February 22, 2012
By Contributing Editor Tom Philpott
Rear Adm. Thomas J. McGinnis has been chief of pharmaceutical operations for TRICARE for four years, overseeing changes to corral costs and encourage beneficiaries to use their triple-option drug benefit efficiently. Prescriptions filled at military treatment facilities (MTFs) or through the TRICARE Home Delivery program save money for beneficiaries and for taxpayers versus using the retail network of neighborhood drug stores and supermarkets.
In the following interview with Observation Post columnist Tom Philpott, McGinnis discusses planned increases to retail pharmacy copayments laid out in the FY 2013 defense budget request and recent trends in pharmacy operations. The interview has been edited length and, in some cases, clarity.
What do you hope the impact of a fresh set of pharmacy copayment changes will have on program costs and beneficiary behavior?
The overarching goal is to incentivize use of the lowest cost-point venues — military pharmacies and home delivery — which are much less expensive than retail, especially for maintenance medications that beneficiaries probably will be taking for the rest of their lives, such as cholesterol-lowering drugs and blood-pressure medications.
Also, given the savings tied to generic versus brand-name medications, another goal is to incentivize beneficiaries to ask their doctors, “Is there a generic available for my condition?” For almost any condition there is. They can continue to get generic drugs for free through mail order or for only a small copay[ment] if they continue to use retail.
What would the savings be to the military pharmacy program if Congress adopts this higher set of beneficiary copayments at retail outlets?
Over a 10-year period, savings would be $10.6 billion in mandatory spending and $17.4 billion in discretionary spending. In 2013 alone, we would see a $256 million decrease in mandatory and $979 million in accrual dollars, which refers to the over [age] 65 population. So projected pharmacy costs in 2013 of almost $8 billion would fall below $7 billion.
We spend 80 percent of our pharmacy dollars on only 29 percent of total prescriptions — brand-name drugs. So if we can move more beneficiaries toward generic and home delivery, which alone is a 27-percent savings over retail, that’s where the big savings comes in.
Just in the first quarter of FY 2012, after very modest increases in copay[ment]s, we saw a significant shift to home delivery and generics. Generics became free. For patients with a market basket of medications, four or five, the savings is 19 percent on average. That would be huge if we can move more patients [through use of less] modest copay[ment] increases.
The proposal calls for a $14 increase, to $26, per prescription of brand-name drugs in FY 2013. That would increase $2 every year until it reached $34 a prescription. What’s the rationale for that plan?
It’s a gradual increase to a more realistic level. Copay[ment]s had not changed in 10 years until the modest increases on Oct. 1, 2011. If you go back to the advent of the TRICARE program, copay[ment]s as a percentage of drug costs were higher. So we are trying to build them up to what they would have been had we kept up with health care expenditures since 1996. It would still be less than commercial insurance companies charge beneficiaries.
It’s a gradual so beneficiaries can get used to the increase. Some of them will move [to home delivery and generics] right away. For others, there needs to be a pretty big spread before they will move. Economists call it price elasticity. We will incentivize mail order by keeping generics free. All drugs will remain free at MTFs. And we keep copay[ment]s at zero for active duty [servicemembers] at all three points of service.
Will $34 for brand-name drugs by 2017 raise copayments enough so that their relative cost to beneficiaries has returned to 1996, or will more $2-a-year increases be necessary?
That has to be assessed at that time. Another over-arching goal is to sustain the pharmacy benefit and keep it on a more sustainable path.
Did you consider variable copayments, based on income or retired pay, as the department wants to do with planned increases in TRICARE fees?
That would add another level of complexity, and we’re on a time-for-claims adjudication process at almost 60,000 pharmacies already.
A footnote in the budget chart for the proposed drug copayments says, “Non-formulary pharmaceuticals will have limited availability in retail pharmacies.” Is that new?
Yes, very much so. These are the third-tier drugs. When we bid a class of drugs, the pharmaceutical industry usually has about five brand names. We’ll get good bids from three of the five, a moderate bid on a fourth, and the fifth won’t want to play with us, for any good price. That last one gets put in a third tier.
These other four are in the second tier and one of them is going to be a better price than others, so that will be in our basic core formulary at MTDs. Every MTF will have to have the drug. An example is Nexium of the proton pump inhibitor class to treat gastric reflux. We get a great price from AstraZeneca. But another drug, Aciphex, didn’t give us a good price, so its third tier. So at retail we charge a $25 copay[ment] instead of $12.
