State of California Health Insurance Mandate: Autism and Pervasive Developmental Disorder

California’s mental health parity law requires group health insurance plans to provide coverage for the diagnosis and medically necessary treatment of pervasive developmental disorder and autism. Also, effective July 1, 2012, plans must cover behavioral health treatment of pervasive developmental disorder and autism in compliance with the mental health parity requirements. 

MENTAL HEALTH PARITY

The federal mental health parity law applies to health plans that provide mental health or substance abuse benefits and are sponsored by employers with more than 50 employees. The federal parity law does not require plans to provide mental health or substance abuse benefits. However, if a plan does provide these benefits, the financial requirements and treatment limits for the benefits generally cannot be more restrictive than those applicable to the plan’s medical and surgical benefits.

In addition, California has its own mental health parity law. California’s law requires health insurance plans (including managed care plans) to provide coverage for the diagnosis and medically necessary treatment of severe mental illnesses of a person of any age, and of serious emotional disturbances of a child, under the same terms and conditions applied to other medical conditions.

Pervasive developmental disorder and autism are included as severe mental illnesses subject to the law’s parity requirements.

Covered benefits must include outpatient services, inpatient hospital services, partial hospital services and prescription drugs, if the policy or contract includes coverage for prescription drugs. Also, the terms and conditions applied to the benefits for pervasive developmental disorder and autism must be applied equally to all other benefits under the policy or contract, including:

• Maximum lifetime benefits;
• Copayments and coinsurance; and
• Individual and family deductibles.

BEHAVIORAL HEALTH TREATMENT

In October 2011, Governor Brown signed a bill into law (SB 946) that extends California’s mental health parity law by requiring health insurance plans (including managed care plans) to cover behavioral health treatment for pervasive developmental disorder and autism. This coverage is also subject to the mental health parity law’s restrictions. This mandate goes into effect on July 1, 2012.

“Behavioral health treatment” means professional services and treatment programs, including applied behavior analysis and evidence-based behavior intervention programs that develop or restore, to the maximum extent practicable, the functioning of an individual with pervasive developmental disorder or autism. The treatment must be:

• Prescribed by a licensed physician or developed by a licensed psychologist;
• Provided under a treatment plan prescribed by a qualified autism service provider; and
• Administered by one of the following:
  — A qualified autism service provider;
  — A qualified autism service professional supervised and employed by the qualified autism service provider; or
  — A qualified autism service paraprofessional supervised and employed by a qualified autism service provider.

The treatment plan must have measurable goals over a specific timeline that are developed and approved by the qualified autism service provider for the specific patient being treated. The treatment plan must be reviewed at least once every six months by the qualified autism service provider and modified whenever appropriate.

In addition, the treatment plan cannot be used for purposes of providing respite, day care or educational services or to reimburse a parent for participating in the treatment program.

A “qualified autism service provider” means either of the following:

• A person, entity or group that is certified by a national entity (such as the Behavior Analyst Certification Board), accredited by the National Commission for Certifying Agencies and designs, supervises or provides treatment for pervasive developmental disorder or autism, (provided the services are within the experience and competence of the nationally certified provider); or
• A person licensed as a physician, physical therapist, occupational therapist, psychologist, marriage and family therapist, educational psychologist, clinical social worker, professional clinical counselor, speech-language pathologist or audiologist who designs, supervises or provides treatment for pervasive developmental disorder or autism (provided the services are within the experience and competence of the licensed provider).

Health insurers subject to this mandate must maintain an adequate network that includes qualified autism service providers that supervise and employ qualified autism service professionals or paraprofessionals to provide and administer behavioral health treatment.

As provided under California’s mental health parity law, a health insurer may utilize case management, network providers, utilization review techniques, prior authorization, co-payments or other cost sharing when providing these benefits.

This mandate does not require any benefits to be provided that exceed the essential health benefits that health insurers will be required to provide under the health care reform law. This determination will be made after final guidance is released on essential health benefits.

This mandate will become inoperative on July 1, 2014, and will be considered repealed as of Jan. 1, 2015, unless a law is enacted to keep this mandate in effect.

If you are a business owner and have questions about what actions you should take or what your responsibilities will be under the new law, please don't hesitate to call Elizabeth Long, Senior Benefits Consultant at 858-369-7923 or email her at elong@championrisk.net.

2014 The Affordable Care Act Compliance Checklist

The Affordable Care Act (ACA), which was signed into law in March 2010, put in place comprehensive health coverage reforms with effective dates spread out over a period of four years and beyond. Some of ACA’s reforms are already in effect for employers and their group health plans, such as the Form W-2 reporting requirement for large employers and the requirement for non-grandfathered health plans to cover certain preventive care services without cost-sharing.

