There are generally six stakeholders in the supply and demand of prescription drugs – pharmaceutical manufacturers, health insurers (including self-insured employers), pharmacy benefit managers (PBMs), pharmacies, wholesalers and patients. In the past four years, the medical and pharmaceutical industries have assimilated into a merged, vertically integrated model. During this timeframe, either a major insurance carrier has acquired a major PBM or vice versa.

While this conglomeration creates efficiencies for the merged entity, how it affects the employer’s health spend is varied.

In a carve-in pharmacy scenario, the employer’s pharmacy benefits are purchased and integrated through the insurance carrier relationship. Because of this, administrative function is more automated and succinct. There is one overall ID card for members, and data sharing between the medical and pharmacy benefits is consolidated. This allows for synchronization with carrier condition management programs and care coordination efforts with providers.

In a carve-out scenario, the tradeoff is that the employer can now attain greater visibility and control over the clinical programs, as well as the contractual stipulations and plan performance. Employers can also obtain flexibility with considerations on plan design and network enhancements. Additionally, it allows them to adopt more innovative clinical and steerage programs for greater medication adherence and financial outcome opportunities. This is largely driven by the fact that carve-out PBMs have to justify the financial investment to overcome the administrative advantages typically perceived with having a carve-in pharmacy arrangement.

Carve-out PBMs all have varying business models, with each PBM having different preferences of levers to lower overall cost. These differing levers are actually widely dispersed tactics. Some focus on rebates and contractual guarantees alongside strict formulary management. Others focus on the purchasing efficiencies with particular pharmacies that have favorable contracts. Some simply charge an administrative fee with no markup on the cost of procuring medications. A few highlight the use of programs that maximize the use of nuanced savings strategies, such as co-pay coupons, patient assistance programs or other progressive strategies. And finally, some leverage bulk purchasing as a means to aggregate economies of scale and negotiate with pharmacy entities.

Pharmacy Coalitions

Coalitions act as a means to aggregate mid-market employers in a manner that allows those entities to leverage their total volume and pharmacy spend in order to receive pricing that would typically be reserved for large employers. Just as PBMs differ greatly from each other, coalitions all have unique business objectives. Some purchase directly through one PBM entity, while others negotiate with multiple PBMs. Coalitions may have a regional, market-size or industry-specific focus, and some may charge membership fees or have rigid contracts with employers.

Co-Pay Programs & Rebates

In the status quo of pharmacy benefits, pharmaceutical manufacturers provide subsidies to employee-patients, typically in the form of a coupon or debit card, which can be used to pay for out-of-pocket expenses. This allows the member to then purchase a potentially more expensive drug under their benefit plan for the same or lower cost than a lower tier alternative. Because drug manufacturers know the bulk of a drug cost will be paid by the employer, the intent of this program is for the drug manufacturer to absolve the member’s cost share, thus incenting them to use the higher cost drug.

While this solely benefits the member, there are many tactics an employer can use to make this mutually beneficial for the employee-patient and the employer. The employer may:

• allow the use of the coupon to absolve the member’s cost share; however, the employer prohibits the use of coupon dollars to count toward the member’s out-of-pocket expenses.
• introduce the concept of a “variable co-pay program” in which the co-pays are set artificially high to maximize coupons for various medications. This process typically results in savings of $500 to $1,500 per drug script.
• set a higher coinsurance to further utilize more of the manufacturer’s contribution on behalf of the employee-patient.

Another area of interest within the scope of pharmacy is the use and handling of rebates. Rebates are a form of price concession paid by a pharmaceutical manufacturer to the health plan sponsor or the PBM working on the plan’s behalf. Proponents argue that rebates are a result of vigorous negotiations that help lower overall drug costs.

Rebate contract terms are trade secrets and vary widely among brands, pharmaceutical manufacturers and health insurers but tend to be highest for brands in therapeutic classes with competing products. This secrecy makes cost comparisons between competing brands difficult to estimate on the basis of price alone. Rebates therefore create a “black box” in the prescription drug distribution chain. The patient and, typically, the plan sponsor or employer do not know how much the pharmaceutical manufacturers are paying in rebates and how much of the rebates PBMs are keeping before passing the remainder to the health insurer. While rebates average close to 20% of the price, some brands have no rebates and others are believed to offer rebates of over 60%.

While rebates can be perceived as a source of revenue for an employer’s drug spend, the intent of any plan sponsor is to achieve patient clinical adherence, condition management and, possibly, employee satisfaction at the lowest overall price. In following that logic, some pharmacy tactics focus on the lowest cost of procurement, which is a potential contradiction to maximizing rebate dollars, as rebate dollars are returned to the employer after the purchase of the highly rebated drug occurs. Therefore, if the drug is procured in a nontraditional manner at a significantly lower cost, it is not accumulated within the aggregate reimbursement of rebate dollars. However, when a drug does not qualify for alternative procurement, it stays within the formulary to maximize the rebate dollars associated with the drug.

Alternative Funding Markets

To address the increases in pharmacy spending, the use of advocacy-based programs, utilizing alternative-funding markets, is on the rise. These alternative-funding markets are comprised of private foundations (largely operated or sponsored by pharmaceutical manufacturers), public charities, state access programs or international mail-order programs. By applying these strategies, employers are seeing a reduction in pharmacy costs of 35% or more on high-dollar medications, while greatly reducing the member’s cost-share burden.

For details on two additional pharmacy cost-saving strategies – obtaining prescriptions internationally and medical tourism – click here.