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VALUE HEALTH TO INTRODUCE COUNTER-DETAILING BY END OF 1991; MEDCO IS BEGINNING MASSACHUSETTS PROGRAM THIS MONTH, WITH $ 1 MIL. SAVINGS TARGET FOR FIRST YEAR

Executive Summary

Value Health Inc. intends to add prescription drug formulary and counter-detailing services before the end of the year, according to a synopsis of upcoming new business projects in a recent $ 38.5 mil. initial public offering. The formulary and counter-detailing programs are components of a new managed care pharmaceutical program called Physician Rx Profiling. Value Health has not yet determined the size of their counter-detailing force, but the firm has begun recruiting and training clinical pharmacists for the job. Value Health says it has several customers that have expressed interest in the program. Medco Containment Services is committing "the equivalent of eight full-time, specially-trained pharmacists" for its counter- detailing program now getting under way in Massachusetts in affiliation with the Blue Cross/Blue Shield Medex (Medigap) plans. Medco determined that an eight-person team would suffice based on previous experience with counter-detailing by Harvard professor Jerry Avorn. One of the originators of the counter-detailing approach to controlling prescribing practices, Avorn is working with Medco on its program in Massachusetts. In a March 26 decision permitting the Blues to add Medco prescription services to 1991 coverage, the state insurance division notes that Medco anticipates making 8,000 counter- detailing calls in a year (four visits each to 2,000 physicians -- or 1,000 visits for each full-time counter-detailing pharmacist). Medco told the state insurance division that the counter- detailing program and prospective drug utilization program would save $ 1 mil. in the first 12 months and "$ 2 mil. annually once in full effect." More broadly, Medco claims that its DUR activities in conjunction with other "managed care" approaches to prescription drugs can generate savings of about $ 100 per eligible life annually on traditional major medical or plastic card drug plans. The moves by Value Health and Medco into counter-detailing are indicative of the entrance of third-party administrators into product selection and drug ingredient cost decisions. Medco describes its counter-detailing plan as part of a change in focus by the company from cutting costs on dispensing to cutting costs on prescribing. In the 1980s, the firm notes, it set its objectives on assuring low cost dispensing (through mail order and claims administration efforts to cut dispensing fees). In the current decade, the firm is emphasizing "managed care" programs aimed at cutting unnecessary or inappropriate dispensing and controlling the ingredient cost of prescriptions. Medco Exec VP Per Lofberg said the changes in emphasis in the drug benefit plans are "totally analogous to what is happening in the [general] health care market in this country." For Medco, the attempt to cut costs out of the drug ingredient part of the prescription appears in its first results to be a profitable strategy. Although the Prescribers' Choice (preferred therapeutic alternative) program is in place only for 10% of Medco's current business, the company is already crediting it with major contributions to profit margin improvement. Medco Chairman Martin Wygod estimated that about two-thirds of the company's recent 25 basis-point improvement in margins is "directly" attributable to favorable purchasing contracts with drug manufacturers. Wygod explained to the Alex. Brown health care conference that Prescribers' Choice will actually hold back revenue growth a bit by lowering the prices of the drugs dispensed by Medco's mail order business, but the positive impact on profit growth will be dramatic. He said that he is "very, very comfortable" with predictions that the Prescribers' Choice program could add 100-400 basis points to profit margins during calendar 1992. Wygod said the profit improvement should fall at the upper end of the spectrum. Medco says that it has a dozen manufacturers signed up for either its Prescribers' Choice program or Product Assurance program. The Product Assurance program assures a refund to the patient for any prescriptions that have to be discontinued because of side effects. Medco and Value Health are moving toward managed care services for prescription programs from different positions. While Medco is strong in mail order and claims management, Value Health's strengths are in utilization review and its 10,000-unit preferred provider organization. Medco's mail order business has grown to a projected 21.4 mil. prescriptions in the year ending June 30 this year (up from 18.1 mil. last year). Medco puts its mail order dollar volume at $ 1.3 bil. in calendar 1990. Value Health, by contrast, attributes only 3% of its prescription volume to mail order business and says that segment of the business is provided "as a convenience." Value Health's foundation is in retrospective DUR information. DURbase, Value Health's 10-year old utilization database, is currently the nation's largest drug utilization review program focused on adverse reactions, the company says. Serving almost 5 mil. patients enrolled in employer-sponsored and Medicaid drug benefit programs, the DURbase program draws on a database of more than 9 mil. patient records and 120 mil. medical and prescription benefit claims. Some of DURbase's clients include Metropolitan Life Insurance, the NYS Prescription Plan, and the Michigan Special Education Association. The prospectus for Value Health's initial offering explains that DURbase is used "to identify patients at high risk for drug induced illness." Every patient claim processed through the DURbase system is subjected to "over 200 clinically based screens" designed to pinpoint prescriptions that are likely to result in an adverse drug reaction. "When patients [at risk] are identified," the prospectus states, "Value Health communicates by alert letter with the prescribing physicians." The company maintains that its letters generate changes in therapy over 60% of the time. Value Health is currently issuing between 8,000 and 10,000 alert letters per month through the DURbase system. On average, each alert letter is estimated to save the company's clients between $ 105 and $ 159 per patient on the costs of prescription drugs alone. Based on those estimates, total annual savings on drug costs for DURbase clients are between $ 10-20 mil. annually. That figure does not include savings from averted hospitalizations. Under its ValueFee program, Value Health negotiates discount prices for prescriptions filled through its pharmacy network. Value Health claims that its prescription prices and utilization controls can save 18% off of other vendor prices. Current customers include American Express, SelectCare, Manufacturers Bank of Detroit, and Chevron. This month, Value Health is launching a ValueClaim paper claim drug benefit service. By requiring beneficiaries to use a paper claim system to receive reimbursement for pharmaceuticals, the company maintains that the program sponsor can avoid some of the induced usage created by card plans. Value Health's prospectus says that "the company believes many employers want" such a program, offering a "managed care design without foregoing the advantages of deductible and claims submission features." In 1990, Value Health's total revenues were $ 96.5 mil. The company's prescription drug benefits programs, administered by a subsidiary known as Value Rx, accounted for more than two-thirds of those revenues ($ 67.2 mil.). The other third of the company's 1990 revenues came from products designed to "manage costs and maintain quality in other selected health care sectors" such as psychiatric care, and footcare, "that are of particular concern to employers because of their size, rapid cost, escalation and potential for overutilization." Value Health's two largest customers are Ford and Chrysler; these two firms accounted respectively for 37.8% and 10.2% of the company's 1990 revenues. Those two contracts are handled as capitated programs.
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