Many of ACA’s key reforms will become effective in 2014.
Key ACA reforms that will affect employers in 2014 include health plan design changes, increased wellness program incentives, a new reinsurance fee, the employer “pay or play” mandate and additional reporting requirements. To prepare for this next phase of ACA reforms, employers should review upcoming requirements and make sure they have a compliance strategy in place.

This Legislative Brief provides a health care reform compliance checklist for 2014. Please contact Champion Risk & Insurance Services, L.P. for assistance or if you have questions about changes that were required in previous years.

PLAN DESIGN CHANGES
Grandfathered Plan Status
A grandfathered plan is one that was in existence when health care reform was enacted on March 23, 2010. If you make certain changes to your plan that go beyond permitted guidelines, your plan is no longer grandfathered. Contact Champion Risk & Insurance Services, L.P. if you have questions about changes you have made, or are considering making, to your plan.

□    If you have a grandfathered plan, determine whether it will maintain its grandfathered status for the 2014 plan year. Grandfathered plans are exempt from some of ACA’s mandates. A grandfathered plan’s status will affect its compliance obligations from year to year.

□    If you move to a non-grandfathered plan, confirm that the plan has all of the additional patient rights and benefits required by ACA. This includes, for example, coverage of preventive care without cost-sharing requirements.
Annual Limits
Effective for plan years beginning on or after Jan. 1, 2014, health plans are prohibited from placing annual limits on essential health benefits. (ACA’s prohibition on annual limits was phased in over a three-year period; restricted annual limits were permitted for plan years beginning before Jan. 1, 2014.)
□    Confirm that no annual limit will be placed on essential health benefits for the 2014 plan year and beyond.

Pre-existing Condition Exclusions
Effective for plan years beginning on or after Jan. 1, 2014, ACA prohibits health plans from imposing pre-existing condition exclusions (PCEs) on any enrollees. PCEs for enrollees under 19 years of age were eliminated by ACA for plan years beginning on or after Sept. 23, 2010.
□    Confirm that PCEs will not be imposed on any enrollees for the 2014 plan year and beyond.

Dependent Coverage to Age 26
Effective for plan years beginning on or after Sept. 23, 2010, ACA requires health plans that provide dependent coverage of children to make coverage available for adult children up to age 26. However, for plan years beginning before Jan. 1, 2014, grandfathered plans were not required to cover adult children under age 26 if they were eligible for other employer-sponsored group health coverage.
□    If your plan is grandfathered, confirm that it will make coverage available to adult children up to age 26 regardless of whether they are eligible for other employer-sponsored group health coverage, effective for the 2014 plan year and beyond.

Excessive Waiting Periods
Effective for plan years beginning on or after Jan. 1, 2014, a health plan may not impose a waiting period that exceeds 90 days. A waiting period is the period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll in the plan becomes effective. Other conditions for eligibility are permissible, as long as they are not designed to avoid compliance with the 90-day waiting period limit.
□    If your plan has a waiting period for coverage, confirm that the waiting period is 90 days or less for the 2014 plan year and beyond.

Coverage for Clinical Trial Participants
Effective for plan years beginning on or after Jan. 1, 2014, non-grandfathered health plans cannot terminate coverage because an individual chooses to participate in a clinical trial for cancer or other life-threatening diseases or deny coverage for routine care that would otherwise be provided just because an individual is enrolled in a clinical trial.
□    For the 2014 plan year and beyond, confirm that plan terms and operations will not discriminate against participants who participate in clinical trials.

Limits on Cost-sharing
Effective for plan years beginning on or after Jan. 1, 2014, non-grandfathered health plans are subject to limits on cost-sharing or out-of-pocket costs. Out-of-pocket expenses may not exceed the amount applicable to coverage related to HSAs. Deductibles may not exceed $2,000 (single coverage) or $4,000 (family coverage). These amounts are indexed for subsequent years.

Final guidance on this requirement provides that the deductible requirement will apply only to plans in the insured small group market, while the out-of-pocket cost limit will apply to all non-grandfathered health plans (including self-insured plans and plans and issuers in the large group market).
□    Review your plan’s limits on cost-sharing to make sure they comply with ACA’s limits on cost-sharing, effective for the 2014 plan year.

