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Until the 1980s, drug coverage was not a distinct benefit in employer-based health insurance. Instead, it was included in major medical plans (when it was included). Such plans were developed by the commercial insurance companies in the late 1950s to compete with Blue Cross and Blue Shield (which covered the services of hospitals and physicians, respectively). Major medical plans served as the start of “catastrophic coverage,” reimbursing up to $10,000 in expenses that were not restricted to specific categories of hospital or physician expense (ie, they could include drugs).1 Coverage was usually subject to an overall deductible for all services and to the same coinsurance amounts (usually 20%) that applied to all medical care.2 It was thus a limited feature of private insurance plans.3

Two factors led to growth in the provision of drug benefits during the 1980s and 1990s: the rise of managed care and the rise of pharmacy benefit managers (PBMs). The 2 factors evolved simultaneously in symbiotic fashion. The growth of the PBMs was further spurred by rising expenditures on pharmaceuticals and the employers’ need to control these costs. These events are chronicled in the next 2 sections.


The first key event was the rise of managed care organizations (MCOs) such as the health maintenance organization (HMO) and preferred provider organization (PPO) models. The 1973 HMO Act legitimized HMOs and provided some initial funding for planning. The HMO industry took off in the 1980s, fueled by employer interest in cost containment and controlling health insurance premiums. Total HMO enrollment increased rapidly between 1980 and 2000 (Figure 16-1).

Figure 16-1

Growth in US Health Maintenance Organization Enrollment.

The HMOs offered a distinct drug benefit with minimal deductibles and copayments. The drug benefit could be included as part of the basic benefit package (23% of HMOs in 1989) or in a rider typically purchased with that package (74% of HMOs in 1989).4 Two-thirds of HMOs provided coverage to 90% or more of their enrollees. The MCOs offered such coverage to reduce (ie, substitute for) more expensive, downstream care in hospitals and emergency departments (EDs), and thereby manage the capitated payments they received.

Third-party insurance coverage for drug benefits expanded rapidly during the 1990s (Figure 16-2). In 1996, 55% of the commercial population and 67% of the non-Medicare population had drug coverage.

Figure 16-2

Growth in Third-Party Coverage for Drugs. (Source: IMS Health Retail Method of Payment Report, 1999.)


The second key event was the rise of PBMs, who worked initially with the HMOs ...

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