03.30.2010 Presentation for the
City of Woodhaven
• HR Connection 5.0 Presentation
• HR Connection 5.0 Overview
• What is an HRA?
• Zywave Rx Fact Sheet
• Legislative Brief—Electronic Disclosures
• Legislative Brief—COBRA Answers for Employ‐
• Trends Fact Sheet
• Agent Call List
INTRODUCTION TO HRCONNECTION® 5.0
Rated HR for Human Resourceful.
THE PROBLEMS HR & EMPLOYEES FACE
• Employers need to educate and empower
• Employees need benefit information.
• Newer, more efficient ways of communicating
benefits and other company information are
becoming more prevalent.
THE SOLUTION: HRCONNECTION 5.0
• Cornerstone Benefit Plans, Inc. is pleased to bring
you the solution to your HR and benefits
• HRconnection – the most powerful HR
communication system available – helps you deliver
company information in one secure and convenient
location that is easily viewed by employees.
• It’s customizable to your needs and preferences.
HRCONNECTION HELPS . . .
• EMPLOYERS manage company information in one secure and convenient
location that employees can view from any computer with Internet access.
• EMPLOYEES reach a comprehensive resource for company and benefits
information, any time of the day or night, by answering most questions that
would normally be directed to the HR department.
• HUMAN RESOURCES personnel to function more efficiently and devote
more time to strategic issues.
• Obtain up-to-date company and benefits information and useful forms.
• Connect to comprehensive human resources information 24 hours a day, 7
days a week.
• Access real-time answers to frequently asked questions on important issues
HRCONNECTION HELPS HUMAN RESOURCES . . .
• Showcase benefit programs to employees and their families
• Provide centralized employee self-service, any time, reducing inquiries
directed to HR.
• Reduce printing and distribution costs by providing materials online.
• Communicate important company information to all employees in a
consistent, timely, and useful manner.
• Attract and retain valued employees by portraying a high-quality image.
• Provides a wealth of information for employees in an easy-to-use and
understandable format, which includes:
- Company Information - Human Resources
- My Information - Setup and Administration
- Vacation Administration
Each employee will have
there own user ID and
Here the Employee can
access HR document,
Employer can add
company bulletin, and
Ex: Expense Reports,
track Vacation If an Employer would like
& Sick Day’s online Election’s made by
the Employee, this can be
done for a fee.
This site is brought to you by:
HR will be able to list there Contact Information. HR &
Employees will be able to post bulletins, and even
access the employee directory!
This site is brought to you by:
This site is brought to you by:
• Empower employees to manage personal
information, including the ability to:
– Add, review or update personal information, as well as
emergency contacts, dependents and beneficiaries
– Manage time-off requests and view a summary by type
– Enter life events
– Manage/view benefit elections
Employees will be able to access there own
Personal Information. They will be able to
track vacation and sick days, change there
address, view there medical plan, and even
notify HR if there is a Change in Life Status.
This site is brought to you by:
This site is brought to you by:
• Educate and assist employees on company-specific information, including:
– Company history
– Holiday and event listings
– Departmental contacts
– Employee directory
– Company bulletin board
– Provides employees online access to:
• Job descriptions/postings
• Company handbook
• Recommended links
• Policies and procedures
• Career growth, such as training opportunities
Eliminates the need for distributing bulky and costly employee materials.
Employees can access the following at any
-Policies & Procedures
This site is brought to you by:
This site is brought to you by
• Bundles everything employees want to know about
their benefit plans in one secure location. Benefits are
listed by type, and employees can obtain detailed plan
information and benefit summary information, including
the ability to:
• View plan design information, including rates & eligibility
• Access Summary Plan Descriptions (SPDs)
• Compare plan benefits
• Obtain plan form
• View carrier contact information
• Access Frequently Asked Questions
Employees will be able to view all plans
the company is currently offering.
• Easy navigation and interactive features for employees.
• Easy to set up and update; fast and flexible administrative functions.
• Delivering targeted employee information is easy with a customizable home
page that includes an at-a-glance design to display:
– A welcome message and seasonal announcements.
– A list of links to employer-recommended Web resources.
– Targeted employee communication campaigns.
– A dashboard of upcoming time off and time remaining, personalized to
• From portal setup, to uploading custom content, to
reporting... HRconnection offers administrators the
• Upload employee data
• Add, edit or delete benefit plan data
• Administer life events
• Schedule, approve and track vacation
• Publish content
• Select portal look, feel and functionality
• Create election and employee reports
WITH HRCONNECTION . . .
...you educate and empower your employees!
– It’s flexible and secure – choose the features that make
sense for you
– Provides easy online access to users
– Allows HR to do more with less
Get resourceful today with HRconnection 5.0!
