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Employers find ways to contain pharmacy benefits costs

Narrow networks, carve-out coalitions help mid-size firms

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Employers find ways to contain pharmacy benefits costs

As employer spending on prescription drugs continues to outpace other types of medical expenditures, many midsize U.S. employers are focusing their health care cost containment efforts on pharmacy benefits.

While encouraging generic drug utilization through lower copayments is perhaps the most prevalent pharmacy benefit cost-containment tool employed by middle-market companies, those that self-insure are carving out their pharmacy benefits from their medical plans, contracting with pharmacy benefit managers either directly or through coalition-led group purchasing initiatives.

Some employers are using a technique that has worked to trim medical costs: narrow pharmacy networks, which work like narrow provider networks by offering discounts to employee benefit plans that send more business their way.

And with specialty drugs becoming more prevalent in the treatment of certain conditions such as cancer, multiple sclerosis and rheumatoid arthritis, midsize employers have begun following the lead of their large-company counterparts by introducing specialty drug utilization management programs, usually led by PBMs.

And, in an effort to stem overall medical costs, growth in the use of value-based insurance design continues among mid-market employers. Though VBID programs require additional investments by employers who either waive or lower copayments for patients being treated for certain chronic conditions, most employers that adopt this strategy believe they will save money over the long run.

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Pharmacy benefits carve-outs continue to be a popular way for midsize employers to focus on and manage their prescription drug expenditures, expert say.

“We are seeing heightened interest among midsize employers in exploring carve-out models through coalitions or group purchasing arrangements,” said Nadina Rosier, North America group and health benefits practice leader for pharmacy at Towers Watson & Co. in New York.

Carving out pharmacy benefits via a coalition enables midsize employers “to pull together with other employers to leverage their purchasing power,” said Lisa Zeitel, senior vice president and national pharmacy practice leader at Aon Hewitt in Norwalk, Conn. “This enables them to access pricing negotiated based on the group size versus the individual employer size. Size still does matter with pharmacy benefits, though not as much as five to 10 years ago.”

However, “the employer must be willing to self-insure their health benefit so that they can carve out the pharmacy piece,” she said.

In the past, many insurers with in-house PBMs have resisted such efforts by self-funded midsize employers to separate the administration of prescription drug benefits from medical benefits, usually by raising fees on administrative services-only contracts for self-funded benefit plans, industry sources say.

“There are still those health plans out there that will push back,” said Paul Burns, national pharmacy practice leader for Buck Consultants L.L.C. based in Atlanta. Although “the medical's the bigger piece of the business, they'll wind up getting into a competitive bidding process and go skinny on the medical piece and use the pharmacy to subsidize the medical. If the PBM gets carved out, that changes the dynamic. Typically, the ASO fee gets changed.”

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“Insurers were loading the medical rate between 2% and 3% if the employer carves the pharmacy benefits out,” said Stephanie Ward, vice president of account management at Corporate Synergies in Mt. Laurel, N.J.

After a dispute last year between Express Scripts Inc. and Walgreen Co. that temporarily kept the popular Deerfield, Ill.-based drugstore chain out of ESI's network, more and more midsize employers are introducing narrow pharmacy networks, experts say.

In fact, “most plan sponsors actually chose to keep (Walgreens) out of network when they did come back in late last year,” said Sean Donnelly, president of the commercial division at Express Scripts in St. Louis. “Over 60% of our book of business is now in a narrow network that doesn't include Walgreens.”

Mr. Donnelly said that “roughly 70% of any given employer's membership is already using a narrow network pharmacy.”

Buck's Mr. Burns estimated that narrow pharmacy networks usually “save 1% or 2% off the use of the larger network.”

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