But we think we can get greater leverage in negotiating drug prices for the formulary by telling companies if they don’t give us a good price, they’re not even going to be available [to TRICARE users] at retail. That’s the way we operate at MTFs today. Third-tier drugs are not available unless medical necessity is established by the MTF physician.
So at retail, there will be only two tiers under your proposal?
Yes. The third tier would be available at retail only if you tried all of these other drugs and your doctor says the very expensive drug is medically necessary. [Then your doctor] could fill out a medical necessity form.
How much of your projected savings relates to this change?
There are only 179 drugs in the third tier, plus another 107 brands of glucose test strips, compared to more than 5,000 drugs on the formulary.
TRICARE pharmacy costs, which had been climbing steadily for many years, recently leveled off and now appear to be falling. Why?
Yes, a graph of our costs since fiscal 2002 looks like a ski slope, which plateaued in 2009 and 2010 and then began to come down a little bit in 2011. A couple of different things are happening. The big one is federal pricing refunds in the TRICARE retail network.
The National Defense Authorization Act for 2008 gave us authority to collect from drug manufacturers federal price refunds on brand-name drugs through retail outlets. It took effect in January 2009. Before that, we only had a voluntary refund program worth about $29 million in 2007 and $201 million in 2008. The industry didn’t have to do that, but they wanted their brand-name drugs on the basic core formulary across all three points of service. Being on the formulary means every point of service, including MTFs, must stock that drug. It has the same effectiveness of other drugs in its class, but DoD gets a great price on it.
And now we’re also collecting mandatory refunds for brand names in the retail network.
What’s the history behind that change?
We have always gotten federal pricing discounts on drugs dispensed at MTFs and through mail order but not in the retail network. Pharmaceutical companies made the argument that the retail network is not a depot-type system like MTF pharmacies or mail order. Congress finally acted to level the playing field for our retail network, requiring the federal ceiling price rather than the price charged nonfederal customers.
So the $303 million in discounts we saw in 2009 was both mandatory and voluntary discounts. In 2010, discounts totaled $664 million, again mostly mandatory, and in 2011 we collected refunds of about $1.2 billion.
So retail drug discounts were the main reason for falling pharmacy costs. What else had an impact?
We have seen a couple of blockbuster brand-name drugs go generic, and we are seeing increased generic drug utilization in our system. Last year, for all three points of service, the generic drug utilization rate was 70.8 percent, up from 58.6 percent five years ago. That drives down costs.
Twenty percent of our dollars are used for 70.8 percent of our prescriptions, those filled by generics. Eighty percent of our dollars are used to buy the 29.2 percent of our prescriptions, the brand-name drugs. That shows how generics really save us a lot of money.
And we have to keep educating beneficiaries and providers about this. When a generic drug is available, try that first. See if that works before you go to more expensive brand-name products.
How do you use the formulary to incentivize use of generics?
Copayments are one big way. In October [2011], we changed them for the first time in 10 years. The generic copay[ment] at retail went from $3 to $5, and at mail order it went from $3 down to zero. So beneficiaries can look forward to paying $60 per year for a generic drug from the retail network or use mail order and get it free. So we saw a big bump up in mail order in the first quarter, and I think free generics by mail has been a big part of that.
It’s $60 in savings for beneficiaries, and DoD saves quite a bit of money, especially if beneficiaries bring brand-name medications to mail order with their generics. We bumped the copay[ment] for brand-name medications at retail from $9 to $12 and left it at $9 for a three-month supply at mail order. So they pay only $36 versus $144. Brand-name drugs at retail cost us 27 percent more, so moving to mail order is a win-win situation.
How are usage rates changing across the three points of service for the pharmacy program?
The MTF has been trending upward slightly. The retail line, which for many years was on a steep slope upward, has plateaued, and we will start seeing retail trending downward. Just in that first quarter of FY 2012, we saw retail utilization drop for the first time, by 4.2 percent, and home delivery was at 15.8 percent, its highest-ever utilization rate. From FY 2009 to 2010, retail growth was 5.1 percent and home delivery was 8.2 percent growth. So we are seeing almost a doubling of home-delivery growth and retail growth declining for the first time.
Was this all due to an adjustment in copayments?
There was what I call a “perfect storm” of factors around Oct. 1 [2011]. We saw the free generics at mail order. We had our educational campaign out there telling beneficiaries it’s easy to transfer your prescription to mail. At the same time, we saw reports on Walgreens leaving the TRICARE network, and beneficiaries realized they had to do something because they weren’t going to be able to use Walgreens after Jan. 1. So we have seen a lot of beneficiaries moving out of Walgreens to other less costly retail outlets to DoD or to MTFs or to mail order.