Cornerstone Benefit Plans, Inc. is pleased to provide City of
Woodhaven with HRconnection®, an intuitive HR communication Web
portal that helps you deliver company information in one secure and
convenient location that is easily viewed by employees. Customizable
to your needs and preferences, HRconnection offers you the following
flexible features and benefits.
CHOOSE YOUR OPTIONS TRAINING AND SUPPORT
Customization of portal look, feel and menu options A customized implementation
Self-serve access to company and employee communication information and access to a dedicated
including City of Woodhaven’s history, handbooks, forms, directories and Cornerstone Benefit Plans,
policies Inc. Account Manager
Online benefits elections including standard and customizable reporting On-screen, context-sensitive
Anytime access to benefit plan information
Online Quick Reference
Time-off approval, tracking and reporting capabilities Guides
Database of employee information useful for reporting
Select portal functionality is optional based on preferences
What is a Health Reimbursement Arrangement?
A Health Reimbursement Arrangement (HRA) is an employer-funded account that is
designed to reimburse employees for qualified medical expenses that are paid for out-of-
pocket. There are no annual contribution limits on HRAs; however, the employer usually
sets the contribution below the annual deductible. HRAs are often designed to operate with
a high deductible health plan (HDHP), thereby reducing premium costs while encouraging
employees to spend wisely.
Your employer sets up the HRA, determines the amount of money available in each
employee’s HRA for the coverage period, and establishes the types of expenses the funds
can be used for.
What are the benefits of an HRA?
You may enjoy several benefits from having an HRA:
- Contributions made by your employer can be excluded from your gross income.
- Reimbursements may be tax-free if you pay qualified medical expenses.
- Any unused amounts in the HRA can be carried forward for reimbursements in later
Who is eligible for an HRA?
HRAs are employer-established benefit plans. These may be offered in conjunction with
other employer-provided health benefits. Employers have complete flexibility to offer
various combinations of benefits in designing their plan. You do not have to be covered
under any other health care plan to participate. Self-employed persons are not eligible for
an HRA. Certain limitations may apply if you are a highly-compensated participant.
An HRA may reimburse medical care expenses only if they are incurred by employees or
former employees (including retirees) and their spouses and tax dependents. HRA coverage
must be in effect at the time the expense is incurred.
Are HRAs really best only for the young and healthy?
No. HRAs and other HDHPs are well-suited for a very wide demographic of people.
According to Aetna, the average age of its HRA plan members is 42, the same average age
as those who opted for more traditional plans.
What is a High Deductible Health Plan (HDHP)?
A HDHP has:
- A higher annual deductible than typical health plans; and
- A maximum limit on the sum of the annual deductible and out-of-pocket medical
expenses that you must pay for covered expenses. Out-of-pocket expenses include
copayments and other amounts, but do not include premiums.
An HDHP may provide preventive care benefits without a deductible or with a deductible
below the minimum annual deductible. Preventive care includes, but is not limited to, the
1. Periodic health evaluations.
2. Routine prenatal and well-child care.
3. Child and adult immunizations.
4. Tobacco cessation programs.
5. Obesity weight-loss programs.
6. Screening services (i.e. cancer, heart and vascular diseases, infectious diseases,
Amount of Contribution
Your employer funds the account, so it costs you nothing out-of-pocket. There is no limit on
the amount of money your employer can contribute to the accounts. Additionally, the
maximum reimbursement amount credited under the HRA in the future may be increased or
decreased by amounts not previously used. The maximum annual contribution is
determined by your employer’s plan document. There may also be a cap amount for the
HRA. Your employer can choose to fund your HRA with an annual contribution or on a
Distributions from an HRA
Distributions from an HRA must be paid to reimburse you for qualified medical expenses you
have incurred. The expense must have been incurred on or after the date you are enrolled
in the HRA.
Debit cards, credit cards and stored value cards given to you by your employer can be used
to reimburse participants in an HRA. If the use of these cards meets certain substantiation
methods, you may not have to provide additional information to the HRA.
If any distribution is, or can be, made for other than the reimbursement of qualified medical
expenses, any distribution (including reimbursement of qualified medical expenses) made in
the current tax year is included in gross income. For example, if an unused reimbursement
is payable to you in cash at the end of the year, or upon termination of your employment,
any distribution from the HRA is included in your income. This also applies if any unused
amount upon your death is payable in cash to your beneficiary or estate, or if the HRA
provides an option for you to transfer any unused reimbursement at the end of the year to a
If the plan permits amounts to be paid as medical benefits to a designated beneficiary
(other than the employee's spouse or dependents), any distribution from the HRA is
included in income. However, if before August 15, 2006, the plan contains such a provision,
this rule will not apply until plan years beginning after December 31, 2008.
