The Top Five Responses of Employers to Ward Off Rising Pharmacy Benefit Costs

The Top Five Responses of Employers to Ward Off Rising Pharmacy Benefit Costs

The pharmacy benefit is the most utilized benefit in your employer health plan and represents 15% (or more) of a typical employer’s health plan spend. Last year, prescription drug spending reached a record-breaking $374 billion, up 13% from the previous year.[i] The end of these rising costs is not in sight: pharmacy spend is increasing at a national average of 7.3% – 10% per year.[ii] [iii] Employers take note!

If you were asked how your company could save on the growing cost of pharmacy benefits for your employees, how would you answer? Having the right answer is urgently imperative, particularly as a growing number of employers are looking for more transparent models of healthcare. Employers seeking to reduce healthcare costs and increase employee engagement are aiming for alignment across all sectors of their healthcare strategy—including the pharmacy benefit.

A significant portion of pharmacy spending falls into the specialty drug category. Specialty drugs are complex and high-cost. They are used to treat rare and/or chronic conditions such as cancer, hemophilia, HIV and Hepatitis C. While specialty drugs account for only about 1% of claims volume, they are approaching 50% of claims costs[iv]. These costs are projected to quadruple by 2020.

Therefore, the question, “How can employers save on pharmacy costs?” has never been more relevant.


The Top Five Responses to Ward Off Rising Pharmacy Cost


  1. Be Acutely Selective in Choosing a PBM

Pharmacy Benefit Managers (PBMs) are central to an effective pharmacy benefit strategy, as they serve as third-party administrators (TPAs) of employers’ prescription drug plans. PBM services include contracting with pharmacies, negotiating pricing, paying prescription drug claims, clinical management, and maintaining the formulary.  The good news for employers is that data analytics, in support of population health management, is now a key component of the most effective strategies by leading PBMs. As with most services, however, not all PBMs are equal.  In fact, some have neglected some of those duties to become nothing but a distribution system.

After vetting service and administrative capabilities, the primary focus when evaluating a benefit manager should be how the PBM derives its income. The simplest form of revenue will be a nominal per-transaction fee. However, PBMs have multiple channels of revenue, often hidden from the employer. A common source of revenue is Spread Pricing—the practice of paying a pharmacy one price for a prescription but charging the plan (employer) another price and pocketing the difference. Additional revenue can be sourced via mail order, specialty drug programs, data sales, and ancillary fees. Further revenue may be derived from full or partial retention of rebates –which often appears attractive to the employer but could end up costing the employer as much as five times the face value of the rebate.

Because of these hidden practices, it is often best to layer the PBM with complimentary service providers who have expertise in pharmacy benefit contracts and building formularies. This is another reason why it is well worth the investment in having an employee benefits consultant who focuses on the needs of the employer and is qualified to blend a PBM with these experts.


  1. Build a Robust Formulary

Formulary Management is a strategy employers can implement with their PBM to reduce wasteful pharmacy spending while assuring a safe, affordable, and meaningful benefit for their employees. This strategy groups drugs into tiers with varying co-pays and provides financial incentives toward lower-cost, but equally effective, alternatives. Built-in Pre-Authorization processes and Step-Therapy (complete with audits) also strengthen the formulary and reduce unnecessary spending.


A well-built formulary will also include a compelling incentive toward generics where the average savings is 75%.[v] While many consumers understand the value of using generics, many are unfamiliar with the types of options. A generic equivalent is a drug with the same chemical entity as the brand name drug. A generic alternative is a different chemical entity with substantially lower costs, but with the same therapeutic effect as the higher cost brand name medication. The lack of knowledge about these alternatives is why it is estimated that brand name drugs are used unnecessarily 95% of the time.[vi] Therefore, the most aggressive step to point the employee to a lower cost (but equally effective) alternative is to remove many high-cost brand name drugs from the formulary.

