions amounted to about $113 million. In addition, pharmacists were uncompensated for the time value of Medicaid accounts receivables while awaiting payments. Again, using a conservative estimate from Table 3, this factor accounted for about $13.5 million. Combining these two uncompen-

sated costs, the total amount that Medicaid failed to reimburse to pharmacists in 1982 was nearly $127 million. It is no coincidence that this figure almost exactly equals the total amount that OIG felt it could save by discounting AWP prices to account for AAC.The only reason pharmacists have tolerated the inadequate dispensing fees and uncompensated administrative costs over the past decade is that they have been able to compensate for those inadequacies by taking advantage of efficient business practices, leading to earned discounts on purchases, in order to cover part of the shortfall in Medicaid reimbursement. In effect, the Medicaid reimbursement procedures based on AWP served essentially the same as AAC plus about 11%of product costs plus a (less than adequate) dispensing fee. Pharmacists will not, and must not, tolerate a change in the reimbursement rate structure that does not adequately account for the sub-

Impact of Administrative Costs on Pharmacies: Illustration Using 1982 Medicaid DataItem

A 1982 Total Medicaid Drug Program Expendituresa B

Conservative Estimate

Moderate Estimate

$1,651,092,921

$1,651,092,921

$9.91

$9.91

166,608,670

166,608,670

$0.68

$0.80

$ 113,293,890

$ 133,286,930

10.0% x 30 365

16.0% X 30 365

1982 Lilly Digest Average Prescription Charge b

C Estimated # of Medicaid Prescriptions for 1982 ( A / B )

D Pharmacy Administrative Costs per Claimc E Estimated Uncompensated Pharmacy Administrative Costs from Medicaid (C x D)

F Interest Rate for Carrying Unpaid Claims an Average of 30 Days

13,570,490

G Estimated uncompensated Pharmacy Cost of Carrying Unpaid Claims for 30 Days (A x F )

$

H Total Uncompensated Pharmacy Costs from Medicaid in 1982 ( E + G )

$ 126,864,380

a Changes to the Medicaid Prescription Drug Program Could Save

Millions (Washington, DC: U.S. Office of Inspector General, July 26,1984), Schedule I. b C

The Lilly Digest: 1983 (Indianapolis: Eli Lilly & Co., 1983).

These figures are 1979 data adapted from Fink, Joseph L., III, Manager's Guide to Third-Party Programs (Washington, DC:

American Pharmacy, Vol. NS26, No.8, August 1986/606

$

21,712,850

$ 154,999,780

American Pharmaceutical Association, Spring 1982), pp. 1-2. The Consumer Price Index (CPI) for all items was used to adjust these figures to 1982 dollars. The 1979 range of $0.51 to $0.71 adjusted to a 1982 range of $0.68 to $0.93 based on CPls respectively of 217.5 and 289.1. The conservative estimate uses the low end of the range and the moderate estimate uses the midpoint of the range.

65

-

stantial uncompensated administrative processing costs of Medicaid prescriptions in relation to private-pay prescriptions. One final factor omitted in the OIG report was an estimation of the cost of implementing the proposed recommendations. Assuming that the recommendations were acceptable-and they are not-the cost of implementing any of these new systems for estimating AAC would consume a sizeable portion of any federal and state savings that might be realized.

Role of Non-Dispensing Pharmacy Services raditionally, third party programs (including Medicaid) have provided a single dispensing fee,

mained constant for several years at a time. However, pharmacists have complained of a number of shortcomings of such reimbursement structures including inadequate compensation for administrative costs of filing third party claims, lack of reimbursement for non-product related services (e.g., patient profiles, OTC consultations, and patient education and counseling), inflexibility of third parties in reimbursing nontraditional pharmaceutical services (e.g., IV additive solutions, total parenteral nutrition solutions, chemotherapy preparations, injectable preparations, unit dose packaging, and emergency prescription and delivery services), and insufficient reimbursement to cover inventory carrying costs for high cost drug products (e.g., those greater than $20.00 cost per prescription).

tribution systems, special product formulations, patient counseling, drug therapy monitoring and utilization review, total parental nutrition, and a number of other pharmaceutical services are routinely performed within hospitals and, likewise, have contributed substantially to cost control under the reimbursement schemes by which Medicaid, Medicare, and other third party programs pay for hospitalization costs. There is a growing need for consistent delivery of comprehensive pharmaceutical services in ambulatory and long term care settings. Home treatment for cancer, nutritional disorders, and other long-term illnesses is increasing in popularity for both economic and psychosocial reasons. The implementation of prospective payment systems (i.e., DRGs) in hospitals has, also, focused attention on