Reimbursements under an HRA can be made to the following persons:
1. Current and former employees
2. Spouses and dependents of those employees
3. Employees’ covered tax dependents
4. Spouses and dependents of deceased employees
PERSPECTIVES PROVIDING INSIGHT INTO TODAY'S EMPLOYEE BENEFITS ISSUES
Increasing A Annual Healthcare Cost Increases,
Healthcare Costs 16.0% 15.2%
National Averages 2001-2009
and Your Employee
Ninth Edition 8.0%
HEALTHCARE costs, and consequently employee health 4.0%
benefits costs, have been increasing at an alarming rate for nearly
a decade. While the upward trend in healthcare costs seems to be 2.0%
slowing, cost increases that are outpacing the rate of inflation are 0.0%
still commonplace; costs increased in 2008 and are expected to 2001‐02 2002‐03 2003‐04 2004‐05 2005‐06 2006‐07 2007‐08 2008‐09
increase slightly in 2009. Avoiding rising healthcare costs is (proj.)
nearly impossible, but you can learn about why they continue to Source: Hewitt Health Value Initiative™, 2008
rise and what you can do to minimize the fallout for your
organization and your employees.
The next few pages will discuss the latest healthcare cost
figures, the factors leading to nearly a decade of unprecedented
rate hikes, and some solutions that firms around the U.S. are 2008 Healthcare Cost Increases,
undertaking to help soften the blow. Major Metropolitan Areas
National Healthcare Cost and Renewal Rate Boston 4.5%
Projections Chicago 3.7%
Overall national healthcare costs have been skyrocketing for Dallas/Ft. Worth 8.1%
over a decade, and are now just beginning to level off. From 1994 Denver 5.3%
to 1998, average annual healthcare cost increases hovered around
2 percent. From 1999 to 2000, however, costs leapt 9.4 percent
and the annual percent change then entered and stayed in the
Houston 2.6% B
Los Angeles 7.5%
double digits until finally taking a slight downturn from 2005 to
Exhibit 1A, right, depicts the percent change in average
New York City 8.7%
annual healthcare cost increases from 2001 to 2009. Cost Orlando 9.2%
increased to 6 percent in 2008. Hewitt projects healthcare costs for Philadelphia 8.1%
2009 to be around 6.4 percent, compared to 6 percent in 2008. San Francisco 6.7%
The overall cost of healthcare has a direct impact on the rates Tampa Bay Area 7.1%
employers pay for employee health benefits. Still, health benefits Washington, D.C. 6.7%
costs have varied widely across the country for the last several
0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
years, hitting some metropolitan areas much harder than others.
Exhibit 1B, right, illustrates healthcare cost increases (or in one
Source: Hewitt Health Value Initiative™, 2008
case, decrease) in major metropolitan areas in 2008. 1
While the rate increase has slowed in recent years, experts jumbo employers (20,000 or more employees). Nationally,
expect significant annual increases in healthcare costs to continue enrollment in CDHPs jumped from 5 percent to 7 percent of all
indefinitely. According to the 2008 Hewitt Health Value covered employees. This migration into lower cost CDHPs is one
Initiative, the average cost of healthcare benefits for active factor helping to hold down benefit cost increases.
employees rose to $8,331 per year in 2008 and is expected to CDHPs delivered substantially lower costs per employee than
grow to $8,863 in 2009. either PPOs or HMOs in 2008. CDHP costs averaged $6,207 per
Exhibit 2A, below, shows the average total health benefit employee, compared to $7,768 for HMOs and $7,815 for PPOs.
costs for active employees for the years 2002 to 2007. Exhibit Employer account contributions are a standard feature of
2B below depicts the 2008 healthcare costs per employee in U.S. HRAs but not HSAs. Over a third of large HSA sponsors do not
major metropolitan areas. contribute. Of those that do, the average contribution is
According to the survey, employers see consumerism and approximately $694. With deductibles in traditional PPOs rising,
health management as the most effective way to manage health the CDHP is becoming a more attractive option for employees
benefit costs for the future, as opposed to the simple cost-shifting who have a choice.
measures that have been used traditionally.
