The Challenges Facing Self-Funded Employers
>> Read on to have all your carving-out questions answered.
Employers have long been promised that the ongoing vertical integration in the pharmacy benefits industry would lead to a more consistent, efficient healthcare model that would result in lower costs for their benefits plans. The reality of it has been different: Employers in those bundled pharmacy arrangements are finding themselves leaving money on the table.
As drug costs and utilization of high-cost specialty medications continue to rise, employers are quietly losing the little leverage they had. Carriers are trying to impose out-of-reach thresholds and excessive penalties for employer groups who want to carve out the pharmacy benefit. And without the negotiating leverage of large companies, small and mid-size companies continue to face a financial, service, and clinical disadvantage.
Self-funded employers in bundled arrangements can take steps to make sure their pharmacy benefits program is serving the best interest of their plan and their members – not the pharmacy benefit manager (PBM) or health insurance carriers. By carving out their pharmacy benefits, employers can flip the script and make benefit plan changes on their own terms.
What actually is “carving out”?
Carving out pharmacy benefits, in contrast to carving in, is a way for self-funded employers to gain more control over those benefits.
In a carved-in arrangement, the pharmacy benefit is bundled in with the medical benefit, which is usually run by a large health plan or a third-party administrator (TPA). In bundled arrangements, the employer has little visibility into the performance of their pharmacy benefit. They typically don’t have access to client-specific rates or rebates, or auditing rights. This means they don’t have oversight over their plan – and there’s no way to hold the plan accountable for the performance of their pharmacy benefit.
In a carved-out arrangement, the pharmacy benefit is peeled away from the medical benefit and managed outside of the health plan’s influence. Employers gain more visibility into their pharmacy contract. They have auditing rights, and typically discounts and rebates are guaranteed at the client level. Carving out also gives them access to critical data that provides necessary insight into how their plan is being run and how it can be tailored to meet their cost and member priorities.
Why would I want to do that?
Self-funded employers deserve control and transparency.
With the cost of pharmacy benefits rising each year, businesses are turning to carve-out plans that allow them to work directly with a pharmacy solution provider for more plan oversight and less cost. Carving out (sometimes called “unbundling”) the pharmacy benefits presents substantial savings opportunities for employers, enabling them to decrease their benefits costs while meeting their employee wellness goals. Carving out the prescription drug program satisfies three basic needs for an optimal pharmacy benefit plan: transparency, control, and data-backed insights for long-term management.
Transparent contract terms
When a company is carved in, they can’t see the critical details behind their contract, and it’s common to not have guaranteed rights when it comes to pharmacy contract terms. Employers in a carved-out pharmacy arrangement gain access to their specific contract terms and the definitions that can significantly alter their pricing and rebate terms. This level of transparency gives employers a full understanding of the pharmacy financials, empowering them to negotiate a more competitive deal.
Annual pharmacy benefits contracts – rather than the three-year contract traditionally offered by the PBMs – are another essential contributor to plan transparency. An annual contract with the best rates, rebates, and terms allows employers to make adjustments as needed to experience continued year-over-year cost savings.
Plan control and flexibility
Every employer has different needs and priorities when it comes to their pharmacy plan. Some are very price-sensitive, while others are far more concerned with retaining top talent or minimizing member disruption. Control over the pharmacy benefits experience includes the power to choose what’s right for the pharmacy plan, rather than just accepting an inflexible, one-size-fits-all plan design dictated by the carrier with a carved-in arrangement.
Aligning contract terms and programs to the employer’s specific needs, and having the flexibility to adjust the contract as data and insights recommend, is necessary to maximize savings while minimizing disruption and maintaining employee health. That can only be found with a carved-out arrangement.
Actionable, tailored insights
The ideal approach to managing pharmacy benefits combines the employer’s complete pharmacy data with specialized expertise that addresses clinical risk areas and cost-savings opportunities. An employer in a carved-in arrangement may receive data on their trend and performance from the insurer – or they may receive data based on the carrier’s entire book of business, applying generalized data to the employer’s specific needs. And even if they have the plan-specific data, if they don’t have access to the expertise necessary to interpret it, it may be useless in helping them make decisions.
Companies that carve out have access to plan-specific data, and to dedicated pharmacy teams that know how to examine that data and provide guidance informed by their analysis. They can understand what they’re getting for their money, what’s impacting their budget and their members, and what decisions to make going forward. And that enables them to see considerable, long-lasting savings without cutting employee pharmacy benefits or sacrificing member satisfaction.
