Prescription drug costs are a major concern among employer groups of all sizes.

Increased use of prescription drugs increased nationwide spending tenfold – from $30 billion in 1980 to $335 billion in 2018 (adjusted for inflation in 2018 dollars). Driving much of that increase over the past ten years is specialty pharmacy whose costs have risen exponentially – a double digit annual increase in each recent year. United States pharmaceutical expenditures grew 9.4% in 2022, for a total of $633.5 billion!

As new drugs are introduced, dynamic and personalized treatments increasingly incorporate new and costly medications. Those trends continue. Plan sponsors should anticipate moderate to significant cost increases to their health plans. In turn, most employers share the impact on costs from medical inflation. So, employees are just as financially vulnerable to increases in their premium contributions, deductibles, co-pay increases and out-of-pocket expense maximums.  For example,a significant feature of Health Reform was to attempt to limit annual out-of-pocket expenses – set at $6,350 per individual in 2014, now $9,100 in 2023 – a 43% increase!

At a significantly high cost are specialty medications that provide breakthrough, lifesaving treatments for complex, chronic and rare diseases. There are hundreds of specialty drugs in more than 40 therapeutic categories and specialty disease states currently available on the market, accounting for 55% of the drug expenditure in the U.S.

For self-insured plans, bearing the financial burden of paying high cost for prescription drugs, specialty medications and associated stop-loss premium rates can be a challenge. In response, self-funded plans are increasingly using alternative funding strategies through Pharmacy Benefit Managers (PBMs) so as to maintain medication benefits while achieving a meaningful cost savings to participants.

Role of PBMs

Despite Congressional scrutiny of PBMs, they currently serve an important role in employee healthcare by facilitating drug access and helping to ease cost burdens. They function as intermediaries between plan sponsors for self-insured plans and pharmaceutical manufacturers. In their role, they create formularies, negotiate rebates with manufacturers, process claims, create pharmacy networks, review drug utilization and manage mail-order specialty pharmacies.

Alternative Funding Programs

PBMs cite the high cost of specialty drugs as justification for recommending Alternative Funding Programs (AFPs). Also known as specialty “carve-outs,” AFPs are drug cost management services that contract with self-funded employer group plans and third-party administrators to secure alternative funding for specialty drugs. Benefit advisors searching for assistance for their self-insured employer clients increasingly turn to alternative funding programs to shift these costs off the pharmacy plan.

AFPs are a relatively new concept in pharmacy benefits. AFPs help eligible participants of self-funded plans access “free” medications from charitable organizations and foundations. Some health plans have already turned to AFPs wherein the specialty drugs are removed from the plan’s Rx formulary. The payer will select a third-party company to support these now “uncovered” medications and will apply for manufacturers’ patient assistance (PAP) funds to cover the cost of the prescriptions.  

Regulatory Limitations and Permissions 

Under the Affordable Care Act (ACA), small plans and individual insurance coverage must include prescription drugs as an essential health benefit (EHB) at a minimum level. However, self-insured plans are not required to offer prescription drugs as an EHB.

Some employers mistakenly believe that they can offer any level of prescription drug coverage—including the elimination of all specialty drugs. However, if a self-insured plan offers EHB it must use a permissible definition of EHB to comply with the Public Health Service Act (PHS Act) provisions that prevent the imposition of annual and lifetime dollar limits on EHB, and limits out-of-pocket spending across all EHB, not just prescription drugs. Health and Human Services (HHS) regulations confirm each state’s EHB benchmark plan. A self-insured plan may choose the EHB plan in any of the 50 states.