Shift to Consumerism Yields CDHP Growth Factors Leading to Increased Healthcare Costs
Why are U.S. healthcare costs skyrocketing? Several market
The percentage of all employers offering a consumer-directed
conditions working in tandem have lead to a decade of
health plan (CDHP) based on either a health reimbursement
unrelenting increases. Understanding why your annual health
account (HRA) or a health savings account (HSA) continues to
plan renewal rates may be significantly higher than the previous
rise; in 2008, it increased from 7 percent to 9 percent, as small
year is the key to formulating alternatives and solutions to your
employers continue to adopt these new types of plans. Growth in
particular plan’s challenges. It is also the key to educating your
CDHPs was strongest among larger employers, where offerings
employees about the reasons behind any plan or contribution
rose from 14 percent to 20 percent among employers with 500 or
changes you may decide to introduce.
more employees, and from 41 percent to 45 percent among
Annual Healthcare Costs Per Employee, National Averages 2002-2009
2002 2003 2004 2005 2006 2007 2008 2009
2008 Healthcare Costs Per Employee, Major Metropolitan Areas
Dallas/Ft. Worth $9,277
Houston $8,740 B
Los Angeles $7,296
New York City $8,540
San Francisco $8,696
Tampa Bay Area $8,331
Washington, D.C. $7,552
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000
Source (both): Hewitt Health Value Initiative™, 2008
Demographics: The Aging of America
It is an inescapable fact: the U.S. population is aging. As a One of the major factors
result, there is a subsequent rise in the occurrence of chronic
diseases like asthma, heart disease, and cancer, and a resultant
driving up the cost of
need for more resources to fight these diseases. This leads to healthcare is the growth of
elevated utilization of prescription drugs and other medical
services, and an overall rise in dollar expenditures on healthcare. healthcare providers.
Dramatic Rise of Prescription Drug Costs
Please turn to the attached Special Report: Prescription Drug Increased Utilization and Consumer Demand
Costs and Your Employee Health Plan for a discussion of why Utilization of many healthcare services has risen over the
prescription drug costs are on the rise. decade. A number of factors such as improvements in medical
procedures and technology, the influence of managed care,
Expansion of Providers elevated consumer awareness and demand, and a boost in the
One of the major factors driving up the cost of healthcare is number of practicing physicians, caused health services like the
the growth of healthcare providers. While these systems provide number of surgical procedures and the number of prescription
many benefits to the communities they serve, they also require a drugs dispensed to rise significantly. Other services, such as
great deal of capital to fuel their growth. These capital breast cancer screenings, immunizations for children, and
expenditures by hospital systems and other providers place diagnostic procedures like CT and MRI have also experienced
upward pressure on the costs of many medical services. sharp utilization increases.
Consolidation of Managed Care Companies New Medical Technology
The landscape of the managed care industry has changed. Life expectancy and disease-specific mortality rates in the
Years of under-pricing, weak underwriting, and the costly U.S. are steadily improving. Old techniques are being replaced
process of assimilating acquisitions has lead to serious dips in with new, often expensive treatments using new medical devices,
profitability and stock prices for a large number of carriers. diagnostic products, drugs, and surgical procedures. These
Those who couldn’t make the cut have either sold off their include everything from digital mammography to hip
managed care operations to a bigger fish, or have completely replacement to radioactive “seeds” used to treat prostate cancer.
gone out of business. Companies that haven’t exited the market It is not surprising that these new procedures come with hefty
altogether are now faced with much less competition and a price tags, and therefore drive the overall cost of healthcare —
renewed commitment to achieving healthy returns. This has and subsequently health benefits costs — upward.
ultimately resulted in increased rates.
Weakening of the Managed Care System
Political Environment and Government Regulation The booming economy of the late 1990s, consumer demand,
Healthcare issues, particularly those surrounding health plans and the regulatory environment discussed above have led to a
and medical liability, have become one of the most hotly debated general weakening of the managed care system.
topics in the political arena, while health insurance is one of the During the economic boom of the late 1990s, patients and
most regulated insurance sectors on both the state and federal employers migrated away from the tightest forms of managed
levels. care, HMOs. Employers seeking to hire the best employees in the
State and federal mandates have increased twenty-five-fold tight job market moved towards offering plans that allow patients
over the last three decades. Often these mandates duplicate or to see doctors that are “out-of-network” or have much less strict
conflict with each other, and they almost always come with referral processes, such as Point-of-Service (POS) plans. In
increased costs for the healthcare system. addition, many employers making health plan purchase decisions
On the political front, concerns about timely access to quality focused on keeping employees happy by ensuring that most
healthcare services and calls for federal laws to protect doctors in an area were in the chosen network, rather than
consumers led to a variety of legislative initiatives, including the choosing narrower networks with deeper discounts.