Why Our Employees Choose the Costlier Drugs

In the absence of a formulary (or with a poorly designed one), employees will often be steered toward choosing the more expensive brand name drug over an equally effective generic. Why would an employee choose the more expensive brand? It’s not typically by conscious choice. Instead it is the result of effective direct-to-consumer marketing campaigns. Drug manufacturers are creative in enticing consumers—your employees—to purchase the costliest drugs. They will spend millions on advertising, telling us to “ask your doctor for it by name.” It works. Yet, as Dondi Ballard of PharmAvail recently shared with our benefit consultants, “If employees are purchasing a drug advertised on TV, the employer is overpaying for the drug.”  A carefully constructed formulary can guide employees away from marketing-based prescription drug usage and toward evidence-based usage.

It’s not just effective direct-to-consumer advertising, however, that causes employees to choose the most expensive options. The drug manufacturers have other equally effective tactics.

Has your physician ever given you a free drug sample along with a prescription? Most of us have had that experience without realizing those samples are provided by a drug manufacturer as a marketing ploy to start the patient using a medication that has a less expensive rival—most likely, a generic.

Another tactic used by drug manufacturers is to offer coupons that reduce or eliminate the employee’s co-pay, but add significant costs to the employer. Similarly, they may provide a drug at a greatly reduced cost to a hospital where the patient is prescribed the medication. That same drug will be billed at a much higher rate at the corner pharmacy once the patient is discharged.

A robust, well-designed, formulary, managed by a partner aligned with the employers’ and employees’ best interest, is the best defense against the medical spend waste on brand name drugs when equally safe alternatives are available at a much lower cost.


  1. Pay Attention to Pharmacy Contracts

Pharmacy contracts don’t need fine print. Regardless of font size, they can be extremely complex and difficult to understand. They often disguise key cost factors by using confusing industry jargon and phraseology. However, employers—or someone representing their interests—must understand the intricacies of the pharmacy contract. Failure to do so can have a significant negative affect on the employer’s plan costs.

Every contract has key elements that cannot be overlooked.  How long is the term of the contract? Is the contract auditable? Are there guaranteed purchase discounts on brand and generic drugs at retail and via mail? Are the definitions clear on what is a generic, brand, or specialty drug? Is there an annual reconciliation process to ensure all terms and conditions are met? [vii]  Is your PBM willing to work with third-party vendors?

The contract length is another key consideration. One common mistake employers make is signing a long-term three-year contract without the ability to adjust contractual language or pricing for certain drugs in the second and third years, and thus adjust to the rapidly changing pharmacy marketplace.[viii] As Keith Bruhnsen, assistant director of benefit administration for the University of Michigan, states, “Long term contracts with PBMs are not always in the employers’ best interest.” He continues, “The longer a PBM can lock you into an agreement, the more that is to their advantage.”[ix]

Securing qualified help in reviewing and editing a contract is essential.


  1. Communicate Value to Employees

Effective PBM management is not about taking anything away from employees.  Effective management is about getting the right drugs at the right time to those employees in need.

Those with an overt vested interest in the organization’s profit will quickly rally around the most effective strategies for reducing unnecessary spending on prescription drugs. However, those tasked with communicating changes, particularly formulary changes, to the employees are fearful of the reaction.  This is not a fight where Human Resources is eager to jump into the ring.

Therefore, it is essential that employers take the necessary steps to over-communicate the reasons for the changes and, more importantly, how the changes will save the employees money without affecting the quality of care. Furthermore, it is recommended to share the appeals process where employees can argue for the medical necessity of a specific drug.[x]

As with any effective change management plan, employers will eagerly look for opportunities to communicate how the change is for the benefit of the employee. If the employee believes the organization genuinely cares for its employees, they are more apt to adopt the change. Dee Edington and Jennifer Pitts wrote in their book, Shared Values, Shared Results: “Employees will be skeptical unless efforts to create strong positive organizational health are based on the genuine desire to improve the quality of health and thriving for employees, as well as to create value for the organization.”[xi]


  1. Include Prevention in Your Game Plan

The most effective means for cutting healthcare and pharmacy costs is to prevent the need for medicine and care. Not needing medication is less expensive than a generic. Or, as Edington and Pitts write, “Investing in good health is less expensive than paying for poor health.”

