If you’re one of many self-funded employers with pharmacy benefit contracts up for renewal this year, you may be in for a surprise. The pharmacy landscape has shifted significantly in the last 3 years: witness the expansion of specialty and orphan-drug pipelines; the emergence of gene therapies; and the rise of biosimilars. The contract you negotiated 3 years ago got you here, but it’s less likely to sustain cost containment strategies and address market shifts over the next 3 years and beyond.
The vast majority of self-funded employers believe that pharmacy costs are beyond their control and in today’s increasingly complex pharmacy environment, it’s easy to understand why many employers stick to traditional approaches to cost containment. In truth, however, many approaches are either outdated or not comprehensive enough to ensure sustainable outcomes unique to the plan’s members and claims history. As the market has changed, several creative approaches are available to help employers not only manage their pharmacy spend but reduce the cost of the benefit – but not all programs are going to support the range of needs and goals across self-funded employer groups. The right combination of timing, pharmacy contract strategy and technology and is key for maximizing the pharmacy benefit program.
Self-funded employers should be thinking about potential options for plan year 2024 now. To help them prepare, a Truveris webinar, “Controlling Costs Through Pharmacy: Your 2023 Guide to Pharmacy Benefits,” offered specific strategies tailored to current pharmacy trends and emerging market developments.
To respond, know how background trends affect you
In the first quarter of 2023, employers faced a number of challenges: continued increases in their pharmacy spend; a greater need for price transparency; navigating the effects of legislation like the Inflation Reduction Act; contractual implications for the coming approvals of biosimilars; and understanding emerging cost-control strategies.
Several of these trends are intertwined. Higher pharmacy spend today is driven largely by the rise of specialty drugs and increases in utilization. Thanks to higher rebates, overall net inflation is only about 2% this year, but cost increases are not uniform; specialty drugs are the fastest-growing cost center of the benefit, consuming 55% of drug expenditures but only 2% of claims. The expected debut in 2023 of several biosimilars — particularly biosimilars for Humira — may help to mitigate this, but the fact is that specialty drugs have become a larger source of profits for PBMs as others decline.
“The percentage of PBM profits from things such as network spreads or manufacturers’ fees has decreased,” says Ryan Storey, PharmD, Truveris Vice President of Pharmacy Solutions and Strategic Accounts. “The dispensing and care management of [specialty] therapies has become a much greater source of revenue in today’s market.”
On the other hand, new approaches to these trends emerge and evolve quickly. Some countermeasures to compete against PBM profits include:
- We’ve seen an upturn in pass-through offerings, in which PBMs relay discounts and rebates to the employer in exchange for higher flat fees.
- Pharmaceutical companies are beginning to pull back copayment-assistance programs compromised by copay accumulators and maximizers.
- Options for unbundling the full-service PBM model are proliferating, specifically with respect to alternative funding or specialty carve-out vending.
For employers, it can be helpful to partner with an organization that interprets trends though the plan’s eyes, evaluating all options from both a financial impact and a plan disruption perspective. When we create contract transparency and can understand what parts of the contract PBMs are gaining from, we can then target specific areas of the contract to extract additional value back for the plan.
5 controllable factors about pharmacy benefit contracts
When it comes to pulling all of these considerations together to create a favorable pharmacy strategy, there are more levers to pull than you might realize – it’s all about controlling the controllables.
Controllable #1: Timing
Beginning the pharmacy procurement process well before the contract ends is critical, as it has a direct influence on the degree to which controllables #2 and #3 can work in your favor. “Time is leverage, and in this market, there is a days-to dollar-ratio,” says Sara Sherrod, Vice President of Marketplace Management at Truveris. Waiting means losing out on cost-saving opportunities.
The PBM typically requires a 90-day implementation window, and they will be less flexible the closer to that date the plan gets. For this reason, Truveris recommends beginning the procurement process 6-9 months in advance of the next year’s contract renewal whereas brokers typically report 3-5 months as the average time they a lot.
Controllable #2: Optionality
It may be tempting (and a lot less work) to go with the incumbent PBM’s renewal offer. But before you do, make sure you explore your options. Working with an external partner can help support the evaluation of your renewal against other marketplace offers. Also if you’re looking to make a switch, unbundle, or other, good options largely depend on the number of lives in your plan and your risk/reward appetite.
Some considerations include:
- Contract for pass-through pricing. On paper, discounts are typically more competitive with traditional pricing; thus, a PBM has to outperform its contractual guarantees for a sponsor overcome the difference and make up for the higher fees. There’s upside, but if you are risk averse, this option might not be for you. “In my opinion, these programs haven’t been out long enough to generate substantial data on overperformance,” says Sherrod.
- Consider joining a purchasing coalition. But also consider that a coalition is tied to a PBM on the back end, with contractual guarantees for the group’s book of business. You have less flexibility to negotiate terms you want. That said, guarantees you can achieve through coalitions are getting more competitive, and smaller to mid-sized plans can often get better rates than they can directly from a PBM, while still benefiting from some degree of service and support.
- Explore cost-containment options like copay accumulators and maximizers, alternative funding programs, and specialty carve-outs. The first two choices are controversial and present a high-risk, high-reward scenario. Using copay programs and other discount channels can yield significant savings on paper, but the outcome is less certain because the impact is utilization-driven. Leveraging discounted rates from a standalone specialty provider comes with less volatility and risk while still yielding meaningful, even if less significant, savings to the plan.
Controllable #3: Competition
After choosing your options, create dynamic competition by putting those options out for competitive bids. Bidders (including the incumbent) will be incentivized to compete for pieces of the benefit that are most valuable to an employer. The below figure is an illustrative example of the mix of vendors and features that might make up your pharmacy benefit.
Controllable #4: Contract Monitoring & Oversight
Third-party PBM contract oversight is imperative. A critical component of increasing transparency in pharmacy plans and ensuring the well-negotiated contract is enforced is using independent third-party to review claims to ensure all rebates, guarantees and utilization is being tracked and performing accordingly.
Controllable #5: Educational resources
In a world where there are new drugs coming to market and many options, give members the tools they need to steer them toward choices that help the member and the plan gain the maximum benefit for their dollars.
Pharmacy Strategy in Action
The figures below illustrate how a dynamics approach to pharmacy procurement and renewals can drive results for an employer group but underscores the value of timing.
In the first case, beginning the procurement process early benefitted a Truveris customer covering 2700+ lives. Initiating the procurement process 8 months before the plan-start date, this food distributor had time for two rounds of bids, ultimately netting a 21% savings over its existing contract.
Had the procurement process begun 3 months later, there likely would have been fewer bidders willing to submit proposals and only one round of bidding, resulting with a contract with one-third less savings.
What do we take from all this? With all of the complexities to controlling costs, there is no single solution but many options to consider. Leverage those options by starting early and leaning on a tech partner to help you navigate those complexities. If approached strategically and with the right combination of technology and expertise, employers can not only gain control of pharmacy, but they can also secure lower pricing for their benefit spend.