So trend lines are breaking in favor of beneficiaries using points of service less costly to the government?
[It’s] less costly for beneficiaries, too. It could be a function of this economy also, with beneficiaries looking at their spending and seeing where they can save some dollars.
Is the cost of the military pharmacy benefit declining?
Yeah, you’ve seen the peak of costs. Six or seven big brand-name drugs are going generic over the next couple of years, or have gone generic already like Lipitor. That will really bring the costs down.
The only thing that keeps me up at night is what will the FDA approve in breakthrough therapy that is going to be very high cost. There are a lot of biotechnology products in the FDA pipeline that are probably going to be quite expensive, but we don’t know when or where they will be approved or what usage there will be for our beneficiaries. Those high-cost drugs could very well offset savings we’re going to see from these generics coming online. That’s the only thing I hedge on when I say our costs will go down.
If you can show Congress that last October’s small-shift copayments changed behavior and brought pharmacy costs down, I suppose it helps the department’s argument for changes to be unveiled in the 2013 budget.
Exactly. But beneficiary groups didn’t complain about those incremental increases. That’s why Congress didn’t block us from raising copay[ment]s for the first time in 10 years, after four years’ trying. So we will have to wait and see what we get.
My guess is there were no big complaints to Congress from beneficiary groups because they wanted free generics by mail, ever since it was recommended by the Task Force on the Future of Military Health Care [in 2008]. The slight increase in retail copay[ment]s was not enough for beneficiary groups to oppose it.
Is it just something about getting medicines for free? The savings is only $60 a year.
A lot of our beneficiaries, especially those in their 50s and 60s, are on cholesterol-lowering drugs, blood-pressure drugs, proton pump inhibitors, like Nexium, for gastric reflux. So it’s not just $60 a year. They are on three or four medications, and it adds up.
You’ve said a goal for the pharmacy benefit is to operate more like an enterprise. What do you mean?
There’s the purchased-care system of retail and mail order that TRICARE Management Activity is responsible for, and there’s the direct-care system of MTFs. Those need to work more closely together. They need to be incentivized properly so the best efficiencies come through. That’s the way we’re going to save money.
The MTF point of service, especially with all the pharmacists being deployed, saw capacity to fill prescriptions fall. Now that the war is winding down and MTFs will be getting back to pre-war staffing levels, we need to make sure they’re incentivized properly so they fill more prescriptions. There should be no concern about going over budget because that’s a good thing. If prescriptions are filled at the MTF, beneficiaries aren’t going downtown and costing the system more.
So with this enterprise concept, you see usage rising at base pharmacies, improving efficiency, and retail-outlet usage going down?
Exactly, especially for maintenance meds, the ones beneficiaries are going to be on pretty much the rest of their lives — the cholesterol-lowering drugs, the blood-pressure medications, the proton [pump] inhibitors. Those really don’t need to be in the retail network. Beneficiaries will save and DoD will save. We’ve got to drive that point home. The retail network will remain necessary for acute medications such as antibiotics and painkillers.
At the Military Health System conference in late January, you mentioned electronic prescriptions have become commonplace in the civilian sector but can’t be used at MTFs. And that’s a concern.
MTF pharmacies were one of the first with such technology, getting rid of the paper and sending prescriptions electronically from the provider to the pharmacy. But that’s only within the military health care system.
Now the private sector is coming to electronic prescribing in leaps and bounds, mainly because CMS (Centers for Medicare and Medicaid) is incentivizing use of e-prescriptions and in the future will penalize providers who don’t use electronic prescribing.
Right now, electronic prescriptions in the private sector can go to the TRICARE mail-order pharmacy or to retail network pharmacies. However, we are not there yet on the MTF side. So if I get referred downtown to see a specialist who wants to write a prescription, I can’t, say, send it back to Bethesda and get it filled there. We are working furiously to get the system to accept electronic prescriptions forms from downtown.
Do you have a deadline for that to happen?
Not yet, no.
Is there concern that, if the military system is slow to accept e-prescriptions, beneficiaries will leave base pharmacies for the retail network?
Yes, that is one of the worries. It’s why we are moving quickly with our system folks to get that fix in place.
About the author: Tom Philpott is a freelance writer and syndicated news columnist. His column "Military Update" appears in 48 daily newspapers throughout the U.S. and overseas.
Copyright Tom Philpott and Military Officers Association of America. All rights reserved.