_ _ Claims Numbers and Dollar Values for 1984 Indiana Medicaid-

#

0/0

#

0/0

Avg $ Value per Claim

7,019,943 477 ,356 470,336 4,043,487 1,326,769 175,499 161,459 365,037

100.0 6.8 6.7 57.6 18.9 2.5 2.3 5.2

633,389,231 177 ,928,495 315,677 ,789 43,692,686 57,112,065 8,476,695 6,509,366 23,996,135

100.0 28.1 49.8 6.9 9.0 1.3 1.0 3.8

$90.23 $372.74 $671.17 $ 10.80 $ 43.05 $ 48.30 $ 40.32 $ 65.74

Claims Number Expenditure Category

Total Claims Paidc Hospital , Inpatient and Outpatient Nursing Homes (SNFIICF) Pharmacies Physicians Dentists Transportation All Other aA b

C

Claims $ Paid

-Processing Burden lndex"

11.1 2.7 1.5 92.6 23.2 20 .7 24.8 15.2

Graphic Overview: Ind iana 's Public Welfare Programs for Fiscal Year 1984 (Indianapol is: State of Indiana, 1984) pp C-8, C-9, and C-13.

The Processing Burden Index (PBI) is a relative estimate of the claims processing burden and cost differences among various types of insured health care benefits . The PSI is calculated by determining the number of claims which must be processed to collect $1 ,000 in reimbursements . The PBI formu la is as follows: PSI = $1,000 / average cost per claim. Total claims processed was 8,256,195 of which 868,465 were denied and 367,787 were suspended leaving 7,019,943 claims paid.

added to the pharmacist's cost for a drug, as reimbursement to pharmacists for dispensing multi-unit outpatient prescriptions. This fee must cover all overhead and operating expenses, includin g the pharmacist's time and the pharmacy's net profit. This single fee approach has been reaso nably easy to administer and relatively effective for cost containment in most third party programs, since pharmacists' fees have often re-

The insufficient reimbursement criteria of Medicaid and other third party programs has, to this point, severely limited the development of many pharmaceutical services in ambulatory and long-term care settings. When comprehensive pharmaceutical services can be provided in an organized and consistent manner they can contribute significantly to the control or reduction of other health care costs. Unit dose drug dis-

the need for more sophisticated pharmaceutical services in ambulatory and long term care settings. Table 6 provides a list of the types of pharmacy services which should be made available to accommodate the changing needs of the outpatient population. · By providing these high technology pharmaceutical services in less costly settings (i.e., in longterm care facilities, or even at home , as opposed to in the hospital), the

