Over the past few years, pharmacy cost trends have moderated significantly with some of the lowest trends reported in 2011.  Trends continue to be relatively high for specialty drugs which are associated with a much higher cost per prescription, but formulary substitution, or substitution to lower cost formulary equivalents, has significantly dampened trends for non-specialty medications.  Formulary equivalents can either be associated with generic or brand name drugs.

Most organizations have implemented generic substitution strategies and have realized savings, but even with these successes, there are opportunities for further savings.  Using formulary substitution or alternatives can have a greater impact on lowering member cost share and overall pharmacy expenditures.  The pharmacy market is very dynamic with additional drugs coming on and off patent each year.  It is important for organizations to continually monitor their pharmacy trends, update formularies, and refine strategies and tactics to generate even greater savings from generic substitution and formulary equivalents.

To illustrate, a hypothetical example is presented below, where the data reveal potential for additional savings through generic substitution.

In Plan ABC, spending for outpatient drugs represents 14.7% of total allowable expenses:

The per member per month (PMPM) trend for prescription (Rx) drug allowed charges increased about 4.5% from the prior year, which is somewhat higher than national averages.

However, Plan ABC’s 2011 PMPM allowable expenses for these claims were favorable when compared to a national benchmark.

While all prescription drug trends have decreased, the Single Source Brand (SSB) drugs have increased.  This is probably due to the increased utilization and cost of specialty medications.  This indicates an opportunity to further enhance Plan ABC’s formulary management strategy by increasing tactics to improve formulary and generic substitution.An analysis of potential 2011 formulary substitution reveals a possible $2.2 million reduction in cost (about $4 PMPM) for this relatively small plan if each of these prescriptions could have been substituted.  The table below displays the top 15 drugs in terms of potential cost reduction.

Generic substitution and using formulary equivalents are not new concepts, but they still offer the potential for significant savings for both the patient and plan or payer.

The following steps will help maximize the opportunity for lower drug spend for the patient and plan:

1. Analyze pharmacy data to better understand cost and utilization trends.
2. Carefully review existing PBM contracts.  Explanations of discounts can be difficult to follow and rebates are not typically provided with claims data, so those savings need to be evaluated before making any changes to formularies or contracts.
3. Review current plan designs and communication strategies to identify ways to further encourage generic substitution.