Human Capital & Careers

Today’s Keys for Lowering Drug Costs

The top tip for keeping active-employee costs in check: separate your medical and pharmacy benefits into different plans.
Barry EyreMarch 14, 2013

Pharmacy benefits for active employees and Medicare-eligible retirees present an excellent opportunity to drive out unnecessary costs and improve risk management, driven by market dynamics as well as regulatory and tax changes.

Right now, drug costs are in flux. Over the next three years, brand-name drugs expected to drive $133 billion in revenue for drug makers during that time period will lose patent protection. That will generate downward pressure on prescription drug costs.

Unfortunately for the bottom lines of corporate health-plan sponsors, the savings will be at least partially offset by the increasing use of specialty pharmaceuticals. These new-age drugs frequently cost tens to hundreds of thousands of dollars per year, and they also spur cost inflation for brand drugs prior to their patent expiration.

By optimizing retiree health benefits and pharmacy benefits for active employees, companies can both improve their financial performance and achieve superior clinical outcomes for employees and their dependents. The strategies and tactics outlined below will help plan sponsors toward both objectives.

Active Employee Pharmacy Benefits
Many employers unwittingly leave significant amounts of money on the table in the provision of pharmacy benefits for active employees as well as pre-Medicare retirees on “active” plans. In many cases, active employee pharmacy benefits are accessed through an employer’s contracted health plan. But unbundling – or “carving out” – the pharmacy benefits presents substantial savings opportunities for plan sponsors.

As anyone who has analyzed a pharmacy benefit manager (PBM) contract will attest, these contracts are both complex and opaque. To maximize cost savings and risk management opportunities available through “carving out,” it is essential to understand and clarify all aspects of the contract while also embedding comprehensive audit rights and the ability to implement appropriate clinical programs.

To maximize their leverage when carving out pharmacy benefits, plan sponsors should structure a request for proposal (RFP) that results in a comprehensive contract with clearly defined terms, competitive discounts and rebates, market price checks before the final contract year, and most importantly, a full range of audit rights to ensure that the agreed-upon contract terms are being delivered. 

A well-negotiated PBM contract, followed by comprehensive auditing and clinical program oversight, can help improve outcomes for employees and their dependents, while simultaneously reducing excess costs. It is not uncommon for a carved-out health-care plan to yield savings of 12% to 15% in total annual pharmacy spend. 

Many health-care plans argue that carving out the pharmacy benefit will negatively affect disease-management programs. It is more difficult, the argument goes, for doctors to account for all medications being taken by a patient when some drug claims run through the medical plan and some through a separate carved-out drug plan. Disease-management programs ostensibly remove cost from both medical and drug benefit plans. 

Those claims are self-serving at best. Plan sponsors can mandate that both providers establish protocol for sharing data to ensure effective disease-management programs, regardless of how prescription drugs are procured.

Now, though, many health plans are actually “carving in” PBM revenue in their contracts. That’s because of the Affordable Care Act’s minimum-loss ratio ­– the minimum percentage of premium income insurers must pay out in claims and health-care-quality improvements – slated to take effect in 2014.

In a “carved-in” arrangement, the health plan acts as a middleman between the PBM and the plan sponsor. This structure drives up the price of drugs for the plan sponsor. The health plan contracts with the PBM to supply the drugs at one price and then marks up the drugs as it contracts with individual self-funded plans as a third-party administrator for medical administrative services. This is referred to in the industry as a “spread” or “traditional” pricing arrangement. 

When prescription drugs are “carved in,” plan sponsors often lack the ability to effectively audit drug claims that provide important insights into utilization patterns and provide opportunities to manage costs and clinical outcomes. Additionally, health-plan contracts are generally silent on drug-pricing metrics, leaving plan sponsors in the dark over contract discounts, rebates, and administrative fees. 

Retiree Pharmacy Benefits
The Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA) created two federal subsidy programs to offset plan sponsors’ prescription drug costs for Medicare-eligible retirees.

One, known as the Retiree Drug Subsidy (RDS), provides a tax-free 28% reimbursement for employers whose costs fall between $320 and $6,500 per retiree in 2012. The Affordable Care Act changed the tax treatment of the RDS subsidy, making it taxable in 2013. Large corporations receiving the subsidy have already reduced their deferred tax assets to reflect the change.

The other subsidy approach created by the MMA is the Employer Group Waiver Plan (EGWP), often referred to as an “egg-whip” or a Series 800 plan. This structure was not widely embraced by the health-care consulting market, and initially corporations showed little interest, partly because of the plan’s limitations in union environments. Companies also failed to recognize the EGWP’s real benefit: protection against the rising cost of specialty medications.

However, changes in the tax treatment of RDS payments, combined with interpretive guidance from the Center for Medicare and Medicaid Services (CMS) subsequent to the passage of health-care reform, has made the EGWP increasingly attractive to employers.

The EGWP has benefited from the integration of a secondary “wrap” plan, which lets plan sponsors offload a greater percentage of costs onto brand pharmaceutical manufacturers. It also lets plan sponsors match the employer’s original plan design, making the EGWP + wrap suitable for collectively bargained retiree groups.

Without any change in benefit levels or cost sharing, switching from the RDS to the EGWP + wrap will result in plan sponsors lowering their ASC 715-60 (formerly FAS 106) liability by approximately 12% to 14%. 

The chart below illustrates how the reinsurance provided by an EGWP can substantially benefit plan sponsors faced with the extremely high costs of specialty drugs.

Under the RDS, plan sponsors receive 28% of the costs incurred between $320 and $6,500 in 2012. In the EGWP plan, sponsors benefit from a base subsidy of approximately $657 (as compared to an average RDS reimbursement of $510), plus federally funded 80% reinsurance for “catastrophic” costs, defined as those expenses an individual retiree generates in excess of a CMS-set threshold ($6,657.50 in 2013) in a given plan year.

Barry Eyre is vice president of business development at KTP Advisors, an advisory firm on pharmacy benefits for active employees and on retiree health benefits.

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