Benefits are often considered a major differentiator and talent draw for companies across the board. However, healthcare benefits are one of the highest expenses incurred by businesses in the United States, and experts predict that healthcare costs will continue to increase in 2021—a fact that may be exacerbated as our communities and healthcare system grapple with the coronavirus pandemic.
Covered California, the state’s health insurance marketplace, predicts 2021 premium increases will rise anywhere between 4 to 40% from COVID-19 alone. Pharmacy spend, in particular, is expected to grow 6.1%+ year-over-year for the next seven years. Pharmacy benefit cost management has quickly moved to a high priority line item for businesses and HR professionals, while simultaneously becoming ever more important to maintaining a healthy, happy workforce. Preparing for potential increases in pharmacy costs is critical for businesses and HR leaders.
Related: Read all of HRE’s benefits coverage here
As a self-insured employer, there are many roads you can take toward reducing benefits costs. One option worth considering is carving out pharmacy benefits from your traditional healthcare plan—a technique that enables you to significantly reduce costs without reducing value for your employees.
Defining Carved-In vs. Carved-Out Pharmacy Benefits
At a high-level, carved-in pharmacy benefits are part of an overall healthcare benefits package, whereas carved-out pharmacy benefits are purchased and managed separately from the general healthcare plan.
Carved-in arrangements are simple, which can be appealing upfront. There is only one vendor contract and relationship for you to manage and they offer the advantage of a single benefits card for employees. Copays and deductibles from the medical and pharmacy plan are automatically coordinated, with no need for integration.
However, carved-in pharmacy arrangements offer little room for negotiation and cannot be fully customized–meaning they almost always cost more than carved-out benefits. In a carved-in arrangement, the health plan provider will typically subcontract pharmacy benefit services to a pharmacy benefits manager (PBM). In these arrangements, both the PBM and carrier may retain drug rebates and mark-up the cost of drugs (a technique known as spread pricing), unbeknownst to plan holders. The lack of transparency in accounting and reporting make it difficult to know exactly what you are spending on pharmacy or to determine if the pharmacy component of your company’s plan is well-managed.
Checklist: Deciding Which Route to Take
When making decisions around benefits changes, benefits and HR professionals often need to weigh the opportunities and drawbacks of each option to best address their employee and business needs. The following checklist can help streamline this process, particularly for self-insured or mid-size businesses:
- What is the year-over-year cost increase on your pharmacy benefits plan?
- Has your business or employee benefits consultant/adviser successfully negotiated lower rates?
- Are you receiving all of the rebates, coupons and discounts available?
- Are you able to customize and optimize the formulary based on member usage?
- Do you have access to performance reporting metrics?
- Do you currently have or plan on having in-house experts that can analyze the performance reporting metrics to identify areas that can be optimized?
- Are there triggers in place to review high-cost or low clinical value claims and recommend alternative solutions?
- Does your pharmacy benefits provider give you access to a team of clinical pharmacists who can explain what’s happening with your membership and recommend strategies to optimize your company’s spend?
- Does your pharmacy benefits provider give your member employees access to experts who can help them make the most of their pharmacy benefit?
If you answered “no” to two or more of those questions, you may want to seriously consider carving out your pharmacy benefits.
The Bottom Line
A carved-in pharmacy arrangement may sound simpler for HR and benefits leaders and employees, but simplicity comes at a price. Bundled medical and pharmacy contracts create a disadvantage in negotiating rates and rebates, driving up plan costs. The financial, service and clinical terms of these arrangements may not be meeting their needs, but carved-in plans give little visibility into the inner workings of the plan’s data and employers have no guaranteed rights when it comes to these pharmacy contract terms.
As our healthcare system and our economy face unprecedented times, it’s opportune for businesses to re-evaluate their benefits and seek to provide more value while reducing costs. If you’re considering making changes to your benefits plan, taking a look at options for a carve-out pharmacy plan is a good place to start. It can put your business on track for a healthier bottom line and a healthier workforce.