now defunct Patients’ Bill of Rights. Homeland security interests, Provider contracting has also placed a strain on the managed
a slowing economy, the war in Iraq, and other domestic issues care system. Many hospitals that have taken a beating due to the
have since forced most of the political debate to the backburner. Balanced Budget Act of 1997 — which cut billions of dollars
However, if the Patients’ Bill of Rights were resurrected or other from Medicare managed care payments — and by other financial
legislation regarding medical liability were initiated, the negative difficulties are now willing to walk away from health plans that
impact on healthcare costs is expected to be significant. they view as offering insufficient reimbursement rates and
Issues such as prescription drugs for seniors, Medicare prohibitive payment practices. In many cases, these threats have
reform, and coverage for the uninsured will also continue to play won hospitals and other providers significant increases in
a big role on political and legislative agendas in the coming reimbursement for the first time in several years. These actions
years, and will undoubtedly continue to place upward pressure on are having a domino effect as other providers become more
costs. courageous and attempt to exert power during negotiations with
With the level of premium increases seen over the last several
Improving Employee Education and Communication
Studies agree that the only way for consumer-driven
years, employers have backed away from offering rich benefits,
strategies to have their desired impact (to drive smarter consumer
and instead have employed a number of tactics to reduce costs.
behavior among employees) is for companies to also invest
heavily in the communication, education, and decision support
Healthcare Spending and Medical Cost Inflation
tools that will result in better decision-making by employees and
Overall healthcare spending and medical cost inflation are
their dependents. Requiring active enrollment is increasing, as are
ascending, often due to many of the factors discussed above.
decision support tools that can help employees evaluate their
Employers React — What Can You Do?
You and other employers are undoubtedly trying to determine
Increasing Disease Management and Wellness Programs
The number of companies using disease management programs
how to keep accelerating health plan rates from having
and wellness programs continues to grow, according to the 2008
debilitating repercussions on your organization. After years of
Kaiser/HRET Employer Health Benefit Survey:
trying to absorb most of the costs because of attraction and
retention issues, many firms are now trying to attack the root • 54 percent of firms offering health benefits offer at least
causes of rising costs with sustained, systemic changes. Small some type of wellness program.
businesses in particular continue to face the critical decision to • Among firms offering health benefits and wellness
raise employee contributions or to discontinue offering the programs, 33 percent of employers report their primary
coverage altogether. reason for offering wellness programs is to improve the
Many employers plan to make significant investments in health of employees and reduce absenteeism.
longer term solutions aimed at improving the health and
productivity of their workers. These strategies involve
introducing more consumer-driven plans, value-based design, Other Strategies for Reducing Costs
improving employee education, influencing positive employee The following are some additional tactics that employers are
behavior changes through condition management and wellness using to reduce healthcare costs.
programs, and improving the amount and quality of data
available on healthcare costs and quality. CONTRIBUTION STRATEGIES
Employers are looking for ways to control costs by
Introducing or Expanding Consumerism evaluating how they differentiate contributions for employees
While basic cost-shifting remains a prevalent means for and their dependents. Pay-based contribution models are also
managing costs, there is evidence of a movement toward more commonly used.
consumer-oriented solutions. Those companies that want to
balance costs and employee relations are incorporating more of a DEPENDENT COVERAGE CHANGES
consumerist focus into their plans. Changing the rules for dependent coverage may be one way
to influence employee behavior. The most common practices
Value-Based Plan Design include:
Employers are beginning to acknowledge that cost-shifting and implementing higher cost sharing for dependents;
cost-cutting strategies are not enough. In addition to the providing flexible credits for opting out of coverage;
consumerism plan designs, employers are looking at new models, requiring additional contribution if an employee’s working
such as value-based design. This option incentivizes employees spouse does not accept coverage from his or her own
to use appropriate care and services to manage their health. employer; and
According to Hewitt’s research, almost 20 percent of large requiring an employee’s working spouse to accept coverage
employers have implemented a value-based design and another from his or her own employer.
40 percent are interested in learning more about these plans.
CHANGE PRESCRIPTION DRUG COVERAGE
Efforts to control overall healthcare costs by making changes
to prescription drug benefits include:
Requiring active enrollment is using a three-tier design,
increasing, as are decision requiring step therapy,
requiring the use of generics,
support tools that can help requiring mail order of certain drugs, and
using a therapeutic MAC/reverse copay design.
employees evaluate their
PERSPECTIVES PROVIDING INSIGHT INTO TODAY'S EMPLOYEE BENEFITS ISSUES
Special Report: Prescription Drug Trends
Overview and increased use of specialty drugs; lower rebates from drug
Prescription drug costs continue to represent an increasingly manufacturers; and changes in the therapeutic mix of drugs. 3
large portion of healthcare expenditures. Understanding the The portion of prescription drug expenses paid by private
pharmaceutical market is key to determining new approaches health insurance has increased substantially over the past 16
for addressing these rising costs. years (from 26% in 1990 to 44% in 2006). This trend has
contributed to a decline in the share that people pay out of
According to the Centers for Medicare & Medicaid Services their own pockets (from 56% in 1990 to 22% in 2006.) The
(CMS), spending in the U.S. for prescription drugs was $216.7 government’s share of expenditures remained fairly constant.
