The Entrepreneur'sRESOURCE

Explore the Resource Center to find resources.  Designed with entrepreneurs in mind, our resource center allows you to find materials to grow great ideas.

Controlling Prescription Drug Benefit Costs

Larkin O'Keefe, President, MedTrak Services

Our company, MedTrak Services, administers prescription drug benefit programs for self-insured companies. I tell our clients, “You need to start a program now to control drug costs. If you design it correctly, you can have negative trends in your prescription drug costs over the next three to five years.” Yes, it’s possible. We took over a health insurance plan that covers high-risk individuals and reduced its drug costs by nine percent in the first year.

What if you don’t do anything to control drug costs? The impact will be larger than you might imagine. The U.S. Centers for Medicare and Medicaid Services projects that prescription drug expenditures in the United States will grow to $521.3 billion over the next ten years. That’s a 160 percent increase, and most of it will be attributable to the use of brand-name and specialty drugs.

Brands vs. Generics 

Brand-name drugs without generic equivalents (single-source brands) consume approximately 80 percent of pharmacy benefit plans’ total costs. The average brand costs more than $90 compared to $20 for the average generic. When a brand-name drug’s patent protection expires, generic versions of the drug can be approved for sale. The generic version works like the brand-name drug in dosage, strength, performance, and use and must meet the same quality and safety standards. All generic drugs must be reviewed and approved by the U.S. Food and Drug Administration. Fortunately, generic versions of some of the most frequently prescribed brand-name drugs are scheduled for approval over the next three years (see table). A generic equivalent for Lipitor, the number one-selling drug in the country, is scheduled to go on the market in 2007. Generic equivalents for two other good alternatives to Lipitor, Zocor, and Pravachol, were recently approved.

Still, the majority of drug benefit cost increases over the next ten years will result from a flood of specialty drugs coming on the market. Specialty drugs are high-cost injectable, infused, oral, or inhaled drugs that need special storage, handling, and administration or that generally require close supervision and monitoring of the patient’s drug therapy. The average monthly cost of a specialty drug is about $1,500.

Percentage Co-payments

In light of these trends, the single most effective thing entrepreneurs can do to reduce drug benefit costs is to motivate plan members to switch from single-source brands to generics. Quite frankly, the best way to do this is to squeeze pocketbooks by implementing percentage co-payments on brands and specialty drugs. For every percentage point increase in use of generics, drug costs will decrease one percent.

We recommend requiring plan members to pay between 30 and 35 percent of the cost of branded drugs. We find if you can get a large enough spread in co-pays between what members pay for brands versus generics – generally a $15 to $20 differential – they’ll start to look for lower-cost alternatives.

Alternatives in the form of competing generic products are available for at least 60 to 75 percent of brand-name drugs without generic equivalents. The proton pump inhibitor for indigestion, Nexium, for example, has no generic equivalent. But there are other proton pump inhibitors, such as Prilosec, that do. Omeprazole is generic Prilosec.

Most plan members we see are willing to use generics but lack knowledge about their efficacy, availability, and cost. When the doctor hands them a brand-name sample and a prescription, the pharmacist can’t switch the prescription to a generic without calling the doctor. With most pharmacies today focused on filling more prescriptions, few take the time to make these substitutions.

We urge our clients to tell their employees to ask two questions when doctors write prescriptions for them:

  • Does this have a generic available?
  • If not, is there a generic alternative that does the same thing?

We also educate plan members about alternatives through our Web site and by sending letters to them that say, for example, “You’re on Nexium. There are three lower-cost alternatives and here’s what they are. Ask your physician and see if one is right for you.”

Other Strategies

Entrepreneurs can save additional drug benefit costs by encouraging employees to:

  • Look Up Prices and Alternative Generic Products Before Buying – The Internet contains many Web sites providing this information. Two good ones are for prices and for different therapy options within each therapeutic class.
  • Use OTCs – Many brand-name drugs, such as Claritin, are available today in over the counter (OTC) versions, typically at less cost. Covering some of them in the company’s plan can save money.
  • Split Tablets – The cost of drugs is based on number of pills, not dosage. A member who’s taking a 50 mg drug strength can cut the cost of the drug in half by splitting a 100 mg tablet (see list below of commonly used brands that can be split).

Anything that empowers, informs, or motivates plan members to make cost-effective health care decisions is key to managing pharmacy benefits. Entrepreneurs who do a good job promoting generics and limiting their exposure on specialty drugs through co-pay design can watch their expenses go down, not up, over the next ten years.


Schedule for Approval of Generic Drugs by FDA












































Wellbutrin XL







* Industry sales over $1 billion annually.

Commonly Used Brands that Can Be Split

  • Atacand
  • Avandia
  • Avapro
  • Benicar
  • Coreg
  • Cozaar
  • Crestor
  • Diovan
  • Effexor
  • Lexapro
  • Lipitor
  • Norvasc
  • Pravachol
  • Risperdal
  • Seroquel
  • Toprol XL
  • Viagra
  • Zocor
  • Zoloft
  • Zyprexa

Editor’s Note: This article does not and does not purport to provide medical or health care advice, opinions, or recommendations. Each person's situation is unique and a medical doctor or pharmacist should be consulted appropriately. Medication should be administered and taken only as prescribed by a medical doctor or directed by a pharmacist.

© 2006 Ewing Marion Kauffman Foundation. All rights reserved.

comments powered by Disqus

Search for Resources

Stay Connected

Email Newsletter Signup

Want to get connected? Sign up to receive regular news, polls and updates from The Kauffman Foundation.

Email Newsletters

Want to be up-to-date with the latest news and updates from To subscribe, just give us your email address below; you'll choose which e-newsletters you'd like to receive on the next screen.