Comprehensive Benefits Package
Starting in 2014, insured plans in the individual and small group market must cover each of the essential benefits categories listed under ACA. This requirement does not apply to grandfathered plans, self-funded plans or insured plans in the large group market.
□    If you have an insured plan subject to ACA’s comprehensive benefits package mandate, confirm with the health insurance issuer that the plan will cover the essential health benefits package, effective for the 2014 plan year.

WELLNESS PROGRAM INCENTIVES

Under current law, the reward under a health-contingent wellness program is limited to 20 percent of the cost of coverage. Health-contingent wellness programs require individuals to satisfy a standard related to a health factor in order to obtain a reward (for example, not smoking, attaining certain results on biometric screenings or meeting exercise targets).

For 2014 plan years, the maximum permissible reward increases to 30 percent of the cost of coverage. In addition, proposed regulations would increase the maximum permissible reward to 50 percent of the cost of health coverage for programs designed to prevent or reduce tobacco use. More guidance is expected on the wellness program reforms.
□    For a health-contingent wellness program, confirm the program complies with current law and consider whether to increase the reward in 2014.

REEINSURANCE FEES

Health insurance issuers and self-funded group health plans must pay fees to a transitional reinsurance program for the first three years of health insurance exchange operation (2014-2016). The fees will be used to help stabilize premiums for coverage in the individual market. Fully insured plan sponsors do not have to pay the fee directly.

Certain types of coverage are excluded from the reinsurance fees, including HRAs that are integrated with major medical coverage, HSAs, health FSAs and coverage that consists solely of excepted benefits under HIPAA (such as stand-alone vision and dental coverage).

The reinsurance program’s fees will be based on a national contribution rate, which HHS will announce annually. For 2014, HHS announced a national contribution rate of $5.25 per month ($63 per year). The reinsurance fee is calculated by multiplying the number of covered lives (employees and their dependents) for all of the entity’s plans and coverage that must pay contributions, by the national contribution rate for the year.
□    Review the health coverage you provide to your employees to determine the plan(s) subject to the reinsurance fees.

EMPLOYER "PAY OR PLAY" MANDATE

Employers with 50 or more employees (including full-time and full-time equivalent employees) that do not offer health coverage to their full-time employees (and dependents) that is affordable and provides minimum value will be subject to penalties if any full-time employee receives a government subsidy for health coverage through an Exchange. The sections of the health care reform law that contain the employer penalty requirements are known as the “shared responsibility” or “pay or play” provisions.

The employer mandate provisions were set to take effect on Jan. 1, 2014. However, on July 2, 2013, the Treasury announced that the employer mandate penalties and related reporting requirements will be delayed for one year, until 2015. Therefore, these payments will not apply for 2014. July 9, 2013, the Internal Revenue Service (IRS) issued Notice 2013-45 to provide more formal guidance on the delay. The Treasury plans to issue additional regulations on the reporting requirements over the summer. Future guidance may also impact the rules described in this document. No other provisions of the ACA are affected by the delay.

• The penalty amount for not offering health coverage is up to $2,000 annually for each full-time employee, excluding the first 30 employees. Under proposed IRS regulations, an employer would not be liable for this penalty if it offers coverage to all but 5 percent (or, if greater, five) of its full-time employees and dependents. 
• Employers who offer health coverage, but whose employees receive tax credits because the coverage is unaffordable or does not provide minimum value, will be subject to a fine of up to $3,000 annually for each full-time employee receiving a tax credit, with a maximum annual fine of $2,000 per full-time employee (excluding the first 30 employees).

The IRS provided safe harbor guidance for employers on determining who is considered a full-time employee (and must be offered coverage), how to measure a plan’s affordability and how penalties will apply when there is a waiting period for coverage. Guidance has also been issued on ways to determine a plan’s minimum value, including a minimum value calculator. The IRS also proposed transition relief for non-calendar year plans, or fiscal year plans. It is unclear how the delay of the employer mandate penalties will impact these rules.

□    Monitor legislative developments for additional guidance on the employer shared responsibility provisions.
□    Count the number of your employees to determine if you are a large employer subject to ACA’s shared responsibility provisions.
□    If you are a large employer, take the following additional steps:

• Determine whether health coverage is offered to substantially all full-time employees and dependents;
• Assess the affordability of the health coverage under one of the IRS’ affordability safe harbors (Form W-2, rate of pay or federal poverty line);
• Review whether the plan provides minimum value by using one of the three available methods (minimum value calculator, safe harbor checklists or actuarial certification); andIf you have a fiscal year plan, determine if you qualify for the transition relief for plan years beginning in 2013.