billion in 2006, more than 5 times the $40.3 billion spent in However, according to the U.S. Department of Health and
1990. 1 While prescription drug spending has been a fairly Human Services (HHS), the implementation of the Medicare
small proportion of national health care spending compared to Part D drug program in 2006 significantly changed the mix of
spending for hospital and physician services (10% in 2006, funding sources, as the government’s share rose from 28% in
compared to 31% and 21%, respectively) it has been one of 2005 to 34% in 2006, the private insurance portion fell from
the fastest-growing components, until recently growing at 48% to 44%, and the consumer out-of-pocket share declined
double-digit rates compared to single-digit rates for hospital from 24% to 22% (Figure 2).
and physician services. In 2006, the annual rate of increase in
prescription spending was 9%, compared to 7% for hospital
care and 6% for physician services 2 (Figure 1).
Figure 2: Percent of Total National Prescription Drug
Expenditures by Type of Payer, 1990‐2006
Figure 1: Average Annual Percentage Change in
Selected National Health Expenditures, 1996‐2006 56
49 48 49 48
20 18 44 Out‐of‐
18 40 Pocket
16 15 15 36 35 34
14 14 31 28
14 13 13 30 31 26 Private
12 11 23 Health
20 20 22 21 22 25 25 22
10 9 9 9 18 Insurance
8 8 8 8 8
8 7 7 7 7 7 7
6 6 6 6 10
5 5 5 Public
4 3 3 0 Funds
1990 1992 1994 1996 1998 2000 2002 2004 200 6
Source: Kaiser Family Foundation calculations using National Health Expenditure
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
historical data from Centers for Medicare & Medicaid Services.
Hospital Care Physician & Clinical Services Prescription Drugs
Source: Kaiser Family Foundation calculations using National Health Expenditure Notes: Consumer Out-of-Pocket includes direct spending by consumers
historical data from Centers for Medicare & Medicaid Services. for health care goods and services not covered by a health plan and cost-
sharing amounts (coinsurance, copayments, deductibles) required by
public and private health plans. It does not include consumer premium
Prescription spending growth slowed from 1999 to 2005 payments and cost sharing paid by supplementary Medicare policies,
which are included in the Private Health Insurance category. May not
because of the increased use of generic drugs, the increase in add to 100% due to rounding.
tiered copayment benefit plans, changes in the types of drugs
used, and a decrease in the number of new drugs introduced.
However, the growth in drug spending in 2006 resulted from Within public funds, the funding shares changed from 7%
the increased use of prescription drugs believed to be because Medicare and 68% Medicaid in 2005, to 53% Medicare and
of the implementation of Medicare Part D, new indications for 26% Medicaid in 2006 (Figure 3, next page).
existing drugs, strong growth in several therapeutic classes,
condition not previously treated with drug therapy, they can
also lead to increased drug spending. However, new drugs can
Figure 3: Distribution of Total Public Prescription reduce drug spending if they enter the market at a lower price
Drug Expenditures by Type of Payer, 2005 & 2006 than existing drug therapies, for instance, if a new drug enters
a therapeutic category with one or two dominant brand
25% competitors. The number of new drugs approved by the U.S.
Food and Drug Administration (FDA) has fluctuated over the
past decade, with 39 approvals in 1997, 27 in 2000, 20 in
7% 2005, and 18 in 2006. 9
21% Drug spending can also be reduced when existing brand drugs
2006 26% lose patent protection and face competition from new, lower
53% cost generic substitutes. Analysis by the FDA shows that
generic competition is linked with lower drug prices: on
0% 10% 20% 30% 40% 50% 60% 70% 80% average, the first generic competitor prices its product only
Other Public Medicaid Medicare slightly lower than the brand-name manufacturer; the second
Source: Kaiser Family Foundation calculations using National Health Expenditures generic manufacturer reduces the average generic price to
historical data from Centers for Medicare & Medicaid Services.
nearly half the brand name price; and then prices continue to
fall at a slower pace as additional generic manufacturers
Notes: “Medicaid” includes federal and state funds for Medicaid and the market the product. The average generic price falls to 20% or
Medicaid State Children’s Health Insurance Program (SCHIP) lower of a brand’s price for medications with a large number
expansion: “Other Public” includes other federal, state, and local
expenditures and the Medicaid SCHIP program.
of generic equivalents. 10
About 75% of FDA-approved drugs have generic
counterparts. In 2007, 21% of total prescription drug sales and
Driving Forces 65% of total prescriptions dispensed were generic medicines.
