Articles | July 27, 2022

Rx Coverage Is a Valued Benefit: Manage Its Cost Effectively

Over the last several decades, a wave of innovative new drug therapies came to market that improved and even extended millions of lives. They also came with enormous price tags that have made prescription drug benefits an important part of the health benefit package your plan participants depend upon.

Many plan participants use their prescription drug coverage each year. The benefits need to be responsive to their clinical and logistical needs. The coverage must also be affordable.

Pharmacist Helping Female Customer With Medicine Recommendation

Achieving the goal of delivering cost-effective prescription drug coverage to plan participants is increasingly challenging because there are numerous cost drivers. To get more mileage from prescription drug benefits, plan sponsors need to pay close attention to each of the following:

  • Plan design
  • PBM contracting
  • Clinical controls

This article discusses these important aspects of prescription drug cost management, as well as providing an overview of cost drivers.

The importance of Rx benefits

In the 1980s, most health insurance plans covered outpatient drug claims under their medical plan insurer, like all other medical services, such as hospital and surgical benefits. Outpatient prescription drugs were subject to the medical plan deductibles and coinsurance requirements. They represented about 4 percent of total medical plan spending, while hospital claims consumed up to 50 percent of a typical medical benefit plan budget. Medicare didn’t cover outpatient prescription drug claims, and pharmacy benefit managers were just arriving on the scene with promises of easy access to medications and plan savings.

Today, outpatient prescription drugs now account for 20 to 25 percent of the typical overall medical plan cost spending and are the second-highest segment of plan sponsor expenses, after inpatient hospital claim costs.

PBMs have expanded their services beyond claims processing to include more sophisticated drug utilization review and formulary options to drive better drug pricing.

In any given year, 35 to 50 percent of a plan’s active covered population will have at least one prescription drug claim. For retiree plans, the range jumps to 80 to 90 percent of the covered population. In contrast, only about 7 to 8 percent of plan participants will be admitted to the hospital in a year. Further, the average claimant has about eight outpatient Rx claims per year.

Understanding Rx plan cost drivers

Unfortunately, the prescription drug industry is plagued with many problems, including — but not limited to — massive marketing efforts and protective federal laws that extend patents, permit rebate schemes and allow other anti-competitive tactics that increase plan costs. PBMs add to the problem with their lack of transparency and complicated contracting schemes that can generate higher costs. Finally, wasteful prescribing patterns by some physicians adds to the system’s excess costs.

The result: Americans spend more than twice as much per person per year for outpatient drugs than most other industrialized nations with lower life expectancy rates.  

Even as we wait for meaningful federal policies to lower drug costs to patients, plan sponsors can significantly reduce their prescription drug benefit plan costs while improving the effectiveness of the outpatient prescription benefits. To be able to do this, plan sponsors need to understand the cost drivers.

These are among the most significant plan cost drivers:

  • Outdated plan design — Effective plan design strategies offer low cost sharing for lower-cost generic drug therapies and higher cost sharing for more costly brand drugs, where interchangeable or lower-cost alternative therapies exist. Such designs will drive an increase in generic drug dispensing rates that maximize savings for both the plan and the patient, as well as create greater incentives for patients and their prescribers to find the best-value formulary drug therapies for their conditions. In addition, caps on out-of-pocket spending should be set to avoid excessive cost burdens to plan participants.
  • Inferior contracting terms - Outdated and misguided PBM contract terms can result in overpaying for pharmacy benefits. Some of these issues stem from hidden spreads retained by the PBM, elusive exclusions that fall outside of discount and rebate guarantees, unclear and complex definitions and offset language that allows the PBM to underperform, which work against the plan and increases plan costs.
  • Limited use of formulary management — Too many plan sponsors assume they must pick their PBM’s standard drug formulary for the best value. In some cases, drugs placed on or removed from formularies have more to do with the PBM gaining profit than a plan sponsor’s best interests. With hundreds of high-quality drug options and many high-cost drugs with little to no clinical value on drug formularies, plan sponsors have the option to select more effective drug formularies that deliver clinically appropriate medications without the high price tag. About 10 percent of Segal clients have implemented more efficient, limited formularies with significant plan savings and no negative impact on patient care.
  • Lack of appropriate clinical management programs — Waste is a significant part of the U.S. system. Too many drugs are prescribed that will be thrown away due to poor side effects. Waste can also be seen when high-cost drugs are prescribed instead of lower-cost options, which would perform in the same exact way. In some cases, drugs can also be abused for inappropriate reasons. PBMs have proven tools to reduce wasteful prescribing, improve clinical results by avoiding dangerous drug mixes and reduce the abuse of highly addictive drug therapies. After careful study of drug utilization experience, plan sponsors should take advantage of these programs and implement those that are appropriate for their covered population.
  • Specialty drug utilization — High-cost specialty drugs continue to be a significant portion of plan cost trends. While these drugs have been invaluable for many, they come with a high price tag. These drugs typically make up half of all prescription drug benefit spending but less than 2 percent of all claims. Since they are dominated by high-cost, single-source, patent-protected brand drugs, there is less opportunity to save money by promoting generic drug alternatives. Further, these drugs typically target less common but critical illnesses where patient needs are more sensitive. However, there are ways to save substantially on better contracting methods and formulary management. In addition, there are a growing number of biosimilar drugs coming out in the market which will help drive competition and help lower overall costs.

