In the first edition of Finance Friday, we delve into the world of Prescription Carve-Outs…. How can this save your company money, and is it right for you?
Nationally, a great deal of attention is being focused on prescription drugs due to rising costs and lack of coverage in select populations. Spending for prescription drugs is one of the most swiftly growing components of health care. Price increases and a growing dependence on the newest and most expensive medications have both contributed to this surge in spending.
U.S. spending on prescription drugs has increased 54 percent since 2005, and 162 percent since 2000. Forecasts show that spending will continue to climb.
Prescription Benefit Plan Administration
Prescription benefit plans are typically managed by third-party administrators known as pharmacy benefit managers, or PBMs. In delivering this service, PBMs typically maintain discount contracts with a network of pharmacies, process claims in real-time, provide customer service support, pay pharmacies for covered prescriptions, employ a clinical team to keep current with the changing pharmaceutical landscape and report plan results to responsible parties. 
Not unlike the cost of any good or service, the end-cost of the prescription drug benefit is determined by a familiar equation: Price x Units = Cost. Although prescription benefit plan design plays a significant role, plan administration is equally important. A national study showed prescription programs administered on a stand-alone basis by PBMs delivered better financial results than did those administered by carriers alone, or carriers in tandem with a PBM.
Factors influencing the unsatisfactory performance of carriers include:
- Limited clinical pharmacy resources
- Superficial analysis of prescription drug information
- Plan design inflexibility
Whether your plan is self-funded/self-administered, self-funded and other administered, or fully insured, your prescription benefit is likely to be administered through a PBM.
Carve-out Considerations
Employers that switch from a fully insured plan to a self-funded plan typically show a large first-year savings. This is due, in part, to the factors outlined below as well as the realization of trend in the years that follow. In subsequent years, employers can continue to reduce or control costs by modifying their plan design and taking advantage of prescription cost management programs such as mail service or step therapy.
The benefits of self-funding include:
- Reduction of state premium taxes
- Elimination of surcharges for reinsurance
- Improved cash flow: the employer pays for actual claims as they occur, as opposed to claims that may or may not be incurred
- Earning interest on health plan reserves
- Plan design flexibility
- Access to better quality data
- Relief from state mandates
Stop-loss Coverage for Prescriptions
Stop-loss coverage (or reinsurance) is a feature of self-funded plans in which the employer assumes the risk of health care cost up to a certain limit on individual claims (specific) or up to a certain limit on all claims (aggregate). An employer pays an insurance company to assume risk above the specific and/or aggregate levels. Overall, stop-loss coverage can limit the employer’s risk while allowing them to retain control over claims and benefits. A few PBMs have formed strategic partnerships with stop-loss carriers to provide prescription drug reinsurance for employers seeking additional protection.
In closing, self-funding the prescription drug benefit can pay big dividends, but it is not for everyone. A careful analysis of carrier premium credit, stop-loss premiums and expected claims must be completed before heading down this path. Although stop-loss coverage is available, the employer must recognize that they are not immune from risk. Aggregate stop-loss will provide a limit to the maximum risk for any one employer. The combination of stop-loss premiums, claims and the risk-corridor created by attachment points create potential loss situations.
Here at The Equinox Agency, we are consultants with in-depth knowledge of the PBM industry to assist in the decision-making process and to provide ongoing support once your new self-funded prescription plan is up and running. Please contact info@agentequinox.com for more information!