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cost per case and, as well; the total cost efficient use of medications in mand comes from an outside segexpenditures for health care can be patient care. ment; primarily physicians, and reduced. Failure of Medicaid and Pharmacists must take the lead whose impact is best measured not other third party programs to accom- in developing systems to provide in reduced expenditures for drug modate this demand for complete compensation for nondispensing ser- benefits, but in a reduced need for pharmaceutical services in nonhos- vices. Also, they will have to demonother, more expensive services such pital settings will continue to lead .strate the impact of such services. as physician visits, emergency room to hospitalization of patients for the Finally, pharmacists will have to visits, hospitalizations, or surgery. sole purpose of receiving a specialty develop methods for documenting Therefore, it is important to be service which could have been pro- delivery and effect of these services aware of the forces that influence vided outside ofthe hospital environ- and for billing third parties. drug program expenditures and of ment. While this situation persists, the impact that pharmacy services Recommendation 13: The Associa- can have on other program expendiMedicaid .and other third party protion should support projects to grams are paying not only for the tures. needed pharmaceutical services, but evaluate the extent and value of the Briefly, factors that may influence pharmacist's professional services also for the sometimes unnecessary drug program expenditures include: (either new or existing services), hospital stay. Consequently, a reimbursement whether or not the dispensing of a consumer factors such as the structure and policy which provides medication is involved in a specific number of enrollees, the age, sex, pharmacists with appropriate re- patient encounter. and income characteristics of the enmuneration .for complete pharRecommendation 14: The Associa- rolled population, and the rate of illmaceutical services in ambulatory ness among enrollees; tion should report findings on the and long-term care settings can be value of pharmacy services which -expected to bring about savings in physician factors such as premerit third party coverage by disother sectors of the health care ex- seminating these materials to phar- scribing habits regarding price, penditure bill (i.e., hospitalization or macists, other health care providers, generics, and frequency of prescribnursing home expenditures). Even . . insurers, employers, ' and employee ing; . though the drug expenditures, per groups. se, may appear to increase (many product acquisition costs that drug charges-are included in the hosRecommendation 15: The Associa- are primarily at the discretion ofthe pital bill, but are not ·itemized in tion should design third party plan manufacturer and the wholesaler; Medicaid's budget as expenditures options, reimbursement and utiliza- and for pharmacy services), a decrease tion methods, and report forms for in total health care expenditures third party coverage of those nondispharmacy costs of operation and will be the net effect of a reimburse- pensing pharmacy services found to service delivery. ment structure for needed phar- be of benefit. Pharmacists in traditional commaceutical services. munity practice have very little conOne of the most appropriate -Forces Influencing Drug and trol over the number of prescriptions methods for compensation of phar- -Program Expenditures basic premise in most busi- per enrollee or the cost of drug prodmacists who provide non-dispensing nesses is that one can set up cost uct acquisition for filling such preservices is the relative value scale method, discussed earlier. The objec- centers and expect the manager of ·scriptions. If third parties want to tive of relative value scale reim- each cost center to control the re- achieve greater control over pharsource utilization and productivity macy benefit program costs through bursement methods is to delineate a single payment structure for phar- of personnel within .his or her area risk-sharing, capitation-type reimof the corporation. The cost centers bursement mechanisms, they must maceutical services which provides: give the pharmacist authority and in health care delivery programs are -not so easily divisible and separable sanctions necessary to deal with the an administratively manageable in terms of measuring their impact other, external factors that affect or -with .respect to controlling re- total prescription drug costs. system for a third party"program , The real benefit of prescription source utilization. .Health care pro-an economically efficient deliv- viders in one segment of the prog- drug programs comes from the imery of services for the payer(s), and .ram may well deliver services that pact of pharmaceuticals and pharhave far-reaching impacts on many .macy services on other, more expensive services and procedures. sufficient financial incentives to other segments of the health care II Recommendation .13: The Associaassure the provision of pharmaceuti- program. tionshould monitor health care utiliPharmacy services comprise one cal services directed at clinically such example of a service whose de- zation trends, including: safe, -therapeutically effective, and

1.

2.

3.

.4.

1. 2. 3.

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• Physician visit rates; • Hospitalization rates; • Long-term care utilization rates; • Number, size, volume, and types of prescriptions purchased; • Number, volume and types of nonprescription medications purchased; • Number, volume, and types of home diagnostic products purchased; • Number, volume, and types of durable medical equipment purchased or rented; • Per capita utilization of and expenditures for the above items; • Breakdown of these usage rates and expenditures by age, sex, education, income, and other relevant user characteristics. II Recommendation The Association should report health care utilization trends to pharmacists on a regular basis (monthly, quarterly, and annual reports) with relevant analysis and commentary on such trends. ®

12.

References

13.

1. J . G. Adams, "The Societal Impact of Pharmaceuticals: An Overview ," Pharmaceutical Manufacturers Association, Washington, DC, 1984. 2. B. A. Weisbrod and J. H. Huston, "Benefit s and Costs of Human Vaccines in Developed Countries: An Evaluative Survey," Pharmaceutical Manufacturers Association, Washington, DC , 1984. 3. J . H. Haaga, "Cost-Effectiveness . and Cost-Benefit Analysis of Immunization Programs in Developing Countries: A Review of the Literature," Pharmaceutical Manufacturers Association, Washington, DC, 1984. 4. J . L. Wagner, "Economic Evaluations of Medicines: A Review of the Literature," Pharmaceutical Manufacturers Association, Washington, DC, 1984. 5. T. D. Dao , "Cost -Effectiveness and Cost-Benefit Analysis of Pharmaceutical Intervention," Pharmaceutical Manufacturers Association, Washington, DC, 1984. 6. A. Vinokur et al ., "The Role of Survey Research in the Assessment of Health and Quality-of-Life Outcomes of Pharmaceutical Interventions," Pharmaceutical Manufac-