REPORTING OF COVERAGE

Effective for 2014, ACA requires health insurance issuers and sponsors of self-insured plans that provide “minimum essential coverage” to report certain health coverage information to the IRS. A separate IRS reporting requirement will apply to large employers subject to ACA’s shared responsibility rules. Large employers will have to report information on the design and cost of their plans, applicable waiting periods and employees covered by the plan.

It is expected that the IRS will use this information to verify data related to ACA’s individual and employer mandates. These reporting requirements were also delayed for one year, until 2015. The Treasury plans to issue additional regulations on the reporting requirements over the summer.

□    Monitor legislative developments for additional guidance on the reporting requirements.
□    When the reporting requirements become effective, provide required information regarding plan coverage and participation in accordance with information return requirements.

This Legislative Brief is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. © 2013 Zywave, Inc. All rights reserved. 5/13; BK 7/13 
 


If you are a business owner and have questions about what actions you should take or what your responsibilities will be under the new law, please don't hesitate to call Elizabeth Long, Senior Benefits Consultant at 858-369-7923 or email her at elong@championrisk.net.

Why are Health Care Costs Rising?

Health care costs, and consequently employee health benefit costs, have been growing at an alarming rate for nearly a decade. Employers have seen their health insurance premiums increase 119 percent since 1999. Total health insurance costs for employers could reach nearly $850 billion by 2019. Why are costs rising so high, so fast?

National Health Care Costs
As health care costs climb, the amount your employer must pay for your health benefits also increases. Unfortunately, the trend of health benefit costs rising faster than the rate of inflation is expected to continue.

Do you know how much your employer pays for your health benefits? 
According to the 2010 Hewitt Health Value Initiative, the average cost of health care benefits for active employees is expected to climb from $10,552 in 2012 to $11,188 in 2013. For a family of four, the cost is about $16,000 a year.

Unpredictable and uncontrollable health insurance rate increases are having a very serious financial impact on many employers and employees. Employers are also passing more of these costs onto employees, as the percentage that employees are asked to payis also increasing. In 2012, employees paid an annual average of $2,204 (20.8 percent of the total cost of their coverage); this figure is projected to grow to $2,385 in 2012. (21.3 percent of the total cost)

Why are Costs Rising?
Several market conditions working together have led to steep increases. Understanding these factors will help you be aware of the reasons behind any benefit or employee contribution (the amount you are required to pay out of your paycheck) changes your employer decides to make.

Unpredictable and uncontrollable health insurance rate increases are having a very serious financial impact on many employers and employees.

Several factors that have contributed to climbing health care costs over the past decade include:

• Demographics
• Expansion of health care providers
• Consolidation of managed care companies
• Government regulation
• Increased utilization and consumer demand
• New medical technology
• Weakening of managed care system
• Health care spending and medical cost inflation
• Increased prescription drug costs

In addition, Hewitt has identified specific factors that are contributing to current health care costs and projected figures that are the highest seen in 5 years:

The Aging of America
According to the U.S. Census Bureau, the number of Americans age 65 and older is expected to nearly double by 2025, and the elderly population (80 and older) will increase 80 percent. As this population ages, there is a subsequent rise in the occurrence of chronic diseases such as asthma, heart disease and cancer, and the need for more resources to fight these diseases. This leads to the increased use of prescription drugs and other medical services, and an overall increase in health care spending.

The Dramatic Rise of Prescription Drug Costs
Prescription drug costs continue to represent an increasingly large portion of health care expenditures. According to the Centers for Medicare & Medicaid Services (CMS), spending in the U.S. for prescription drugs was $234.1billion in 2008, more than six times what was spent in 1990. The U.S. Department of Health and Human Services projects U.S. prescription drug spending to reach $457.8 billion in 2019 – almost double what it was in 2008.

While prescription drug spending has been a fairly small proportion of national health care spending compared to spending for hospital and physician services, it has been one of the fastest-growing components, compared to hospital and physician services.

A number of factors contribute to changes in prescription drug costs, including the following:
Increased use – More people are using more prescription drugs, thereby driving up spending. From 1999 to 2009, the number of prescriptions purchased increased 39 percent, compared to a U.S. population growth of 9 percent.

Increased prices – Prescription drug prices increased at 3.4 percent in 2009.

Changes in the types of drugs used – Prescription drug spending is affected when new drugs enter the market and when existing medications lose patent protection. New drugs can either increase or decrease overall drug spending, depending on price and how the new drug relates to existing drugs on the market – e.g., replaces a drug, is a new treatment, adds competition, etc. Drug spending is also typically reduced when brand name drugs lose patent protection and face competition from new, cheaper generic substitutes.

