Both unit costs and utilization rates are adjusted to reflect the details of a specific employer's plan, and then combined
to calculate the expected monthly claim-cost rate per population. This is known as the per-member-per-month claim cost (PMPM).
This number captures the impact of plan-specific details, such as covered benefits, cost sharing, and financial incentives
(for example, creating disbursement-fee incentives so pharmacists will fill prescriptions with generics), as well as data
on demographics, geographic area, and the employer's industry. (Teachers get more dental care than miners, for example, because
they appear in public at work, speaking in front of groups.)
When drug companies talk to health plans, they need to present details about the expected utilization of the treatment and
its costs in all areas of healthcare delivery. To do so, manufacturers must refine their understanding of how different elements
of the healthcare system interact, and what variables affect them. This is a primary expertise of health-insurance actuaries.
Using the in-depth knowledge and expertise of such professionals will enable the development of a solid base model for the
manufacturer, which can then be tailored to meet the needs of different health plans. Customized models can be created to
include the impact of benefit design, geographic area, healthcare-delivery management level, and other relevant factors.
Models can also be made more valuable by the implementation of dynamic population modeling, typically employed by actuaries.
Models generated by pharmaceutical companies are often based on information gathered in clinical trials, or from populations
that are derived from canned databases, rather than reflecting the population pertaining to the health plan of interest. A
pharmaceutical company would not need to know the demographic characteristics of each health plan. Instead, it could develop
a model that allowed utilization and cost estimates based on user-defined demographic data.
A Long Way to Go
In 2000, the Academy of Managed Care Pharmacy (AMCP) developed the Format for Formulary Submissions, an effort to help pharmaceutical
companies give health plans more complete information about new products. Designed to speed the decision-making process at
health plans, the Format was a guideline for companies to present information in a standardized dossier.
Version 2.1 of the Format, released in April 2005, provides specific requirements regarding the requested cost-effectiveness
model, and specifies that a budget-impact model (if any) be done separately. Creating separate cost-effectiveness and budget-impact
models is good advice. Proponents say the Format levels the playing field between manufacturers and health plans by going
beyond clinical information to create a standard for constructing, presenting, and critiquing cost-effectiveness models. Most
manufacturers are now submitting dossiers, although they are often incomplete, especially when it comes to comparisons with
However, a cost-effectiveness analysis does not use units that help the actuary estimate and budget for future costs, or monitor
claims. In too many cases, the manufacturers aggregate the purported health benefits of a drug into a single index, such as
saved Quality-Adjusted Life Years (QALYs). By combining factors that actuaries like to weigh separately, the manufacturers
obscure the very information their customers value.
Savvy pharmaceutical companies can do better. An actuarially sound, full-budget-impact model may be out of reach. But companies
could express data in units that a health plan can integrate into its own internal actuarial analysis. Financial decision
makers at a health plan want to know how a new drug or medical device affects the value of expected claims. Clinical efficacy
and even cost-effectiveness may impress a pharmacy and therapeutics committee. But the financial decision makers will look
at the big picture and the bottom line. Companies that want to maximize their chances of achieving preferred status on the
plan's formulary need to provide health plans with their most complete, actuarially sound budget-impact analysis.
Dereliction of Data
A report published by the International Society of Pharmacoeconomic and Outcome Research suggests several reasons why health
plans make little use of drug-company data Five of them are listed below. Not surprisingly, they echo comments frequently
heard at most health plans when the Pharmacy and Therapeutics Committee holds a meeting.
» Health-plan decision makers are skeptical of information provided by drug makers.
» Decision makers remain skeptical of extensively used assumptions in pharmacoeconomic analyses. Instead of estimates, they
prefer empirical data, such as results from randomized control trials. Health-plan decision makers cannot use data that aggregates
health benefits into a single index, such as Quality-Adjusted Life Years (QALYs) saved. They prefer to examine independent
components, such as utilization rates and claim-cost rates (PMPM) for relevant medical services.