Benefits, Financial

Managing Pharmacy Spend

Ben Fuelberth
June 22, 2016

Managing Pharmacy Spend

Pharmacy spend is now the fastest growing portion of healthcare spend, representing over 20% of all healthcare spend nationally. Managing healthcare spend is a business imperative for employers. Business profits can quickly become eroded based upon a bad renewal or claims year, leaving many employers looking for strategies to “stem the tide” of health insurance increases.

To have significant impact, employers have historically focused on countermeasures that focus on a majority of their claims. Typically, these strategies focused on 70% or more of claims that medical represents, and where year over year trend increases approached double digit levels. Over the past few years, however, trend factors have essentially flipped between medical and pharmacy benefits. Where we may have seen a mid-single digit pharmacy trend and a double-digit medical trend in the past, recent surveys suggest the inverse—medical in the single digits and pharmacy exceeding double digits and approaching the teens.

Gone are the days of encouraging generic utilization to save money. It’s beholden upon employers, especially those with self-funded plans, to rethink and create a sustainable pharmacy benefit strategy.

New drugs, new prices

For pharmacy benefit managers, plan sponsors, and consumers alike, specialty pharmacy represents an area of great concern. Specialty pharmacy has emerged as one of, if not the top, area of greatest cost increase in pharmacy and maybe health care in general. These specialty drugs, which require special handling and monitoring, represent over 70% of pharmacy spend growth over the last five years, vastly outpacing Consumer Price Index growth.1  Specialty drugs can be used to treat a wide array of simple as well as complex conditions. Drugs treating Hepatitis C, oncology medications, injectable medications, and a new class of cholesterol-lowering drugs called PCSK9 inhibitors are a few examples of specialty drugs that have recently entered the market and represent high costs to health insurance plans.

Pricing increases of drugs also cause concern. Since 2011, the prices for the top 10 prescribed drugs in the United States have all increased by at least 50%. Four of the top 10 have increased by 100%. Major price hikes in drug costs, like the 5,000% increase Turing Pharmaceuticals levied on Daraprim, a drug used to treat a rare infection are outliers, represent real hardships for consumers and plan sponsors alike.

While they don’t receive as much publicity as the Daraprim increase, commonly-used drugs have seen significant increases as well. Enbrel and Humira, drugs primarily utilized to treat rheumatoid arthritis, both saw increases of over 115%, and Copaxone, a multiple sclerosis drug, increased by 118%. By some accounts, the increase in cost for Enbrel is projected to add as much as $1 billion in healthcare costs.

Pharmacy benefit management

In all fairness, many of these quoted pricing increases don’t include or account for the discounts and rebate agreements that Pharmacy Benefit Managers (PBMs) negotiate with drug manufacturers to decrease drug costs for insurance plans and consumers. These discounts and rebates vary between PBMs and can be based on a number of criteria, including, but not limited to, volume, market share, and formulary placement. PBMs will typically retain a percentage of the rebates or charge a fee for administration and negotiation of rebates for the health insurance plan sponsor. The remaining portion of the rebates help to offset plan costs.

Even with these discounts, pricing increases outpace the Consumer Price Index by roughly 8% year over year, which poses a real issue for the plan sponsors, insurers, and consumers paying for the drugs.

Targeting the consumer

With the increased prevalence of High Deductible Health Plans (HDHPs), consumers are being asked to become better consumers of health care, especially at the pharmacy. Even though generic utilization has been pushed for many years as a way to curb pharmacy spending, there’s still considerable room for improvement. According to a recent study, consumers spent an additional $73 billion on costlier brand name medications. In many cases, patients aren’t aware that a generic equivalent exists, or physicians are prescribing a brand name medication when a lower-cost, generic alternative is available.

Employers and insurers all have incredible incentives to increase generic utilization beyond the current national figure of 88% as a strategy to curb costs. Employers are on the front lines of empowering employees with the tools and information they need to make informed, cost-effective decisions in pharmacy treatments.

For employers and employees alike, benefits plan design changes alone won’t be enough to manage increasing pharmacy costs. To create a sustainable pharmacy strategy, employers will need to implement solutions that address their specific pharmacy cost drivers. This starts with an understanding of what population-specific claims drivers are present and what chronic conditions are most prevalent. By understanding the challenges specific to each population, employers can begin to create a path toward pharmacy cost containment.

Developing a Holistic Benefits Strategy