Mandatory Generic Drug Plans – Do They Really Save Money?
The past several years have seen many organizations move towards a Mandatory Generic drug plan only to be met with disappointment when the actual cost reduction was revealed.
‘Mandatory Generic’ refers to a drug plan design that stipulates that when a particular brand name drug has a generic alternative(s) the employee will only receive coverage for the generic(s). This is irrespective of whether or not a doctor’s note indicates ‘no substitution.’
Most generics are 25% (and in some cases 18%) the cost of brand name drugs so switching to a mandatory generic plan seems like it would be quite cost effective.
The solution, unfortunately, isn’t that simple due to the fact that many brand name drugs currently consumed are single-source brand drugs (i.e. they do not have generic alternatives).
In fact, from our experience on current data, roughly 85% of the cost of all brand drugs are associated with single-source brands. In other words, only 15% of the brands used actually have generic alternatives (i.e. multi-source brands).
Now, if we step back and consider that of the total drug spend roughly 60% is associated to brands (both multi and single-source). By taking this 60% (total brands) and multiplying it by 15% (i.e. multi-source), we get 9%.
The 9% represents the cost of drugs that are associated with multi-source brands. These are the only drugs that are impacted by the Mandatory Generic plan design and by doing so we reduce this cost by 75% (since most generics are 25% the cost of brands) for an estimated annual savings of 6.75% of drugs.
6.75% savings on drugs is still savings at the end of the day, however, it probably is not what most of us hoped for and in some cases may not warrant the employee push back received for the inconvenience.
The reality is that each company’s breakdown of multi-source vs. single-source brand usage is different and this must be analyzed on a company level to determine the true savings that will apply by switching to a Mandatory Generic plan.
Peter Demangos MBA, CFP, CLU, is the Managing Director at PDF Financial Group Inc. email@example.com