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How Employers Can Curb Rising Pharmaceutical Costs 7/14/2017

Pharmaceutical Costs

By: Marcus Humphrey, Executive Advisor, Employee Benefits & Rick Boss, Executive Advisor, Employee Benefits

As the average inflation rate last year grew a modest 1.3 percent in the U.S., the cost of prescription drugs has continued to soar, creating financial fallout for employers and employees. Pharmaceutical prices rose nearly 10 percent in 2016, according to data cited by the Wall Street Journal, and public outrage over the sky-high costs has captured the media’s attention like never before. Last August, for example, Mylan Pharmaceuticals came under fire for jacking up the price of the EpiPen tenfold, from $57 in 2007 to more than $600 today. The move places a huge financial strain on thousands of Americans who suffer from severe allergies and have few, if any, viable treatment alternatives.

Similarly, a course of treatment for Hepatitis C using drug therapy developed by Gilead Sciences can cost as much as $80,000; yet, no generic alternative currently exists. Although the United States is among the richest nations in the world, the cost of life-saving drugs far exceeds the reach of most Americans, leaving them in an untenable situation, unable to afford the critical care they need.

The high cost of specialty drugs, like those used to treat cancer, rheumatoid arthritis, and Hepatitis C, is also taking its toll on employers, who absorb a large percentage of the cost as part of their benefits offerings. The structure of traditional co-pay health plans is such that while an employee may only pay a $30 or $40 co-pay for a prescription drug, the employer absorbs the remainder of the expense, often to the tune of hundreds of dollars per prescription. The fact that employees are shielded from a significant portion of the costs places the burden of education on employers, who have to walk a fine line between helping employees obtain the medications they need, which has a positive impact on productivity, and reducing health care costs by increasing co-pays and other cost sharing mechanisms, which in turn could cause consternation among employees.

Strategies to Reduce Drug Costs

In addition to making the expenditures for specialty drugs more transparent to employees by educating them about the true cost of medications, employers are exploring other means of bringing down employer pharmaceutical costs to protect the bottom line.

In the case of high-priced specialty medications, many businesses are taking a more aggressive approach to use management. For example, if an employee requires an injectable specialty medication, the employer may require that the injections be done at a specific facility with which the organization has negotiated discounted pricing. In other cases, the employer may implement tighter controls around which drugs are covered, based on clinical effectiveness and price. For example, if a $10 drug has proven just as clinically effective as a $200 drug, the employer may incentivize use of the lower-cost medication versus the pricier prescription.

Similarly, employers can manage claims through step therapy and prior authorization programs. For example, a doctor may have three options available on the drug plan formulary for a patient’s course of treatment. One is a lower-cost drug that helps 80 percent of patients with the condition, one is a medium-cost drug that helps 95 percent of patients, and the third is a high-cost drug that is successful with 99 percent of patients. Often, the physician will simply prescribe the drug with the highest success rate, without taking the price into consideration. To control prescription drug expenses, employers can implement a step therapy plan that incentivizes the physician to start with the lower-cost drug and see whether it works for the patient. In the example provided here, 80 percent of the time, the treatment works just fine. If it doesn’t, then the option exists to try the more expensive drugs.

Employers can curb rising pharmaceutical costs by focusing on channel management, excluding certain pharmacies or creating a tighter pharmacy network. Employees may be required to have prescriptions for specialty drugs filled at pharmacies where favorable pricing has been negotiated, or the employer may implement a mandatory tier coinsurance-based cost-sharing mechanism for employees. In either scenario, the goal is to curb pharmaceutical costs by making sure employees are purchasing the product as efficiently as possible.

A Closer Look
At Marsh & McLennan Agency, we help employers bring down pharmaceutical costs by analyzing utilization trends under their current pharmacy program, and often times negotiating more favorable contracts with Pharmacy Benefit Managers (PBMs) as well as providing employees with tools needed to make more informed decisions about purchasing their prescriptions. Manufacturers pay out billions of dollars in rebates each year, but that money rarely makes its way back into an employer’s coffers. We often find significant savings for employer pharmacy programs—sometimes in the tens of thousands of dollars—simply because the contracts haven’t been reviewed in the past two or three years and better discounts are now available. Not only are we able to reduce the price point for specific drugs, we can also drive traffic to more cost-efficient locations for employees to have their prescriptions filled. In addition, educating employees about the true cost of drugs and having them cost-share at a higher level than under the prior co-pay system can help lower employer costs.

In the big picture, employers still can only do so much from a plan perspective and to improve awareness related to the cost of specialty drugs. To really move the needle will require a change in public policy. Whether the catalyst will come from the new administration is unclear, but mounting pressure from businesses and the public at large may soon lead to a shift in momentum and force pharmaceutical manufacturers to take a closer look at their pricing policies.


This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change.

Copyright © 2017 Marsh & McLennan Agency LLC. All rights reserved.

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