Advertising – Prescription use in general and brand-name, higher-priced drugs can be influenced by advertisements. Critics of direct-to-consumer advertising feel that promotion of drugs to consumers instead of doctors creates inappropriate consumer demand and utilization of certain medications. Profits – Prescription drug sales were $300.3 billion in 2009, an increase of 5.1 percent over 2008. This increase was more than double the increase from 2007-2008.

Insurance coverage – Individuals with insurance are more likely to use prescription drugs than those without, and the growing prevalence of managed care plans – which tend to offer drug benefits – has fueled increased prescription drug use.

The Consolidation of Insurance Companies
During the economic boom of the 1990s, competition among insurance carriers and managed care companies was fierce. In order to gain market share, many large insurance companies acquired smaller, weaker firms and kept their rates low in order to stay competitive. This practice has taken its toll, leading to dips in profitability and stock prices for a number of large insurance carriers. Now, those companies that have survived are faced with much less competition and are committed to returning to profitability, which has ultimately resulted in increased rates for employers and contributed to greater cost-sharing for employees.

The Weakening of the Managed Care System
Also in the 1990s, employers began offering plans that allowed patients to see out-of-network doctors or those that had less strict referral processes through benefits, such as point-of-service (POS) plans. In addition, many employers making health plan purchase decisions focused on keeping employees happy by ensuring that most doctors in an area were in a chosen network, rather than choosing narrower networks with deeper discounts. All of this has led to a general weakening of the managed care system. With the level of premium increases over the last few years, many employers have backed away from offering such rich benefits, and instead have implemented a number of tactics to reduce costs.

Political Environment and Government Regulation
Health insurance, and more specifically managed care, is one of the most regulated insurance sectors on both the state and federal levels, and has become one of the most highly debated topics in the political arena. With the passage of the health care reform legislation on March 23, 2010, comes more regulation. Provisions already began taking effect and will continue through the decade.

Increased Utilization and Consumer Demand
Utilization of many health care services has risen over the last decade. A number of factors such as improvements in medical technology, the influence of managed care, elevated consumer awareness and demand, and a boost in the number of practicing physicians caused health services like the number of surgical procedures and the number of prescription drugs dispensed to rise significantly. Other services such as breast cancer screenings, immunizations for children, and diagnostic procedures like CT and MRI have also experienced sharp utilization increases.

Health Care Spending and Medical Cost Inflation
Overall health care spending and medical cost inflation are also ascending, due to many of the factors discussed previously.

What Does it all Mean?
Your employer, like others, is undoubtedly trying to determine how to keep accelerating health plan rates from having a serious financial impact on both employees and the company. Many firms absorbed the increasing costs for years to avoid further burdening their employees. Now, most are realizing that they will have to pass portions of the costs on to employees in the form of greater contributions from their paychecks, or benefit designs that require them to pay more out-of-pocket for the medical services they use through increased coinsurance, copayments or deductibles.

Sources: National Coalition on Health Care, U.S. Census Bureau, Centers for Medicare & Medicaid Services, IMS Health, U.S. Department of Health and Human Services. 

If you are a business owner and have questions about what actions you should take or what your responsibilities will be under the new law, please don't hesitate to call Elizabeth Long, Senior Benefits Consultant at 858-369-7923 or email her at elong@championrisk.net.  

Prescription Drug Trends

Prescription drugs are a vital part of health care plans, and it is important for employers to understand the trends beyond prescription drug costs and what they can do to manage those costs.

Spending in the United States for prescription drugs was $234.1 billion in 2008, more than 6 times the $40.3 billion spent in 1990.¹ Although prescription drug spending has been a relatively small proportion of national health care spending, it has been one of the fastest growing components compared to hospital and physician services. However, due to various trends, the rate of increase in drug spending has declined in recent years. By 2008, the annual rate of increase in prescription spending was 3 percent, compared to 5 percent for hospital care and 5 percent for physician services (Figure 1).