Purchasing Pharmacy Benefits Like the Big Companies
There’s a reason nearly all the Fortune 100 companies carve out pharmacy benefits – and a reason the carriers are set on preventing smaller groups from doing it. These most sophisticated buyers of healthcare have carved out the pharmacy benefit because it offers a better cost and care model. Maintaining an effective pharmacy benefits plan keeps patients from shouldering too much of the cost of prescription drugs.
Large employers favor the carved-out pharmacy model.
For smaller companies to achieve benefits like this, they need the optimal pharmacy benefits partner who can objectively and independently support the employer’s objectives. They need Fortune 100-level negotiating leverage to achieve contract terms aligned with their goals and priorities, rather than the misaligned terms and management so common to carved-in plans.
Long-term, big-picture perspectives
Most employee benefits deals focus on first-year pricing and savings potential — and rightly so. It’s not uncommon for the large carriers to undercut all other offers on the table in the final moments. These numbers can look enticing to an unassuming plan sponsor, but looks can be deceiving. The truth is, the big carriers already know they’ll more than make up for any lost first-year revenue on years two and three of that long-term contract. Not to mention the hidden costs already baked into the vague contract terms and conditions.
However, chances are, the carrier’s offer doesn’t mention how their prescription drug trend over time compares to the market. Nor will it expose how much more can be done to manage trend more effectively without reducing member satisfaction. Looking at the carrier’s 8% drug trend over the course of three to five years can raise a lot of questions about how that might compare to marketplace alternatives. Pit, for instance, a conservative 4% carve-out drug trend against a bundled or carved-in 8% drug trend, and ask yourself if an employer competing in a tough economy can afford to leave that kind of money on the table.¹
Is it really that important to carve out pharmacy benefits?
For many self-funded employers, it’s crucial.
Pharmacy benefits provide a critical and highly utilized service to plan members and can have significant influence in employee recruitment and retention. But drug costs are on a steady rise, and even through the chaos of the COVID pandemic, major players in the pharmacy industry are continuing to see high profits year after year. That leaves employers vulnerable to prescription costs they can’t afford, and plans that serve the carrier’s profit motive as much as they serve employers and their employees.
Without visibility into the actual performance of their pharmacy benefits plan, employers have no way of knowing if they’re losing money on bad deals – and if so, how much they’re losing. They have no way of knowing if better utilization management or an optimized formulary would better serve their members and their bottom line. And even if they had that visibility, they’d be stuck in a one-size-fits-all plan, powerless to make those money-saving changes.
No employer can afford to overlook plan waste. No small- or medium-sized business has such robust revenue that they’ll hardly notice money lost to suboptimal pharmacy benefits plans and plan management. Carving out pharmacy benefits gives employers transparency and control, so they can be sure their pharmacy benefits plan is performing for them.
The Truth About Carving Out
A carved-out arrangement offers many advantages for employers looking to lower their employee benefit costs or overall pharmacy costs. But often, employers looking to carve out pharmacy will get pushback from their medical carrier or the medical TPA.
Carrier Argument #1:
The carved-in model is the “connected” or “integrated” model because the carrier is handling the pharmacy and the medical benefits.
The health carrier and PBM already operate on different platforms. The data on the pharmacy side is still coming from an outside source, even in your arrangement is carved in. It’s just as easy for a medical plan to integrate data files with a carved-out pharmacy vendor as it is with the health carrier’s PBM.
Carrier Argument #2:
It’s best to bundle pharmacy and medical for a whole picture view of your plan’s healthcare outcomes.
With advanced pharmacy data analytics and expert insights, employers don’t have to rely on a carved-in arrangement to provide a view of plan performance and healthcare outcomes. A data-driven pharmacy benefits program, tailored to address the nuances of their member demographics, can help self-insured employers stay competitive in today’s challenging economic environment. Bundling pharmacy and medical benefits locks an employer into a one-size-fits-all solution that isn’t built for their specific needs – or the specific healthcare needs of their employees.
Carrier Argument #3:
Having one common place to go to solve all the plan’s different issues is more convenient.
Having one place to turn might sound like a better option, but if that resource is not serving the employer’s or their employees’ best interests, the bundled arrangement could be causing more harm than good. When it gets down to it, should the medical vendor or carrier, or TPA systems and associates, be the most appropriate resource to answer questions on pharmacy? Or would the employer and their members be better served getting that from pharmacy experts?
Would Rx carve-outs work for my industry?
Carving out pharmacy benefits can work for any industry, because its focus is on the unique needs of the employer and their employees.
Health conditions and prescription drug utilization can vary widely from one employee population to the next, and from one sector to the next. Work and working conditions shape individuals’ exposure to a wide array of physical, environmental, and psychosocial factors that can influence health. Individuals in, for instance, healthcare, education, government, and transportation work in very different environments and face different risk factors. Carving out pharmacy benefits can be not only possible but ideal, because it allows employers to customize their plan around those unique needs.
