Beware of Rising Pharmacy Benefit Costs
The proportion of total health care benefit costs represented by pharmaceuticals is rising rapidly. Last year, more than three-quarters — 77% — of employers reported that pharmacy benefit costs were at least 16% of the total, according to the fifth annual Prescription Drug Benefit Survey by Buck Consultants at Xerox.
That number was up from 57% five years earlier, according to the same report. Also, nearly 5% of employers in the survey reported that drug benefits represented more than 30% of the total, while only half that number reported exceeding 30% last year.
The common culprit in this trend is the proliferation of expensive “specialty” drugs that consumed only one-fourth of drug benefit costs a decade ago and are projected to total 44% in 2030, according to the Pharmaceutical Care Management Association. Let’s take a closer look at this phenomenon and how it may affect out-of-pocket spending caps under the Affordable Care Act (ACA).
Specialty drugs are generally defined as a biotech product:
- Administered by injection in a clinical setting,
- Prescribed by a medical specialist, and
- Used to treat chronic conditions such as hepatitis, multiple sclerosis, some cancers and high cholesterol.
Although costly, specialty drugs can in some cases save money over the long term compared with conventional treatment methods. They can also cure or manage conditions that were previously untreatable with conventional therapies.
Nevertheless, being mindful of the high cost of these drugs and the impact of the ACA’s out-of-pocket limits, many employers are trying to adjust their pharmacy benefit plan designs to steer employees to the most economical choices.
The ACA’s out-of-pocket limits are adjusted annually according to a medical index. For 2016, the limits will increase 3.8%, from $6,600 to $6,850 for self-only coverage, and from $13,200 to $13,700 for family coverage. The out-of-pocket limits for high-deductible health plans are linked to the urban consumer price index, which has been rising more slowly. This year and next, those limits will be the same: $6,450 for self-only and $12,900 for family coverage.
United Benefit Advisors (UBA), a consortium of benefits advisory firms, recently reported on the rising number of pricing tiers in pharmacy benefit plans designed to encourage employees to choose the most economical drugs. The original two-tier structure, in which the drug world was divided only between generics and brands, is disappearing fast.
Only 7% of employers with 500 to 999 employees used that model last year, according to UBA’s annual health plan survey. Since 2012, the percentage of employers with four-tier plans has leaped to 33% from 14%, says UBA. Four-tier plans have preferred and nonpreferred categories for both generic and brand drugs. Median copays for those four tiers last year were $10, $35, $55 and $100.
Six-tier plans, while still rare, add preferred and nonpreferred tiers for specialty drugs. “When you have an employee taking a drug that costs $30,000 a month, a $100 copay is unsustainable,” explained a UBA spokesman. Often, there’s only one source for a specialty drug, however, so the preferred and nonpreferred distinction is moot. That will change over time, though.
Tripling the copay to, for example, $300 would raise an employee’s out-of-pocket to $3,600 (assuming the employee didn’t also face a coinsurance requirement). That leaves considerable room for satisfying deductibles, copays and coinsurance costs for other health benefits before hitting the ACA’s out-of-pocket ceilings. Although even an additional $2,400 in employee copays for a specialty drug may represent a small proportion of the drug treatment’s overall monthly cost, it’s still meaningful when profit margins are thin.
Specialty drug costs
Meanwhile, many employers — particularly the largest — are deploying a variety of strategies to control the cost of specialty drugs beyond simply asking employees to bear more of the burden. Two common techniques are:
- Requiring prior clinical authorization before paying for specialty drugs, and
- Applying step-therapy rules under which patients start with the least expensive drugs and move up the cost scale until the least expensive, effective drug is identified.
Most polled employers also set a cap on the quantity of the drug they will cover, restrict approved drugs to a formulary, and, as noted above, use higher pricing tiers.
Less common specialty drug cost-control techniques include:
- Using only one pharmacy network,
- Applying “pharmacogenomics” (the study of the role of genetics in drug response) prior-authorization rules,
- Contracting directly with the drug-maker, and
- Negotiating discounts with physician offices and outpatient hospitals.
Regarding that last point, physician offices and outpatient hospitals are typically the places where specialty drugs are dispensed and administered — particularly drugs that must remain refrigerated and administered by injection.
No employer wants to design a health care plan that increases the likelihood that employees who need costly medications will hit their ACA out-of-pocket limits sooner rather than later. Yet, in setting deductible, copay and coinsurance levels, you’ll have to look carefully at your organization’s spending on drug benefits. Your objective is to determine the optimum allocation of employee cost-sharing between the drug and medical components of your plan, being ever mindful of the rising proportion of health benefit expenditures devoted to pharmaceutical products.
Do you have concerns about rising pharmaceutical costs?