Annual prescription spending growth slowed from 1999 (18 percent) to 2005 (6 percent) because of the increased use of generic drugs, the increase in tiered copayment benefit plans, changes in the types of drugs used and a decrease in the number of new drugs introduced.² The annual change in drug spending in 2006 (9 spending) increased as a result of a number of factors, including the implementation of Medicare Part D. The 2007 change in drug spending (5 percent) decelerated because of an increase in the generic dispensing rate, slower growth in prescription drug prices and growing consumer safety concerns about certain drugs.³ The 2008 drug spending change (3 percent) declined because of a slight decline in per capita use of prescription drugs due to the impact of the recession, a low number of new drug products and safety and efficacy concerns.⁴

  

As seen below in Figure 2, the share of prescription drug spending paid by private health insurance increased substantially between 1990 and 2005 (from 26 to 48 percent), contributing to a decline in the share that people paid out-of-pocket (from 56 to 24 percent); the public funds (government) share of expenditures increased from 18 to 28 percent in that period. However, the implementation of the Medicare Part D drug benefit in 2006 substantially changed the mix of funding sources, as the government’s share rose from 28 to 37 percent between 2005 and 2008, while the private insurance portion fell from 48 to 42 percent, and the consumer out-of-pocket share declined from 24 to 21 percent.

Notes on Figure 2: “Consumer Out-of-Pocket” includes spending by consumers for health care services not covered by a health plan and cost-sharing amounts (coinsurance, copayments, deductibles) from public and private health plans. It does not include consumer premium payments and cost sharing paid by supplementary Medicare policies, which are included in the Private Health Insurance category.

Medicare’s and Medicaid’s shares of public funding changed when the Medicare drug benefit took effect in 2006. Between 2005 and 2008, Medicare’s share grew from 7 to 60 percent, and Medicaid’s share fell from 70 to 24 percent (Figure 3), because Medicare replaced Medicaid as the primary source of drug coverage for beneficiaries with coverage under both programs.

  

Factors Driving Changes

A number of factors contribute to changes in prescription drug costs.
Increased Utilization. The number of prescriptions dispensed in the United States in 2009 increased 2.1 percent, a larger growth rate than the 1.0 percent increase in 2008 over 2007. From 1999 to 2009, the number of prescriptions increased 39 percent, compared to a U.S. population growth of 9 percent.⁵ 

Lack of Adherence. A recent study found that the rate of unfilled prescriptions has increased. Together, health plan denials and patient abandonment resulted in 14.4 percent of all new, commercial plan prescriptions going unfilled in 2009, up 5.5 percent from 2008.⁶ A 2009 study found that drug-related morbidity, including poor adherence (not taking medication as prescribed by doctors) and suboptimal prescribing, drug administration and diagnosis, costs as much as $289 billion annually, about 13 percent of total health care expenditures.⁷

Price. Prescription drug prices increased 3.4 percent in 2009, 2.5 percent in 2008, 1.4 percent in 2007 and 4.3 percent in 2006. The average annual growth in prescription drug prices from 2000 to 2009 was 3.6 percent, compared to 4.1 percent for all medical care and 2.5 percent for all items.⁸

  

Changes in Types of Drugs Used. Prescription drug spending is affected when new drugs enter the market and when existing medications lose patent protection. New drugs can either increase or decrease overall drug spending, depending on price and how the new drug relates to existing drugs on the market (replaces something, is a new treatment, adds competition, etc.). Drug spending is also typically reduced when brand name drugs lose patent protection and face competition from new, cheaper generic substitutes. FDA analysis of 1999-2004 data shows that for products with a large number of generics, the average generic price falls to 20 percent and lower of the branded price.⁹ Several high-sales brand name drugs are expected to go off-patent in the next five years. New competition from generic drugs may bring down costs for patients.¹⁰

Sales and Profitability. Prescription drug sales were $300.3 billion in 2009, an increase of 5.1 percent over 2008. This increase was over double the 1.9 percent increase from 2007 to 2008. IMS Health attributes the 2009 growth to various factors including stronger demand, manufacturing pricing practices, greater use of specialty drugs and fewer product safety issues.¹¹ IMS Health forecasts a 3 to 6 percent annual growth in the U.S. pharmaceutical market in the next five years.¹²

PPACA Changes Affecting the Pharmaceutical Industry. The Patient Protection and Affordable Care Act, enacted March 23, 2010, includes several provisions that affect the pharmaceutical industry:

• Imposes an annual fee on certain manufacturers and importers of brand name drugs whose branded sales exceed $5 million.
• Establishes a process for FDA licensure of biosimilar (i.e., interchangeable) versions of brand name drug; drugs are granted 12 years of exclusivity before biosimilar versions of a drug can be approved.
• Changes certain drug labeling requirements and requires the HHS Secretary to determine whether adding certain information to a prescription drug’s labeling and advertising would improve health care decision-making.