Best practices in Rx plan design

Effective prescription drug plan designs address these questions:

  • What is the appropriate balance of coverage for prescription drug benefits?
  • How much should plan participants pay for their medications?
  • What incentives should be used to reduce waste and excessive utilization?
  • Have you removed high-cost, “me too” brand drugs that are just repackaged over-the-counter products, combination medications or multiple source brand drugs that offer generic equivalent options?
  • Are the costs to participants resulting in underuse of needed drug therapies that stave off complications of disease and high-cost hospital events, or worse?

The answers depend on many factors, including the income levels of the workforce, the plan sponsor’s industry and budgetary constraints.  

The graph below shows the prevalence of some prescription drug plan features currently being used by plan sponsors.

Prescription Drug Benefits  - Prevalence of Rx Plan Features

These five strategies are among the best practices for managing the cost of prescription drug coverage:

  1. Keep copayments low for generic drugs. Having no deductibles and low-fixed dollar copayments for most generic drugs is an effective and attractive solution. Since ample competition still exists for generic drugs, annual generic drug price inflation is modest and is not driving much of plan cost increases. A copayment of less than $10 for a 30-day supply of generic drugs will be affordable for most plan participants and will mean cost certainty to the participants who account for 85–90 percent of total prescriptions dispensed throughout the year. To ensure participants pay less for the roughly 20 percent of generic prescriptions that have a very low cost, the PBM contract should include this language: “the lessor of discounted price or the plan member copay will be applied for all eligible claims.”
  2. Set a coinsurance (a percentage of the cost) for brand drugs (with per-prescription caps for formulary brand drugs). Also establish an annual out-of-pocket maximum for Rx benefits. A typical annual Rx benefit maximum is set at around 20 percent of the medical plan out-of-pocket dollar maximum, if separate maximums are applied. Moving to percentage coinsurance keeps pace with price inflation and doesn’t erode in value over time as fixed-dollar copayments do.
  3. Implement an exclusive mail-order and retail 90-day maintenance network choices with higher guaranteed discounts. Exclusive contracting with the PBMs mail order facilities and/or a subset of retail chains to fill maintenance medications can generate deeper pricing discounts. Create member incentives to use these deeper-discounted settings by offering lower cost sharing for a 90-day supply compared to the same three 30-day retail supply prescriptions.
  4. Leverage specialty drug copayment assistance program dollars by modifying specialty drug tier copayments to take advantage of these savings. This strategy will help offset some of the cost burden created by the high-cost specialty drug class. If using an outside vendor, confirm that the vendor can work with the plan’s PBM and that the program will not negatively affect rebates in the current PBM contract.
  5. Apply comprehensive prior authorization, step therapy and quantity-limit rules for high-cost therapies that have multiple therapy options for patients. For many therapy treatment classes, the presence of multiple drug options allows patients and plans to lower costs by trying proven and effective lower-cost options first, if the plan establishes the right clinical protocols.

