BY: Daryl Russell
Sales Executive – Employee Benefits
drussell@bankersinsurance.netcreate new email | (434) 327-1630opens phone dialer
The reason your business’s group health insurance rates continue to climb may not be why you think. Although coverage levels and claims history are large variables, many other factors influence pricing. Knowing these cost drivers enables employers to make informed decisions. Thus, at each policy renewal employers should consider themselves an investigative reporter and become uncommonly inquisitive. Ask questions and push for explanations regarding the true costs of your health plan. Recent legislation has greatly accelerated transparency in health care costs, but more is necessary.
One cost driver in need of scrutiny is the prescription drug plan. These programs are managed by third parties known as pharmacy benefit managers (PBMs). PBMs hold great sway over the overall cost of health insurance coverage, and understanding their role is needed to make informed health plan decisions. Here we will explore PBMs, their role, and how an employer can gain insight into the costs associated.
Although many people have never heard of pharmacy benefit managers, these powerful middlemen have enormous influence over the U.S. prescription drug system.”
– Lina M. Khan, chair of the Federal Trade Commission
Unfortunately, prescription drug plans do not currently have the transparency associated with other medical benefits. The evidence of benefit provided with health plans shows limited information and does not give adequate insight. To understand the costs of a prescription drug plan, let’s explore their key components:
Pharmacy Benefit Managers (PBMs)
Third parties that manage the delivery of prescription drug benefits to the consumer and payment to drug suppliers.
Formularies
The list of medications covered by the health plan. Formularies are the single largest cost driver of a prescription drug plan, and formularies can affect total health plan cost. Formularies are designed by PBMs to address medical needs while allowing them to negotiate cost and rebates with manufacturers. For example, a broad formulary may offer access to many drugs, but the pricing will be higher. This may be because the broader drug offering covers more expensive drugs, but also due to decreased incentive for drug suppliers. A PBM has more difficulty negotiating lower rates with drug companies when those companies know their drug is being offered alongside similar drugs from their competitors. In the same way, when a PBM constructs a formulary that is focused, sometimes called a “performance formulary”, pricing can be more competitive.
Many PBMs offer multiple formularies to fit the employer’s desire. A performance formulary may be appropriate for businesses with younger, healthier employees, whereas broader formularies provide less disruption for older groups that are already using specific drugs.
Rebates
Payments by drug manufacturers to the PBMs to offset the cost of a brand name drug in order to get the drug included in the formulary. Rebates are considerable and can be $500 to $700 per employee per year. Think about it like lobbying. But employers should know what is happening with those rebates. Are they being retained, or are they being passed back to the health plan or employer to reduce costs? Often in smaller businesses rebates offset insurance costs or are applied to administrative fees. Larger businesses over 100 employees and those with opens in a new windowself-funded health plans can have the rebates returned to them.
Plan Design
The strategy of the drug plan. It may be to offer a robust drug benefit, or conversely to encourage employees to utilize lower cost medications. This can be implemented through co-pays that use larger cost sharing for higher priced medications, plus measures to ensure medical necessity. Employers must consider the impact of their plan design on employees. If a plan design encourages lower cost medications too aggressively, it may preclude staff from accessing existing prescriptions.
Payment Guidelines
PBMs pay drug manufacturers on behalf of the health plan. Their purchasing power allows them to negotiate discounts, rebates, and establish pricing methodologies. Health plans benefit from lower negotiated prices, however PBM’s may profit when they pool resources across businesses and negotiate even lower rates, enabling them to retain the difference.
Pharmacy Network
PBMs manage which pharmacies are available, enabling them to better negotiate fees paid to dispense medications.
Mail Order and Specialty Pharmacies
Mail order pharmacies create savings by better managing and dispensing high volume maintenance medications. Specialty pharmacies do the same by focusing on high-cost specialty drugs.
Dispensing/Administrative Fees
The amount paid to the pharmacy to process and dispense the prescription. The cost of the medication is not included.
Clinical Programs
Address specialty medical conditions and the higher cost drugs associated with them. Such programs can address specific diseases, provide access to medications, review drug utilization, and offer ongoing medical management. Examples of clinical programs may be one which encourages a generic drug versus a brand name for a specific disease, then monitors effectiveness. Another may provide support for specific kinds of diabetes and manage drug availability. Clinical programs vary by prescription drug plan.
Pharmacy costs continue to increase, along with their share of overall health care expenditures. Brand name drugs are one reason, accounting for 80% of prescription drug spending but less than 20% of medications dispensed. Many brand name drugs can cost thousands of dollars, and prices vary among PBMs.
Because of these rising costs and the control PBMs exert over the system, efforts are being made to understand their business practices. New opens in a new windowTransparency in Coverage rules require network negotiated rates and historical net prices for covered prescription drugs to be published. The vertical integration of PBMs into the health plan, along with their practice of charging insurance companies more than what they pay pharmacies, has raised the level of scrutiny. The Federal Trade Commission recently announced opens in a new windowan investigation into the six largest PBMs to evaluate business practices.
In the meantime, we encourage employers to launch their own investigation at their next employee benefits insurance renewal and be uncommonly inquisitive. Engage your employee benefits broker and ask questions. Learn more about:
- The administrative services and clinical programs included with your prescription drug plan
- How the PBM determines the cost of medications within your program
- What percentage of cost savings the PBM passes back to the health plan
- Who retains any rebates
Armed with knowledge, you’ll be able to make more informed decisions. Allow Bankers Insurance to review your healthcare insurance plan and provide opportunities like this to create greater value. Give us a call and let us earn your business. We empower our clients to understand their benefits programs, make informed decisions, and stay current, compliant, and nimble. Contact us today to arrange a health plan review and consultation.
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