The Real Impact of Self-Funding on Pharmacy Benefits

Rising healthcare costs are always top of mind for employer groups and their brokers who are looking to balance access with affordability, and pharmacy is one of the only healthcare benefits that employers can influence in a meaningful way.

Plus, with a majority of large employers concerned about high-cost drugs, it’s no surprise that holding Pharmacy Benefit Managers (PBMs) accountable and driving contract transparency are among the top strategies employers are considering to manage these high costs.

Employer interest in moving from fully insured to self-funded health plans as a way to control pharmacy spend has also grown. In 2022, 65% of firms were self-funded, up from 48% a decade ago. For organizations looking to make the switch from fully insured to self-funded benefits, however, understanding how self-funding works, the pros and cons, and the impact on pharmacy benefits are vital.

Self-Funded vs. Fully Insured: Weighing the Pros and Cons

Self-funded and fully insured health plans have their own unique advantages and drawbacks, and understanding the differences is key.

Fully Insured Plans: Predictable Expense, But Limited Control and Transparency

Organizations with fully insured plans pay fixed premiums and administrative costs to a carrier, regardless of utilization. The health plan’s costs are paid by the employer and employee in a cost-sharing model. Some considerations associated with fully insured plans are:

• More Predictability: In a fully insured model, employers know what they will pay every year, so they don’t have to worry about utilization and cost fluctuations. Plus, the carrier handles claims processing so there’s no administrative burden to manage. Since the potential for high-cost claims is included in the premiums, the carrier assumes the risk for catastrophic claims.
• Lack of Flexibility: Since only one carrier provides medical, pharmacy, and other benefit lines, employers aren’t able to customize benefits or choose the right provider network or PBM that’s suited for their employee population.
• Limited Transparency: Only the carrier has access to fully insured data, so plan sponsors lack insight into which medications employees are taking and what drives their spending. They can’t customize the plan according to their employee population’s needs and don’t have the ability to steer utilization or negotiate alternatives.
• Higher Costs: Fully insured plans are typically costlier than self-funded plans and are subject to state health insurance premium taxes. Plus, employers aren’t reimbursed if utilization is lower than expected.

Self-funded Plans: More Control and Transparency

With a self-funded plan, employers pay for medical and pharmacy claims and fees and assume the financial risk of providing healthcare benefits.

• More Plan Flexibility: One of the key benefits of self-funding is the flexibility these plans offer. Organizations can customize the health plan benefits and choose the provider network and PBM that are best suited to their unique employee population’s needs. When plan sponsors are able to choose their own PBM and create competition, they can save upwards of 20% on pharmacy benefits.
• Increased Transparency: With self-funded plans, plan sponsors can gain visibility into the discrete components and cost drivers of their benefits programs. With respect to pharmacy, transparency into PBM practices means understanding how the PBM is paid and holding them accountable to their contract. Having a third-party independent partner re-adjudicate 100% of claims ensures the PBM is accountable and meets the organization’s needs.
  
• Improved Cost Control: Increased transparency through self-funding also allows organizations to curb high drug spend. For example, if organizations find most of their costs are coming from one or two drugs, identifying opportunities to better cover those drugs can help. In fact, self-insured employers that swapped out prescription drugs with generic and less expensive, but clinically-equivalent drugs saved between 9 and 15% on annual spending on prescription drugs, one study reported. What’s more, third-party oversight enables organizations to identify areas of the contract that can be optimized based on their utilization trends.
  Additionally, under self-funded plans, employers don’t have to pre-pay for coverage or pay for state health insurance premium taxes—allowing them to keep more cash on hand. Also, if claims are lower than expected, they can hold onto the savings.
• Utilization Risk: A potential downside of self-funded plans is that they carry risk which is dependent on utilization and claims costs. While an employee population can be relatively healthy, a cancer diagnosis—the number one driver of employer health care costs—for example, could have a significant impact on their bottom line. In fact, in the year following a cancer diagnosis, the average annual medical and prescription drug costs are more than $42,000. To mitigate such financial risks, many self-funded groups opt for stop-loss insurance, which provides a financial safety net by kicking in when individual or aggregate claims exceed predetermined thresholds, helping to protect the financial stability of the self-funded plan.

Are Self-Funded Plans the Way To Go?

As healthcare costs continue to increase and many employers are avoiding an increase in cost-sharing next year, self-funded plans steadily rising. For organizations considering the move from fully insured to self-funded, the decision comes down to the health and demographics of their employees and how much risk they are willing to take. Therefore, they should consider their goals, employee population, utilization, and costs. Organizations should also consult with their benefits broker or a trusted advisor with pharmacy expertise. As pharmacy costs will likely continue to rise for all employers, having transparency and control will be critical.

What To Look for In a Pharmacy Benefit Solution

By working with your broker and a pharmacy partner, your organization can easily navigate from fully insured to self-funded. When employers choose a pharmacy program that provides transparency into drug utilization and spending, they can balance access with affordability and provide an optimal member experience.

Look for partners that are independent, agnostic, and can provide unbiased results, without any financial incentives to steer utilization in a certain direction. Want to learn more about the impact of self-funding on your pharmacy benefits? Connect with us today.

Truveris is a leading digital health company focused on delivering truth and clarity in pharmacy. Truveris’ proprietary technology, coupled with deep pharmacy expertise, helps to build a more efficient market that maximizes choice, accessibility, and prescription drug affordability. Our solutions provide the insight and knowledge to help people lead healthier and more productive lives.