Rising pharmacy costs have sparked interest in different ways to manage this benefit. A new method--called reference pricing--can help companies pave the way for a three-tier pharmacy benefit plan.

Spurred on by an aging population, scientific advances, and direct-to-consumer marketing by pharmaceutical manufacturers, drug costs are the fastest-growing segment of health care spending these days. As the health insurance industry gears up for the struggle to control rising pharmaceutical costs, health plans, academics, state governments, and other sectors of the economy are continually developing new tools and techniques to deal with this problem.

Closed formularies, three-tier benefit design, Internet prescribing, evidence-based medicine, and now the new Format for Formulary Submissions of the Academy for Managed Care Pharmacy (AMCP) are all among the methods designed by private payers to deal with the rising cost of prescription medicines.

Add to this mix a new mode of operations called "reference pricing" or "reference-based formulary submissions." Having been used for some time in Germany, British Columbia and other locations, reference formularies appear to be gaining popularity in the United States as well.

Already several states--Florida, Louisiana, and California--have adopted new methods of formulary control that might loosely be described as reference formularies. The system has already been in place for some time in Hawaii, where the Hawaii Medical Services Association, a Blue Cross Blue Shield affiliate, has had a reference formulary system available beginning in 1999, and in some smaller markets as well. But the idea may be about to get a big boost, with WellPoint Health Networks, the Blue Cross affiliate for the state of California, set to offer a reference product in 2002 as part of its broad initiative to combat drug costs.

The idea behind reference pricing is relatively straightforward. An organization's pharmacy and therapeutics (P&T) committee evaluates a class of drugs for a given health condition, and by one of a variety of methods determines which is the most efficient, best, or most commonly prescribed agent for the health condition. That theoretically best drug is then established as the reference agent and becomes the reimbursement standard for any drug prescribed within that class. The advantage of a reference formulary over a closed system is that a beneficiary may still receive another agent if prescribed by a doctor, but has to pay the difference in price between the drug prescribed and the price of the reference agent. Most organizations also allow exceptions if a given alternative drug is determined to be medically necessary for the patient.

"The idea is to look at the marketplace where reference-pricing is used, in circumstances where generic and brand name drugs are used," says Tom Hazlet, associate professor of pharmaceutical outcomes, research and policy at the University of Washington. "The therapeutics issue is whether the brand name offers an advantage over the generic. In many cases that difference is small," Hazlet says.

But reference formularies have another advantage as well. They may sometimes be used to get a given client base to switch to a more controlled formulary, without incurring the political issues sometimes raised by the institution of a three-tiered formulary model.

"I've seen people use it on a trial basis," says John Jones, past president of the AMCP, and vice president for legal and regulatory affairs for Prescription Solutions, a pharmacy benefit manager in San Diego. "But it tends to disadvantage people who don't have a lot of means, because sometimes the difference in price is substantial. The real opportunity is for savings from a well-managed formulary; if you have treatment guidelines laid out, you control utilization far better than simply pulling money out of people's pockets."

But Hazlet insists that a reference program may save beneficiaries money if used in place of the third tier in a three-tier design. "Say you have a three-tier benefit with 5 percent, 10 percent, and 50 percent copays in the various tiers. Depending on what the drug is, the patient may do better or worse. Let's say you're dealing with a prescription for a proton pump inhibitor. None of those are off-patent, so there's not much difference in price between the innovative product and the most recent entrant," says Hazlet. Under that example, the consumer would pay very little, considering that all drugs are priced relatively equivalent to the reference medication.

"Take a different example," Hazlet says. "Say someone is prescribed a selective serotonin reuptake inhibitor (SSRI). The price Lilly has asked for Prozac is higher than other SSRIs. Well, say the patient needed Prozac specifically. The reference schedule might be more advantageous to them than the 50 percent copayment at the top of a three-tier design, because the copay would be the cost of Prozac less the cost of the other agent," Hazlet says.

Another advantage of the reference-pricing method over the three-tier system is that fewer drug categories are affected, which may appeal to certain client bases. "If you look at the reference system in place in British Columbia, they've only referenced 7 or 8 drug clusters: NSAIDs, calcium channel blockers, histamine II blockers, and nitrates, for example," Hazlet says. "And if you look at the system used in Germany when they first began, they were trying to use reference pricing only with regard to generics. The result was that the generics' houses changed their price to the reference price and that was the end of it."

As it's being applied in the United States, on the other hand, the system may well see more aggressive usage. The Florida Medicaid program has established a preferred drug list for as many as 50 or more categories this year. According to Rob Seidman, chief pharmaceutical officer at WellPoint, "We follow the broad method of establishing reference pricing. Some health plans will be more narrow. For example, we intend to determine what is the average cost of a drug used in diabetes cases, rather than to micromanage the situation by referencing the average cost of an insulin." Seidman says WellPoint also intends to require manufacturers to guarantee improved outcomes for more expensive medicines, a strategy that enabled the Florida Medicaid program to get Pfizer to reduce its prices recently.

Not all payers define reference pricing the same way, however. According to Roy Yamauchi with the Hawaii Health Services Association, his organization came up with the idea a few years ago in looking at a closed model. "A doctor has a choice of agents in a therapeutic class. Which would he choose? We really don't know, but the closest we could come is by taking the weighted average of drugs in a therapeutic class. You don't get the exact replication financially, but that's the reference base."

That method of deriving a reference price may be preferable to the standard approach, which may too often lack the insights offered by evidence-based medicine. "I'm not convinced we're going to save money overall," says Debi Reissman, with Rxperts Inc., "We need to pick the agent that provides not just the cheapest price, but the best overall outcomes and value," she says. "Take for example diabetes as a category. We know that two drugs are effective at lowering blood sugar, but not which one most reduces hospitalizations overall. There are very few head-to-head studies available."

Another example is ACE inhibitors, Reissman says. "We have 11 different ACE inhibitors, but we don't have studies comparing them all. There's some evidence suggesting one might work better in some organs and tissues than another, but we don't know whether some might have a better chance of reducing heart attacks and strokes, or whether some might just reduce blood pressure." One reason is that the sample size for a study of 11 different ACE inhibitors would have to be huge, at least 1,000 people in each group, prohibitively large for anybody but drug manufacturers- who would stand to gain little by such a study, Reissman says.

One other potential problem with reference pricing is the limited opportunity for cost savings, says Jones of the AMCP. "It's really a onetime savings," he says. "Once the population is used to the reference drug, that's what they get. Another problem is that some may find a way around the reference system. If a given category is referenced, doctors might simply prescribe another category instead."

RELATED ARTICLE: Reference-Pricing in Action: A Case Study

Pharmacy benefits manager (PBM) AdvancePCS first instituted its reference-pricing program four years ago, and while fewer than a half dozen clients currently use the reference formulary system, the technique has been a successful means of gradually shifting clients to a more economic three-tier model.