Formulary Best Practice: Cost Containment through Generic Drugs

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Effects of generic competition in pharmaceuticals are more complex than they used to be

Cost containment has been a major aspect of the Affordable Care Act (ACA), with incentives for reducing hospital readmissions and pressure on drug formulary managers to keep prescription drug prices contained as well as possible.

Pharmacy Benefit Managers (PBMs) are third-party administrators of prescription drug coverage programs for insurance plans, including commercial health plans Medicare Part D, employer self-insured plans, and others. PBMs empanel physicians, pharmacists and other relevant experts to create lists (formularies) of drugs approved for reimbursement under various health plans as a way to encourage cost-effective prescribing in keeping with clinical needs.

Formulary “best practices” work toward the goal of keeping a lid on prescription drug costs, and doing so requires extensive knowledge of drug patents and generic alternatives to name brand drugs. The right business intelligence tools can help formulary managers make optimal decisions on which drugs to include in a particular drug formulary.

Drug Patent Expiry and Cost Trends

One significant cost control measure many employers use is requiring employees to pay a greater proportion of prescription drug costs when they choose a name brand drug over an available generic version. Drugs on formularies are also generally segmented into “tiers”, with the top tier being expensive biotech drugs (for which there may not be a generic alternative). Consumers pay significantly more for these drugs than they would a commonly used generic antibiotic, for example.

However, pharmaceutical companies are not always forthcoming about how drugs are priced, and in all fairness, countless factors go into drug pricing. In general, however, patent expiration tends to attract generic competitors to the market and reduce prices across the board. That’s not a given, however, as there are some very old drugs, like Daraprim, which have shot up in price despite the fact that they have been off-patent for a long time.

Not every name brand drug attracts generic competitors. Daraprim, for example, is not widely prescribed, and there’s little incentive for generic manufacturers to offer an alternative. So while patent expiry can and often does result in price relief for consumers, it isn’t a hard-and-fast rule. In other words, simply knowing a patent is about to expire is helpful, but not sufficient for making the wisest choice for a particular drug formulary.

Drug Patent Business Intelligence Tools

Business intelligence is the key to creating formularies that help with cost containment.

Business intelligence tools that help formulary managers make optimum decisions about formularies mustaccomplish several things:

  • They must anticipate which drugs will be going off-patent, and be ready to turn name-brand inventory quickly in anticipation of generic availability.
  • They must understand conditions that cause generic drug prices to jump, as was the case with Daraprim.
  • They must seize opportunities for savings when branded drugs first go off-patent by being ready to dispense generics at the earliest possible opportunity and alerting healthcare providers that a generic will soon be available so they can adjust prescribing patterns.
  • They must anticipate “usage creep” with generic drugs, and develop guidelines to ensure generics aren’t over-utilized simply because they’re generic (which can drive prices up).
  • They must anticipate and understand generic drug shortages, which are more common with injectable drugs, and which can force pharmacies to turn to more expensive alternatives.

Anticipating and Adjusting for Potential Cost Savings

For formulary managers, keeping drug prices under control is a dynamic process. And just as the NBA has gradually embraced the zone defense as a more free-flowing basketball style has developed, formulary managers must understand the newer feedback loops that contribute to both increased and decreased drug prices, for both brand names and generics, and must adapt accordingly.

As drug manufacturers merge and acquire other companies, and as some purchase specific drugs with the aim of driving the price up, the simple concept of “more generics equals lower cost” becomes more complicated and nuanced. For this reason, the right business intelligence tools are absolutely necessary for formulary managers to be able to adapt and adjust, so they can accurately recognize potential cost-savings.

About DrugPatentWatch
DrugPatentWatch provides actionable business intelligence on small-molecule drugs and the 110,000 global patents covering them. Since its founding in 2002, DrugPatentWatch has been cited by CNN, NEJM, Nature Journals, and many other leading publications.
Use cases for the DrugPatentWatch database include:

  • Branded pharmaceutical firms seeking competitive intelligence
  • Generic and API manufacturers seeking knowledge of which drugs to develop
  • Wholesalers seeking advance notice of patent expiry to avoid over-stocking off-patent drugs
  • Healthcare payers seeking to project and manage future budgets

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