According to the Kaiser Family Foundation’s September 2008 From 2005 to 2006, generic sales rose to 8%. 11 Federal
“Prescription Drug Trends” report, changes in prescription legislation allowing FDA approval of generic substitutes for
drug spending are primarily driven by three main factors: brand name biologic drugs was initiated in 2007 but has yet to
changes in the number of prescriptions dispensed (utilization), be enacted.
price changes, and changes in the types of drugs used.
Advertising. Prescription use in general and movement to
Increased Utilization. It is a fairly simple concept: More higher-priced drugs can be influenced by advertising. The total
people are using more prescription drugs, thereby driving amount manufacturers spent on advertising declined from
overall spending upward. From 1997 to 2007, the number of 2004 to 2005 ($11.9 billion to $11.4 billion), rose to $12
prescriptions purchased increased 72% (from 2.2 billion to 3.8 billion in 2006, and declined sharply in 2007 to $10.4 billion.
billion), compared to a U.S. population growth of 11%. The This fluctuation is a new trend, as advertising spending had
average number of retail prescriptions per capita increased increased every year from 1996 to 2004. Advertising directed
from 8.9 in 1997 to 12.6 in 2007. 4 The percent of the toward consumers (television, radio, magazines, newspapers,
population with a prescription drug expense in 2005 was 59% and outdoor billboards) decreased from 2006 to 2007 (from
for those under age 65, and 91% for those 65 and older. The $4.8 to $3.7 billion), and the share directed toward physicians
percentage of these populations with a drug expense has (through pharmaceutical representatives and professional
remained basically steady since 1997, when they were 59% journals) also decreased (from $7.2 to $6.7 billion). However,
for those under age 65, and 86% for those 65 and older. 5 spending for consumer advertising in 2007 was more than four
Increased Prices. Prescription drug prices increased at 3.5% in times the amount spent in 1996 ($3.7 billion vs. $0.8 billion),
2006 – the same rate as in 2005. 6 Retail prescription prices 7 while 2007 physician advertising was almost two times the
(which reflect both manufacturer price changes for existing 1996 amount ($6.7 billion vs. $3.5 billion). 12 Changes to
drugs and changes in use to newer, higher-priced drugs) prescription advertising rules are currently being considered
increased an average of 6.9% a year from 1997 to 2007 (from by the FDA and Congress.
an average price of $35.72 to $69.91), more than two-and-a- Profits. From 1995 to 2002, the number one most profitable
half times the average annual inflation rate of 2.6% over the industry in the nation (profits as a percent of revenues) was
same decade. In 2007, the average brand name prescription pharmaceutical manufacturing. It ranked third in 2003 and
price in was over three times the average generic price 2004, fifth in 2005, second in 2006, and third in 2007 – with
($119.51 versus $34.34). Manufacturers received 78% of the profits of 15.8%, compared to 5.7% for all Fortune 500 firms
average retail prescription price of $69.91, retailers received in 2007. 13 Increasing only 3.8% from 2006, prescription drug
19%, and wholesalers received 4% in 2007. 8 sales were $286.5 billion in 2007 – the smallest growth rate
Changes in Types of Drugs Used. When new drugs enter the since 1961. According to IMS Health, the slower sales growth
market and existing drugs lose patent protection, prescription is attributed to loss of exclusivity of brand name medicines,
drug spending is affected. If new drugs are used in place of fewer new product approvals, the leveling of year-over-year
older, less expensive medications, they can increase overall growth from the Medicare Part D program, and the impact of
drug spending. In addition, if new drugs supplement rather safety issues. 14
than replace existing drug treatments, or if they treat a
Insurance Coverage Response
Lack of insurance coverage for prescription drugs can be A variety of public and private strategies have been employed
detrimental to the industry. An April 2008 survey found that to try to contain rising prescription drug costs.
uninsured adults ages 18-64 are more than twice as likely as
Utilization Management Strategies. Health plans have
those who are insured to say that they or a family member did
excluded certain drugs from coverage, used quantity
not fill a prescription (45% compared to 22%), cut up pills or
dispensing limits, and increased enrollee cost-sharing
skipped doses of medicine (38% compared to 18%) in the past
amounts. In 2007, 75% of workers with employer-sponsored
year because of the cost. 15
coverage had a cost-sharing arrangement with three or four
Prescription drug coverage comes from several sources, both tiers, almost three times the proportion in 2000 (27%). 22
private and public: Copayments for nonpreferred drugs climbed from an average
of $29 in 2000 to $43 in 2007 (an increase of 48%).