Response

A variety of public and private strategies have been implemented to try to contain rising prescription drug costs.¹³

Utilization Management Strategies. Health plans have responded to rising prescription drug costs by increasing enrollee cost-sharing amounts, using formularies to exclude certain drugs from coverage, applying quantity dispensing limits, requiring prior authorization and using step therapy (starting with the most cost-effective drug and progressing to more costly therapy only if necessary). In 2009, over three-quarters of workers with employer-sponsored coverage were in plans with three or more tiers of cost sharing for prescription drugs, almost 3 times the proportion in 2000 (27 percent).¹⁴ Figure 4 shows worker copayment amounts for three- and four-tier structures.

*Fourth-tier drug copay information was not obtained prior to 2004.

A 2009 survey of individually purchased health policies found that the vast majority had drug benefits, with copayments being the predominant form of cost sharing. All HMOs and the majority of PPO/POS policies charged copayments which averaged, respectively, $10/$13 for generic drugs, $26/$28 for preferred brand name drugs, and $44/$48 for nonformulary drugs. Fewer than half of the PPO/POS policies had a prescription drug deductible, while over half of the HMOs had a drug deductible.¹⁵

Discounts and Rebates. Private and public drug programs negotiate with pharmaceutical manufacturers (often using contracted organizations known as pharmacy benefit managers) to receive discounts and rebates which are applied based on volume, prompt payment and market share.

Medicaid. Historically, prescription drugs have been one of the fastest-growing Medicaid services. Medicaid spent $19.4 billion for prescription drugs in 2008, an increase of 3.5 percent over 2007.¹⁶

Medicaid requires drug manufacturers who want to sell their products to Medicaid patients to agree to pay rebates to states for outpatient drugs purchased on behalf of Medicaid beneficiaries. PPACA increases the Medicaid drug rebate percentages for several types of outpatient drugs and requires that the resulting savings be remitted to the federal government.

  

Medicare. The Medicare Part D drug benefit shifted spending from the private sector and Medicaid to Medicare, making Medicare the nation’s largest public payer of prescription drugs (from 7 percent in 2005 to 60 percent in 2008). Medicare prescription drug spending as a share of total U.S. prescription spending rose from 2 percent in 2005 to 22 percent in 2008. Medicare prescription drug spending totaled $52.1 billion in 2008, an increase of 13 percent over 2007.¹⁷

Purchasing Pools. Some public and private organizations have banded together to form prescription drug purchasing pools which increase their purchasing power through higher volume and shared expertise.¹⁸

Consumers. Consumers are turning to a variety of methods to reduce their prescription costs,¹⁹ including requesting cheaper drugs or generic drugs, using the Internet and other sources to make price comparisons, using the Internet to purchase drugs, buying at discount stores, buying over-the-counter instead of prescribed drugs, buying drugs in bulk and pill-splitting, using mail-order pharmacies²⁰ and using pharmaceutical company or state drug assistance programs.

Importation. The high cost of prescriptions has led some to suggest that individuals be permitted to purchase prescription products from distributors in Canada or other countries (it is currently illegal, though it does still happen). Importation issues such as actual savings amounts, drug safety, and marketplace competition and pricing continue to be debated.

  

Outlook

HHS projects U.S. prescription drug spending to increase from $234.1 billion in 2008 to $457.8 billion in 2019, almost doubling over the 11-year period. The average annual increase in drug spending from the previous year is projected to increase from 3.2 percent in 2008 to 5.2 percent in 2009, and then rise to 7.3 percent in 2019 (reflecting increases in drugs prices, the number of new drug approvals and the share of expensive specialty drugs). Drug spending as a percent of overall national health spending is projected to increase somewhat from 10.0 percent in 2008 to 10.2 percent in 2019.²¹

  

In the coming years, implementation of various provisions of PPACA will affect prescription drug coverage, utilization, prices and regulation.  

• Coverage and utilization of prescription drugs will be expanded by PPACA’s:
  • Health insurance mandate and premium and cost-sharing subsidies
  • Designation of prescription drugs as an essential health benefit to be covered by private health plans through the new Health Benefit Exchanges and by Medicaid for newly eligible adults
  • Medicare prescription drug rebate, cost-sharing and catastrophic threshold changes.
• Prices charged to government programs will be affected by changes to Medicaid rebate requirements and expansions to the Section 340B program.
• Prescription drug regulation will be affected by the new process for licensure of biosimilar versions of brand name biological products and by drug labeling requirements.

 

These and other PPACA changes will ultimately impact national spending for prescription drugs in ways yet to be seen.

Reprinted with Permission from the Kaiser Family Foundation. The Henry J. Kaiser Family Foundation is a non-profit, private operating foundation dedicated to providing information and analysis on health care issues to policymakers, the media, the health care community, and the general public. The Foundation is not associated with Kaiser Permanente or Kaiser Industries.