PBM contracting must-haves

Price setting for pharmaceuticals is a complicated process. It’s important to recognize that the actual “sales price” of a prescription drug varies dramatically by buyer and on average is somewhere between 50 percent to 55 percent of the actual “list price of drug.” The actual production costs to produce a drug may be only 15 percent of the typical revenue earned by a manufacturer.

As a result, there is a lot of room for drug manufacturers to create complex pricing schemes and incentives to improve their market share, while still enjoying high profit margins. Of course, drug companies will need revenue to cover more than production, distribution and marketing costs, and costs to recoup research and development.

The large gaps between revenue and costs means there’s an opportunity for plan sponsors to negotiate better pricing. Plan sponsors need to recognize their buying power. By understanding the best prices available in the market and the true breakeven operating expenses of PBMs and retail pharmacies, plan sponsors can trade market share for better pricing in contracts and cut out much of excess margins retained by the intermediaries (e.g., PBMs, retail pharmacies and mail-order pharmacies).

Consider these PBM contract RFP must-haves:

  • Pass through retail pharmacy minimum ingredient cost guarantees.
  • Pass through 100 percent of all manufacturer rebate revenue earned on claims with minimum guarantees.
  • Forbid the PBM to include offset language for each pricing guarantee element.
  • Require consistent and auditable definitions of brand drugs, generic drugs and specialty drugs.
  • Limit pricing guarantee exclusions to only a few drug categories to have valid reasons for being excluded.
  • Set rebate guarantees on fixed and unmanipulated metrics (e.g., fixed PMPM rebate guarantees and minimum rebate per all brand Rx dispensed or minimum rebates as a percent of actual brand AWP for the plan).
  • Consider applying rebate values as a claim adjustment at the point of sale/purchase.
  • Pay direct and transparent PBM administrative fees (i.e., move away from no-fee model to better match fees to PBM administrative costs and remove the PBM incentive to hide revenue sources received from manufacturers).
  • Exceed 40 percent of average wholesale pricing (AWP) for that plan for brand ingredient cost discounts and rebates for mail order, retail maintenance and specialty drugs. Not all therapy classes will approach these levels, but on a composite basis, we have negotiated PBM contracts that are achieving close to 50 percent off AWP after accounting for discounts and rebates.
  • Demand generic drug discount guarantee minimums at 85 percent of AWP or higher. Consider custom generic maximum charge lists per year as an alternative to percentage discounts off AWP.
  • Request an acquisition-cost-plus-fee contract with the PBM, if the plan is very large.
  • Direct contract with specialty pharmacies as an alternative to the PBM-exclusive pharmacy.
  • Determine how biosimilar drugs will be positioned within the formulary and represented in the contract.

Applying more rigor to a PBM contract and RFPs can result in substantial annual savings to the plan and the plan participants — without compromising benefit value.

Applying effective clinical controls

Prescription drug benefits involve more than cost.

There is tremendous value in a strong PBM partner that provides meaningful clinical support to your plan participants. Knowledgeable and responsive clinical staff can help guide you to programs or strategies that improve patient quality of life.

Not all PBMs are the same. Plan sponsors should test the PBM’s clinical systems and staff and only use the programs that will work for the plan. In some cases, utilization management programs, like prior authorization and step therapy, are useful tools to produce plan cost savings. In other cases, clinical programs that support participants who have complex needs and conditions may not save on the prescription drug claim costs but can avoid costly medical plan claims and complications. Turning on the right clinical programs can make a difference in patients’ quality of life and appropriate physician prescribing.

An expert review of the PBM clinical program offerings is an essential step to creating programs that avoid needless burdens and inconveniences to your plan participants as well as providing worthwhile value to your plan.

Cost-effectively deliver the coverage participants value and use

Prescription drug benefits are an essential, high-touch benefit for most plan participants. The programs are highly valued by participants and their dependents and require the proper due diligence.

By applying the tools and strategies to this benefit, plan sponsors can provide cost-effective prescription drug benefits.

Interested in delivering more cost-effective prescription drug benefits to your plan participants?

Let’s discuss a strategy.

Get in Touch

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.