Would Rx carve-outs work for healthcare?
By carving out pharmacy benefits, hospitals are positioned to better leverage their owned resources, such as aligning with their owned or in-house pharmacies, to optimize prescription drug spending and lower their employee benefits costs. Clinical utilization management presents a real savings opportunity among hospital employees, who are more prone to be high utilizers of more high-cost medications compared to other employee populations.
Understanding the conditions that drive spend is critical to ensure the pharmacy benefits contract and plan design are in complete alignment with the organization’s goals and resources. As one hospital in the Southeast realized, a carved-out pharmacy arrangement afforded HR and pharmacy leaders the opportunity to design a more flexible benefit program that put their members first and utilized independent clinical oversight to ensure appropriate medication use among their valuable workforce.
Would Rx carve-outs work for school systems?
School districts have faced tremendous budgetary pressure as a result of the COVID-19 pandemic is school districts. Typically, school districts offer robust benefit packages, and leadership focuses on ensuring member satisfaction. This often leads to open benefits coverage, which can expose them to high instances of medication waste and overspending if pharmacy claims are not monitored proactively for appropriateness. Under a carved-in arrangement,
school district leaders have limited visibility into the primary drivers impacting their budget and with that, a limited ability to implement solutions to manage their drug spend more appropriately. And even with 3,000 to 4,000 member lives, school systems still lack the leverage that helps big companies secure the best deals.
One Midwestern school district realized their pharmacy benefits plan had fallen into a pattern of unnecessary wasteful spending. Clinical solutions were implemented to replace expensive medications with clinically equivalent lower-cost alternatives, as well as to review claims to ensure prescribing aligned with nationally recognized clinical guidelines. The clinical surveillance made possible from being in a carved-out pharmacy arrangement helped them lower
their benefits costs by $1.1M in just one quarter while maintaining member access to appropriate medications.
Would Rx carve-outs work for municipalities?
The government sector is also known for providing rich benefits. These groups also face financial pressures to manage costs appropriately as they navigate the challenges of managing a tight budget. Government groups that stay carved-in with their medical carrier are missing out on significant savings from improved clinical oversight. This is because carving-out pharmacy provides government leaders the flexibility to apply effective protective measures that prevent them from paying for medications they shouldn’t be paying for in the first place and preparing them to monitor spending on new products in the future – while still delivering a highly satisfactory benefit long-term.
This reality rang true for a Western-based city whose leaders were facing unrelenting prescription drug spending increases. Seeking a new solution that didn’t transfer the burden to their members, city leaders found that carving out the pharmacy benefit provided a sustainable opportunity to lower costs and improve the member experience. Members maintained access to essential maintenance and specialty medications while the city reduced their spending by 30%, achieving $1.2M in savings after just one year in a carved-out pharmacy arrangement.
Would Rx carve-outs work for logistics companies?
Trucking and logistics companies face unique challenges with pharmacy benefits. Many of their employees spend extended periods of time in the cab of a truck, eating whatever food is available to them on the road, traveling far away from their home pharmacy. This influences their access to healthcare, the drugs they’re prescribed to be able to maintain their health, and their access to those drugs. And all of these things influence a company’s pharmacy benefits costs.
One logistics company in the south-central U.S. found themselves facing unnecessary spending due to high-cost, low-clinical value drugs. Clinical solutions optimized the formulary to replace those drugs with equally effective, more affordable alternatives. Reviews of high-dollar claims revealed trends contributing to pharmacy costs and allowed them to limit spending to clinically appropriate drugs. The company realized $1.28M savings in their annual pharmacy spend by eliminating the wrong drugs and focusing on the right ones.
OK, this sounds like something worth exploring. Where do I start?
Consult your trusted expert and partner: your benefits consultant, adviser, or broker.
Your first step in gaining control and visibility over your pharmacy benefits is to talk with your consultant, adviser, or broker. They can help you understand pharmacy carve-out and answer any questions we haven’t answered here. They can then help you carve out your pharmacy benefits and select the plan design and clinical program options that will address your member population and your specific financial and healthcare goals.
They will likely start with a complete pharmacy performance evaluation, comparing your options on an apples-to-apples basis. You’ll be able to see just how much money you’re leaving on the table by bundling your pharmacy benefits with your medical carrier. And you’ll be able to see the savings and service you can find when your benefits plan is designed for your company and your employees, not the carrier’s book of business.
When real dollars and real lives are at stake, you have no reason not to secure a more optimal pharmacy benefits plan. Talk to your benefits consultant about transforming your pharmacy benefits by carving out.