  

1 All spending amounts in this report are in current dollars (i.e., not adjusted for inflation.)

2 Aaron Catlin et al., “National Health Spending In 2005: The Slowdown Continues, “Health Affairs 26, no. 1 (January/February 2007)142-153.

3 Micah Hartman et al., “National Health Spending In 2007: Slower Drug Spending Contributes To Lowest Rate Of Overall Growth Since 1998,” Health Affairs 28, no. 1 (January/February 2009) 246-261.

4 Micah Hartman et al., “Health Spending Growth At A Historic Low In 2008,” Health Affairs 29, no. 1 (January 2010)147-155.

5 Kaiser Family Foundation calculations using data from IMS Health, www.imshealth.com (Press Room, US Top-Line Industry Data 2008), and Census Bureau, www.census.gov. The per capita number may differ from the number reported at KFF’s website www.statehealthfacts.org because of differing data sources which use different retail pharmacy definitions (e.g., IMS Health includes mail order, Verispan does not).

6 Wolters Kluwer Pharma Solutions, Inc., Pharma Insight 2009: Patients take More Power Over Prescription Decisions (March 2010), www.wolterskluwerpharma.com/Press/Pharma%20Insight%202009%20-%20Media.pdf.

7 New England Healthcare Institute, Thinking Outside the Pillbox: A System-wide Approach to Improving Patient Medication Adherence for Chronic Disease (August 2009), www.nehi.net/publications/44/thinking_outside_the_pillbox_a_systemwide_approach_to_improving_patient_medication_adherence_for_chronic_disease.

8 Kaiser Family Foundation analysis of Consumer Price Index, All Urban Consumers, U.S. City Average, not seasonally adjusted, www.bls.gov/cpi/home.htm, accessed April 28, 2010.

9 US Food and Drug Administration, Center for Drug Evaluation and Research, “Generic Competition and Drug Prices,”

www.fda.gov/AboutFDA/CentersOffices/CDER/ucm129385.htm, accessed March 12, 2010.

10 IMS Health, “IMS Forecasts Global Pharmaceutical Market Growth of 5-8% Annually Through 2014; Maintains Expectations of 4-6% Growth in 2010,” April 20, 2010, www.imshealth.com (Press Room, Press Releases).

11 IMS Health, “IMS Health Reports U.S. Prescription Sales Grew 5.1 Percent in 2009, to $300.3 Billion” (April 1, 2010), online at www.imshealth.com (Press Room, Press Releases).

12 IMS Health Press Release, ibid., April 20, 2010.

13 See also Kaiser Family Foundation, Cost Containment Strategies For Prescription Drugs: Assessing The Evidence In the Literature (March 2005),

www.kff.org/rxdrugs/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=51885.

14 Kaiser Family Foundation and Health Research and Educational Trust, op. cit., Ex. 9.1, http://ehbs.kff.org/?page=charts&id=2&sn=24&ch=1136.

15 America’s Health Insurance Plans, Center for Policy and Research, Individual Health Insurance 2009: A Comprehensive Survey of Premiums, Availability, and Benefits (October 2009), www.ahipresearch.org/pdfs/2009IndividualMarketSurveyFinalReport.pdf.

16 Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at www.cms.hhs.gov/NationalHealthExpendData/.

17 Ibid.

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18 National Conference of State Legislatures, “Pharmaceutical Bulk Purchasing: Multi-state and Inter-agency Plans, 2008 edition” (Updated May 8, 2008), www.ncsl.org/programs/health/bulkrx.htm.

19 Devon Herrick, National Center for Policy Analysis, Shopping for Drugs: 2004, National Center for Policy Analysis, Policy Report No. 270 (October 2004), www.ncpa.org/pub/st/st270.

20 US mail services sales have increased 54 percent since 2003, though their share of total US prescription sales has increased only slightly -- 2007: $44.6 billion in sales, 16 percent of total prescription sales; 2003: $28.9 billion in sales, 13 percent of total prescription sales. IMS Health, www.imshealth.com (About Us, Press Room, US Top-Line Industry Data, 2007 U.S).

21 Christopher J. Truffer et al. ”Health Spending Projections Through 2019: The Recession’s Impact Continues,” Health Affairs 29, no.3 (March 2010), 522-529.

If you are a business owner and have questions about what actions you should take or what your responsibilities will be under the new law, please don't hesitate to call Elizabeth Long, Senior Benefits Consultant at 858-369-7923 or email her at elong@championrisk.net.