At a recent gathering at the Gwinnett County Chamber of Commerce, John Bringuel, Project Director for Georgia Prescription Drug Abuse and Prevention Initiative at the The Council on Alcohol and Drugs, stated, “The United States has 3 – 4% of the world’s population, yet uses 90% of the prescription drugs and 80% of the world’s pain killers.” That statement came within the context of Americans’ deep-seated search for meaning, pleasure, and escape from the pain and stressors of life.

An abundance of research tells the story of how wellbeing and healthy lifestyle choices are the leading preventatives of disease and the need for medical care—including treatment through medication. There is an undeniable relationship between the mind and body. Much of the need for medication does not begin with physical symptoms. Rather, the physical indicators spring from thinking patterns and reactions to the stress in our lives.


Most employers have a great tool for assisting their employees with the stress and struggles of life:  the Employee Assistance Program, (EAP). This may be a stand-alone service or one that is tacked onto a group policy. Either way, EAPs provide valuable, often free, confidential guidance to help employees with the struggles of life. Employers serious about downsizing pharmacy costs will take the time to press for utilization of the EAP.


The importance of emphasizing healthy lifestyle choices should be more than a soap box for wellness vendors. It should also be the joists supporting our employer healthcare strategies. Mary Delaney of Vital Incite writes, “Turning to medications as a first option for chronic condition control for issues like hypertension, blood sugar control, cholesterol control versus improving diet and exercise, etc., is just a Band-Aid solution that, in most cases, does not resolve the root issue. [xii] Michael Parkinson, MD, past president of the American College of Preventive Medicine, poignantly wrote, “80% of disease, disability, and premature death in the US is due to what we eat, how we move (or not), and how we think.”[xiii]

When it comes to controlling healthcare costs, the ounce of prevention is well worth the exchange for a pound of cure.

In summary, employers don’t need to sit idly by, lamenting the rising costs of their pharmacy benefit. Proactive, wise, and educated choices can curb this costly healthcare trend and provide meaningful relief.

For assistance in exploring options on how to reduce your pharmacy spend please contact us at The Benefit Company. One of our employee benefit consultants will be happy to assist you.


Jack Bruce

Vice President of Strategic Operations

The Benefit Company

Atlanta, Georgia

[i] RxBenefits Brochure 2017

[ii] Mary Delaney, http://blog.ubabenefits.com/solving-the-prescription-puzzle

[iii] RxBenefits Brochure 2017

[iv] Alan Gardner, RxBenefits: A Conversation on Pharmacy Benefit Management with The Benefit Company. April 19. 2017.

[v] Specialty Pharmacy Times. Implications of Biosimilar Use: A Market Perspective. March 13, 2013.

[vi] Potential Savings through Formulary Management, PharmAvail, p. 6

[vii] Alan Gardner, RxBenefits: A Conversation on Pharmacy Benefit Management with The Benefit Company. April 19. 2017. (p.35)

[viii] Alan Gardner, RxBenefits: A Conversation on Pharmacy Benefit Management with The Benefit Company. April 19. 2017. (p.38)

[ix] As quoted by Joanne Sammer in “Stemming the Rising Rx Tide” in HR Magazine, June/July 2017

[x] Joanne Sammer, “Stemming the Rising Rx Tide in HR Magazine, June/July 2017

[xi] Edington and Pitts in Shared Values, Shared Results, p. 7

[xii] Mary Delaney, http://blog.ubabenefits.com/solving-the-prescription-puzzle

[xiii] Edington and Pitts in Shared Values, Shared Results, p. 19

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