The rising cost of prescription drugs continues to be the most significant component of medical cost inflation. An August 2019 study by the Commonwealth Fund looks at the use of low-value high-cost drugs and has concluded that correcting misaligned incentives can result in a potential 3% to 24% in savings. The study shows that many plans include:
- Drugs which are a remake of a previously available medication such as a “time-released version” which is clinically equivalent but can be more expensive
- Drugs which are a combination of two or more medications which, if purchased separately, are a fraction of the cost
- Drugs available in an over-the-counter version
- Brand name or high-cost generic drugs which are included because of a disproportionate rebate incentive which is shared by the PBM
Pharmacy Benefit Manager (PBM) contracts are part of the reason. Many contracts with PBMs have reduced administrative costs because the PBM compensation is based upon spread pricing where the plan and the patient pay a cost which includes a markup by the PBM. And a significant portion of pricing is driven by formularies. In order to create incentives for PBMs to steer patients to certain drugs, PBMs are offered rebates by manufacturers. These rebatable drugs are included in the “preferred” drug tiers. These rebates are often shared with plan sponsors who might unknowingly be complicit with steerage to high-rebate-value drugs to increase the amount they are paid back by the PBM. Increasingly, employers are looking for “pass-through pricing” contracts, which create more transparency but even these arrangements with PBMs have “side-pocket” profits.
Perhaps a bigger reason for these higher-cost inefficient drugs being available is the employer’s reluctance to face adverse reaction by employees who find their medications excluded. Especially if the exclusion affects a member of the C-suite or a key employee.
The first step in reducing these costs is transparency which many entrenched players in the healthcare eco-system are fighting hard against. As pharmacy costs accelerate toward half of the cost of overall medical spend, decisions to manage formularies will become easier and the misaligned incentives will be corrected.