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In 2018, American consumers spent $535 billion on prescription drugs and spending is projected to reach $584 billion dollars in 2020.

The average American spends approximately $1,200 a year on prescription drugs, but those with chronic or severe medical conditions can pay $50,000 or more per month for specialty drugs to treat conditions such as rheumatoid arthritis or cancer.

These high-cost claimants represent approximately 10 percent of the population, but often will account for 90 percent of the pharmacy spend. Deductibles and out-of-pocket maximums can be met with a single dose of a specialty drug, leaving the insurance company or self-funded employer to foot the remaining bill.

There is little an employer can do to lower prescription drug prices, but you can lower your drug spend if you understand how the pharmaceutical industry sets drug prices and how pharmacy benefits are managed.

Understanding Drug Prices

There are three basic categories for prescription drugs—generic, brand-name and specialty—and the prices vary depending on a number of factors including manufacturing costs, availability and specific uses.

Specialty drugs are the most expensive category. They are used to treat chronic or severe medical conditions, such as rheumatoid arthritis or cancer, and are obtained in one of two ways—medication is either dispensed in a medical setting or purchased at a pharmacy and self-administered.

It is less expensive to self-administer specialty drugs, but some medications must be administered only in a medical setting. Some treatments can cost 28 to 53 percent more when they are administered in a medical setting because the medication is billed at a hefty reprice and the facility tacks on additional fees. Nearly all healthcare systems operate under this model, so there is very little an employer can do to mitigate the costs in this scenario.

Brand-name drugs are the next most expensive category. When a new drug is brought to market, the manufacturer who developed it is granted a patent and exclusive right to sell the drug. These drugs are sold at a premium price. An example of a brand-name drug is Glucophage, a treatment for type 2 diabetes that has an average retail price of $82.

Generic drugs are the least expensive category, but they are exact copies of brand-name drugs with the same benefits and side effects. When a drug patent expires, other manufacturers can apply to the Food and Drug Administration (FDA) for permission to make and sell a generic version.

The FDA requires generics to be as safe and effective as brand-name drugs, but because these manufacturers don’t incur the costs related to developing the drug, they can often produce and sell the drug cheaper. For example, the generic version of Glucophage is metformin, which has an average retail price of $18.  

Whether you have a self-funded or fully insured health plan, you can help lower your prescription drug spend through consumer education about prescription pricing.

Teaching employees how to make good buying decisions helps them keep money in their pockets and reduces your costs as well. Training for all employees should include education about your plan and how to best use the pharmacy benefits, but you will also want to highlight these tips to help keep costs down.

  • Always ask if there is a generic version when a doctor prescribes a brand-name drug.
  • Shop pharmacies carefully. Prices for filing prescriptions are not the same for all pharmacies. Your broker can help you find the lowest cost locations in your network.  
  • Ask questions about the recommended treatment. What are the short-term and long-term side effects? How long will you be on the medication?
  • Understand some plans use a step therapy program to try less expensive treatments before authorizing the most expensive option.
Understanding Pharmacy Benefits Managers (PBM)

A Pharmacy Benefits Manager (PBM) is a third-party that manages prescription benefits on behalf of insurance carriers, employers and other payers.

If you have a fully insured health plan, your pharmacy benefit is likely integrated with your medical benefit, so you can’t choose your PBM separately. Instead, you will need to choose a health plan that includes a pharmacy benefit that works for you. A trusted advisor can help you understand which plan designs offer the lowest cost drugs.

If you are self-funded, however, you have the option to choose your PBM. The PBM generally processes prescription drug claims, develops and maintains the drug list (formulary), contracts with pharmacies, and negotiates with drug manufacturers for discounts and rebates.

Rebates are a partial refund that the drug manufacturer gives to the buyer for the cost of the medication. There’s a lot of money in drug rebates and very little transparency in the process. The likelihood that you—the employer who purchased a health plan—are seeing all of the rebate money is pretty slim. Rebates are usually given to the pharmacy or medical facility dispensing the drugs.

PBM contracts can be challenging to decipher and it can be difficult to know where to turn for help. Some PBMs will claim to use a full pass-thru model that gives the employer all the rebates, but in the fine print the PBM will receive what appears to be a kickback or bonus from the drug manufacturer that is disguised as a “clinical research fee” or similar term.

Other PBMs have their own specialty pharmacy to help lower specialty drug costs, but that can be a double-edged sword where you don’t know the real price of the drugs because the PBM still receives a pharmacy rebate. To further complicate matters, some brokers (nearly 75 percent) take a commission on every prescription filled, creating a conflict of interest when negotiating prices on behalf of you and your employees.

The good news is that transparent PBMs really do exist and it’s possible to negotiate a contract with the lowest possible drug costs and with rebates that are passed through to you. An ethical broker can help you find the right PBM in the murky, complex, and sometimes purposely obscure, pharmaceutical world.  

Prescription drug prices aren’t dropping anytime soon, so controlling the pharmacy spend is a team effort. Employers should take the time to educate employees to be savvy pharmaceutical consumers, and self-funded groups need to be proactive about partnering with brokers they can trust to negotiate the most beneficial PBM contracts available.

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A collection of articles from the McClone team with the helpful knowledge and insights to ensure your organization is well protected.