Health-care inflation is back, and prescription drug costs are rising at a double-digit rate. Here are some ways to get in front of the problem.

Health-care cost inflation is back with a vengeance, and prescription drugs are leading the way. The U.S. population is aging, new and more expensive drugs are emerging, and pharmaceutical companies are aggressively marketing directly to consumers and doctors. For businesses, managing the rise in prescription drug costs is becoming a fixture on finance and HR agendas.

Even though prescription drugs account for only about 10 percent of the nation's total health-care costs, they have been driving health-care inflation for the past few years, according to a study conducted early this year by the National Institute for Health Care Management Research and Educational Foundation in Washington, D.C. The study found that outpatient prescription-drug spending totaled $154.5 billion in 2001, up from $131.9 billion in 2000. It also found that although 9,482 drugs are available on the retail market, 50 of those accounted for more than 44 percent of prescription drug expenditures last year. It is easy to understand why, as usage of these medications is growing rapidly and their average price is much higher than that of other medications (see Name Brands Lead Skyrocketing Drug Costs below).

How these numbers trickle down to individual companies varies greatly, according to the 2002 Segal Health Plan Cost Trend Survey conducted by The Segal Company, a benefits consulting firm based in New York City. The survey found that the prescription drug costs for some companies rose more than 40 percent last year, while other organizations' bills grew at rates in the single digits. Staying near the low end of this spectrum is particularly important for businesses that self-insure prescription drug coverage, as increased spending directly affects corporate coffers.

Rising drug costs' impact on a given company depends on how proactively the organization manages the issue. Companies can reduce their spending on prescription drugs, but they need to be realistic about what a cost-cutting program can accomplish. Shaving a few percentage points off of increases might be an achievable goal, but keeping spending constant from one year to the next is probably not possible. "The goal should be for each company individually to see where they are on the spectrum," says Sean Brandle, vice president with The Segal Company. "Some companies will have the opportunity to shave four to six percentage points off projected increases."

There is no off-the-shelf solution to battle rising prices. Each business has to develop a strategy that meets its unique needs. "A lot of this depends on demographics," says Tom Billet, a senior consultant with Watson Wyatt Worldwide in Stamford, Conn. "The older the workers, the higher the costs." Yet no matter what their situation, companies can take steps to deal with prescription drug costs.