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 / Winter 2003 / Issue 33(originally published by Booz & Company)


The Prescription for Drug Costs

Co-pay programs are also typically designed to influence unit volume (the number of prescriptions) more than prices. Because the patient pays a fixed co-pay no matter what the price of the prescription, there is no incentive for the patient to select a less expensive alternative. Payers theoretically should want to push for lower prices. But their incentive to do so is usually attenuated because they do business through PBMs that make their money by capturing some portion of the discounts drug companies offer in exchange for co-pays.

So how can companies that want to continue to provide attractive health benefits give their employees a more direct economic stake in their health-care choices and moderate the upward rise in drug prices? In our view, defined-contribution or consumer-directed health plans are part of the solution. What consumer-directed plans do is place the decision about the “right” level of pharmaceutical spending where it belongs — in the hands of patients and physicians. Rather than pay for health care on a prescription-by-prescription or visit-by-visit basis, the employer contributes a fixed sum that employees can spend as they see fit.

Some argue that individual employees lack the power of large health plans to push back on pharmaceutical price increases. But our research suggests otherwise. A recent Booz Allen Hamilton survey of health plans shows little or no correlation between the size of the plan and the discounts it receives from pharmaceutical companies. Instead, discounts are triggered mostly by the plan’s ability to shift market share from one drug to another.

As patients begin to vote with their wallets and select prescription medicines on the basis of not just performance but also price, pharmaceutical companies will respond. As drug companies compete to make their case directly to patients and physicians, there will be more market pressure to temper rising prices and indirect pressure to lower marketing and advertising expenditures. Pharmaceutical prices and spending may or may not drop as a result, but at least it will be the patients and physicians who are making the choice.

Author Profiles:

Heather Burns ([email protected]) is a senior vice president in Booz Allen Hamilton’s McLean, Va., office. She focuses on strategy and technology solutions in the health-care and environmental industries.
Charles Beever ([email protected]) is a vice president with Booz Allen Hamilton based in New York. He helps companies in the medical products, pharmaceutical, and health-care fields resolve strategic, organization, and performance-improvement issues.
Robert Hutchens ([email protected]) is a vice president with Booz Allen Hamilton based in New York. Mr. Hutchens works with companies in the pharmaceutical, medical supply, and consumer products industries on a range of operational and strategic issues.
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