by Will Hinshaw, partner/founder, Captive Solutions & Options

Primetime television has become a stage for marketing pharmaceutical solutions – catchy slogans, music, bright colors and “everyday people” succeeding in life with help from drug manufacturers. This is top-tier advertising from some of the most profitable companies in the world. To counter the financial impact of prescription costs, most pharmaceutical commercials conclude with an offer to help; regrettably, the how and the where to get the help typically is absent. Caught in the middle are the employers wrestling with the best way to provide cost-effective benefits for employees and dependents.

Dismantling the Rx ladder
The nexus of this bewildering supply chain – identified by some as the most complex in the world – is the pharmaceutical manufacturer. Often vilified, these manufacturers operate in an environment where product failure is the norm – 96% of new prescription drug products fail! The need to recoup losses on the 4% that succeed is understandable. The means and methods to recover the loses are important to shareholders and owners as it is the goal to maximize profits. However, this stands in direct conflict with an employer’s need to manage prescription costs. Interestingly, the manufacturers do provide some means to abate their costs – once that path is discovered.

The Pharmacy Benefit Manager (PBM) is the least discussed but most impactful in the pharmaceutical supply chain. PBMs are contracting and distribution intermediaries acting on behalf of fully insured carriers or self-funded plan sponsors. The PBMs serve as a point of aggregation to provide better pricing arrangements that traditionally are not available via direct contracts with pharmaceutical manufacturers.

Unfortunately, as a profit-driven third party, there are instances where the goals and objectives of these intermediaries conflict with those of budget-focused employers. The contracts link the manufacturer with the retail point of sale (CVS, Walgreens, etc.) and dictate employee pricing. Under a self-funded arrangement, the PBM is the first point of contact for an employer to impact prescription drug cost, as the PBM selects the criteria that meets the plan sponsor’s operational and cost objectives.

The retail points of sale, although most visible, are the primary distributors. The prices, terms and conditions have been set long before the fulfillment contracts are arranged. There are cost differences and responsibilities within the retail outlets. The large retail pharmacy chains – CVS, Walgreens, Rite Aid – widely are understood to provide the least benefit from a cost perspective. Ease of access and the cross-functional shopping experience are reasons plan members access prescriptions here.

Walmart and Sam’s Club represent the next rung on the point-of-sale ladder, and widely are regarded as a lower-cost alternative, although this is not necessarily the case. While these retailers leverage their scale to lower the price for plan members, the cost to the employer (or the plan sponsor or health plan) has proven to be as costly, and in some instances, more costly than the national retailers. Prices are lower for the plan member so other retail items can be purchased while prescriptions are filled.

For the plan sponsor, oftentimes the best cost can be found at the grocery and locally owned pharmacies. This may seem contrary to the previous mention of large-scale aggregation, but the PBMs can exact a better rate for the smaller points of sale that don’t have the negotiating power of the larger retailers. Additionally, the local pharmacy has lower overhead, and the grocery store’s primary objective is food sales, not prescription drug sales. The goals and objectives of the various points of sale create counterintuitive facts that the points of sale are best for the employee (the plan member) and the employer (the plan sponsor).

Lastly, one of the greatest points of complexity in the supply chain is the ownership of these points of sale. The large, fully insured carriers own or have ownership stakes in retail points of sale. In fact, so powerful is the point of sale that CVS acquired the fourth largest insurer in the country – Aetna. Ownership throughout the supply chain – down to point of sale – creates beneficial financial outcomes. Unfortunately, their success may, and generally does, come at the public’s expense.

Steps to impact cost
Under a fully insured plan, the carrier controls the contracting arrangements as it accepts the entire liability of the health plan. Unfortunately, health insurance is a pass-through model; there is little incentive to contain the organic costs associated with prescription drugs. The carriers benefit from higher costs as these are the basis
for the annual increases to health plan sponsors (employers). Compounding this is the possibility that the carrier may have ownership or profit-sharing arrangements with the PBM.

The first step to controlling high-cost prescription drugs is to be self-funded. There are a variety of self-funding methods that brokers or health benefit consultants can offer.

The second step is selecting a PBM. Given today’s competitive environment, PBMs can provide a plethora of cost-containment and price-transparency tools. Select the PBM that best matches the necessary service delivery, cost goals and objectives. The ability to alternatively source high-cost and/or specialty medications is critical. Ensuring the PBM will allow plan sponsors to choose certain prescriptions that can be sourced via the manufacturers’ programs mentioned earlier, as well as through other resources, also is critical.

Finally, ensure subsidy and international sourcing are available. The manufacturers, as well as some third-party entities, have created programs that allow plan members to receive subsidies for prescription drugs. The third parties collect specific data to determine if a plan member qualifies. Most of these programs are needs-based, meaning the amount of subsidy is based on current market conditions in conjunction with the member’s income. Subsidies can range anywhere from 20% to 100%. Alternatively, if an individual does not qualify for a subsidy, or the prescription does not currently have a subsidy program, sourcing the prescription internationally is a viable solution.

This overview of the pharmaceutical supply chain only addresses the primary stakeholders. There are additional consultants, vendors and interested parties affecting the service and cost outcomes. An awareness of the system is necessary for employers to maximize the investment and advantage of a health benefit program. It is important to ensure proper mechanisms are in place to address the potential cost issues. With the rising cost of prescription drugs – several of which exceed $1,000,000 per year – the ability to meet the unforeseen need is imperative. n

Will Hinshaw has dedicated over 25 years to leading organizations in numerous industries, including CAPTIV8, AMBA’s new funding strategy for members. For more information on pharmaceutical cost-containment strategies or to learn more about CAPTIV8, please contact Susan Denzio, sdenzio@firstresourceinc.com.