Employer Coverage. The main source of health coverage in
Copayments for preferred drugs increased by 67%, from an
the U.S. are employers, providing coverage for 177 million
average of $15 in 2000 to $25 in 2007 (Figure 4).
(59%) of Americans in 2007. 16 Sixty percent of employers
offered health insurance to their employees in 2007, and 65% Figure 4: Among Covered Workers with Three‐ or Four‐Tier
of employees in those firms are covered by their employer’s Prescription Drug Cost Sharing, Average Copayments, 2000‐2007
health plan. 17 Other employees likely obtained coverage 80
through a spouse. Nearly all (98%) of covered workers in 71
employer-sponsored plans had a prescription drug benefit in 60
Medicare. Previous to January 1, 2006, the traditional a 40
o30 29 32
Medicare program (the federal health program for the elderly D 22 25 25
and disabled) did not provide coverage for outpatient 20 15 18
8 9 10 11 11
prescription drugs. As a result, 27% of seniors age 65 and 10
older, and one-third of poor (34%) and near-poor (33%) 0
seniors, had no drug coverage in 2003. 19 The Medicare Generic Preferred Nonpreferred Fourth‐Tier*
Prescription Drug, Improvement, and Modernization Act of 2000 2002 2004 2006 2007
2003 put into effect a voluntary Medicare outpatient Source: Kaiser/HRET Survey of Employer‐Sponsored Health Benefits, 2000‐2007,
prescription drug benefit (Part D), under which the 44 million Red numbers=Estimate is statistically different from estimate for the
Medicare beneficiaries can enroll in private drug plans. previous year shown at p <.05.
HHS data shows that as of January 2008, approximately 90% *Fourth-tier drug copay information was not obtained prior to 2004.
of Medicare beneficiaries have drug coverage; 25.4 million
beneficiaries have Medicare Part D drug coverage from either Discounts and Rebates. Drug programs, both private and
a stand-alone prescription drug plan (17.4 million, including public, negotiate with pharmaceutical manufacturers (often
6.2 million low-income seniors and people with disabilities, using pharmacy benefit managers, which are contracted
known as dual eligibles, who were transferred from Medicaid organizations) to receive discounts and rebates which are
drug coverage to Medicare Part D drug coverage), a Medicare applied based on volume, prompt payment, and market share.
Advantage drug plan (7.6 million), or other Medicare health Manufacturers who want their drugs covered by Medicaid
plan types (0.4 million). Another 10.2 million beneficiaries must provide rebates to state Medicaid programs for the drugs
have coverage from creditable employer or union retiree plans they purchase. Somestates have also negotiated additional
(including FEHB and TRICARE retiree coverage.) About 4 rebates, or supplemental rebates.
million beneficiaries have creditable drug coverage from the The Department of Veterans Affairs, the Defense Department,
VA and other sources, and around 4.6 million beneficiaries did the Public Health Service, and the Coast Guard – as well as
not have creditable coverage (were not enrolled in a Part D other government agencies – participate in a program called
drug plan or a source of creditable coverage.) 20 the Federal Supply Schedule, where they purchase drugs from
Medicaid. Medicaid is the joint federal-state program that pays manufacturers at prices equal to or lower than those charged to
for medical assistance to 60 million low-income individuals their “most-favored” nonfederal purchasers. In order to
and is the main source of outpatient pharmacy services to the participate in Medicaid, another program, the Section 304B
low-income population. There are differences in state policies Program, requires manufacturers to provide drugs to certain
in regard to copayments, preferred drugs and amount of nonfederal entities (such as community health centers and
prescriptions which can be filled, but all state Medicaid disproportionate share hospitals) at reduced prices. This
programs provide coverage for prescription drugs. In 2006, program may be expanded, as federal legislation was
about 6 million dual eligibles were transferred from Medicaid introduced in 2007, but nothing has yet been enacted.
drug coverage to Medicare Part D drug coverage, representing Medicaid. Prescription drugs have been one of the fastest-
an estimated 14% of Medicaid beneficiaries and accounting growing Medicaid services. The Deficit Reduction Act of
for about 45% of Medicaid prescription drug spending in 2005 gave states more authority to control Medicaid drug
FY2003. 21 States have been required to make payments to spending through increased cost sharing for non-preferred
Medicare to help finance Medicare drug coverage for these drugs, changes in the way Medicaid pays pharmacists,
transferred and future dual eligibles since January 1, 2006. allowing pharmacists to refuse prescriptions for beneficiaries