Self-insured employers, as plan sponsors, have a fiduciary responsibility to employees and plan members to serve as effective purchasers of health care services. Leading employers recognize that a value proposition is necessary when designing specialty drug benefits. This means offering high-quality, competitive benefits, while acknowledging the need for shared responsibility between employees and the company.
However, there are industry forces in place causing an increasing burden on employers related to the rising costs of specialty drugs. As the primary purchasers of health care in the U.S. today (private employer-based insurance covers approximately 66% of the US population), employers must be focused on key areas to help mitigate the ever-increasing costs.
- Specialty drugs are a major driver of health care costs and represent a rapidly growing share of total drug expenditures – With few opportunities afforded to employers to impact the actual cost of specialty drugs with manufacturers, they must focus on price transparency issues with pharmacy benefit vendors.
- Specialty drugs administered in a clinical setting are billed through the medical benefit with costs bundled in with other services, making it difficult to get a clear and accurate picture of costs – Employers must gain access to medical claims data to gain a realistic view of costs and avoid inappropriate or abusive billing by providers.
- Price and rebate transparency issues play a significant role in adding to the higher costs of specialty drugs and are primarily caused by PBMs and other pharmacy benefits middlemen, including health plans, drug distributors and wholesalers – This not only creates conflicts of interest but requires that employers negotiate or renegotiate their PBM contracts to eliminate the undisclosed drug-price markups.
- Pharmacy benefit designs that place a high cost sharing burden on employees can lead to higher abandonment rates – This causes potential patient harm and can negatively impact employee productivity.
Many employers rely on brokers or benefit consultants to guide their efforts in developing pharmacy benefit strategies, recommend vendor options and even manage the RFP process. Once selected, the employer expects the health plan and PBM to execute the strategy.
Of the employers who completed the 2016 MBGH Employer Survey on Specialty Drugs, 85% indicated they are still using traditional benefit plan designs for specialty drug management. This may indicate that there are few new solutions in the marketplace, potentially preventing an employers ability to effectively manage costs and patient outcomes.
Other employer perceptions that were rated as a high priority included:
80% – Cost trend management is a top priority
71% – The need for new and innovative solutions
68% – Use of prior authorization to manage trend
66% – Use of quantity limits is critical to managing trend
57% – The number of specialty drugs in the pipeline
53% – Formular limitations and exclusions are critical to managing trend
51% – Rebates are critical to cost management
The Price & Rebate Dilemma
In general, employers value the knowledge, skills and resources provided by vendors in supporting their cost management efforts and achieving positive patient outcomes. However, there is growing concern about the costly business practices of PBMs and middlemen.
PBMs design, negotiate and manage prescription drug benefits and have significant power by determining the costs of specialty drugs available to patients through their plans. They develop formularies, negotiate discounts and rebates with drug manufacturers and establish plan networks that mandate how, when and where patients fill their prescriptions.
PBMs represent an industry that developed outside of health plans to focus on keeping drug bills in check. They are virtually unregulated. Many stakeholders are concerned about how PBMs function, what deals they cut, how they generate revenue and what specific services they perform. That lack of knowledge has been frustrating for employers and other stakeholders.
There are two primary ways in which PBMs profit:
- Rebates from manufacturers.
- The spread = the difference between what the PBM charges the employer or health plan for a prescription and what it pays the pharmacy for it, exclusive of the dispensing fee.
Rebates and spreads vary widely, depending on the drug, the manufacturer and the PBM-payer contract. PBMs also make money through administrative fees and charging for mail order services, although both of those revenue streams are contractually obvious to the payer.
Although PBMs indicate they utilize their Pharmacy & Therapeutics (P&T) committees to direct which drugs are placed on formulary, there is concern that many of the drugs are selected or excluded from the formulary based on the discounts and rebates the PBM receives from drug manufacturers (who want to ensure their products are included in the formularies and on certain tiers).
PBMs and wholesalers are such a dynamic industry that their profits often exceed those of pharmaceutical manufacturers.
Follow the Money!
Consider how a single prescription can hypothetically be counted as revenue by different participants in the drug distribution and reimbursement system:
- A manufacturer sells a pallet of a drug to a wholesaler – the manufacturer reports the net revenue from the sale on its income statement.
- The wholesaler sells a case of the drug to a pharmacy – the wholesaler reports the net revenue from the sale on its income statement.
- The pharmacy dispenses a prescription for this drug to a patient – the pharmacy is reimbursed via a combination of the patient’s copayment and reimbursement from PBM – the pharmacy reports the revenue from the prescription on its income statement.
- The PBM reports the reimbursement paid to the pharmacy as “Network Revenue” on its income statement.
The flow of money is illustrated in the article Follow the Dollar: The U.S. Pharmacy Distribution and Reimbursement System. In the video below, MBGH illustrates how money flows in health care and drug channels and the role of middlemen.
To learn how drug middlemen impact the cost of pharmacy benefits – click here to view an infographic that illustrates how the money flows through the system and contributes to the cost of a 30-day supply of a hypothetical brand-name drug.
MBGH, along with sister coalitions and other groups, are investigating and developing new models to address the gaps in benefits coverage and eliminate the opaque business practices of the industry. As an employer coalition, we exist to represent the needs of employers – who continue to be caught in the middle – and paying for the majority of these mostly unnecessary costs.