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turers Association, Washington, DC, 1984. A. D. Little, Inc., "Beta-Blocker Reduction of Mortality and Reinfarction Rate in Survivors of Myocardial Infarctions: A CostBenefit Study," Pharmaceutical Manufacturers Association, Washington, DC, 1984. A.D . Little Inc ., "Use of BetaBlockers in the Treatment of Glaucoma: A Cost-Benefit Study," Pharmaceutical Manufacturers Association, Washington, DC, 1984. A. D. Little, Inc., "Use of BetaBlockers in the Treatment of Angina: A Cost-Benefit Study," Pharmaceutical Manufacturers Association, Washington, DC, 1984. B. S. Bloom, ed., "Cost-Benefit and Cost-Effectiveness Analysis in Policymaking: Cimetidine as a Model," Biomedical Information Corporation Publications, New York, 1982. B. S. Bloom and J. Jacobs, Medical Care, 23 , 7, pp. 872-880. W. B. Mason et. al., Medical Care, 18, 147 (1980). M. C. Smith in : "Improving Medication Compliance," The National Pharmaceutical Council, Reston, VA, pp. 35-44. J. T. Stone, "Third Party-Induced Cost Shifting in Community Pharmacy Practice," PhD Thesis, Purdue University, 1985 . Health Insurance Association of America, "Hospital Cost Shifting: The Hidden Tax," Washington, DC, 1982. W. A. Glasser, Inquiry, 21, 180, Summer 1984. J. A. Miller, National Underwriters-Life and Health Edition, February 12, 1982, p. 24. A. N. Johnson, A. Madson, and Aquilina, Journal of Health Policy, Politics , and Law, Summer 1984, pp. 251-2. L. J. Lyons, National Underwriters-Life and Health Edition, February 6, 1982, p. 2. A. G. Haggerty, National Underwriters-Life and Health Edition, February 6, 1982, p. 2. A. G. Haggerty, National Underwriters-Life and Health Edition, September 3, 1982, p. 34. J. Geisel, Business Insurance, 16, 27 (1982). E . Freidman, Hospitals, 56, 96 (1982).

24. D. H. Hitt, Hospitals , 51, 50 (1977). 25. D. B. Ginsburg and R A. Sloan, New England Journal of Medicine, 310, 894 (1984). 26. Anonymous, American Pharmacy, NS25, 526 (1985). 27. Anonymous, The Green Sheet, 34, 3 (1985). 28. S. W. Schondelmeyer and J. T. Stone, "Third Party-Induced Cost Shifting in Indiana Community Pharmacies" presented to ESAS Section of the Academy of Pharmaceutical Sciences, American Pharmaceutical Association, February 18, 1985, San Antonio, TX. 29. S. W. Wolfe and C. M. Coley, "Pills That Don't Work," Public Citizen's Health Research Council, Washington, DC, 1981. 30 . P Temin, Journal of Health Economics, 2, 187 (1983). 31. J. L. Fink, "Manager's Guide to Third-Party Programs," American Pharmaceutical Association, Washington, DC, 1982, pp. 10-12'. 32. Anonymous, PMA Newsletter, 27, 1 (1985). 33. Anonymous, American Pharmacy, NS25, 576 (1985). 34. Anonymous, apharmacy weekly, July 19, 1985, pp. 113-114. 35. D. Kushner and R. Feierman, American Druggist, May 1985, pp. 17-26. 36. P Areeda, ''Antitrust Analysis," Little, Brown and Company, Boston, 1974, pp . 669-71. 37., National Pharmaceutical Council, "Pharmaceutical Benefits Under State Medical Assistance Programs," Washington, DC, 1984, pp. 36-39. 38. R. P Kusserow, "Changes to Medicaid Prescription Drug Program Could Save Millions," U.S. OfGeneral, fice of Inspector Washington, DC, 1984. ®

Stephen W Schondelmeyer, PharmD, MPA, PhD, is associate professor of pharmacy administration, School ofPharmacy and Pharmacal Sciences, Purdue University, West Lafayette, IN 47907. This article 1,S excerpted from "Pharmacy Compensation and Reimbursement," one of a series of working txioers prepared bv the APhA Commission on Third Party Programs.

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