5 levers to slow the rise of pharmacy benefits costs

It’s no secret that drug costs are on the rise. In 2021, compared to 2020, plans saw a 5.0% rise in the average monthly eligible amount per insured, a 6.0% rise in the average annual eligible amount per claimant, an 8.9% rise in the average eligible amount per claim, and a 9.5% rise in specialty drug costs expressed as an average eligible amount per insured. Those are all inflation-beating increases – the Consumer Price Index was up just 3.4% between 2020 and 2021.

It’s also worth noting that high rates of growth occurred despite the fact that fewer insureds submitted claims during the first two years of the pandemic. What made the difference is that those who did submit claims ended up submitting more of them.

There are many reasons for the rise in drug costs, including more prescriptions for high-cost specialty drugs and more widespread use of drugs for conditions such as diabetes and mental health. And it’s likely drug costs will continue to go up as people catch up on appointments deferred during the pandemic and some present with more advanced disease. 

To keep their benefits plans sustainable into the future, plan sponsors are in urgent need of strategies that will reduce costs while minimizing any negative impact on plan members. Employees place a high value on their benefits plans, and it’s important to avoid any perception that an employer is taking away or watering down benefits.

Each of these five levers can be structured so it provides an appropriate balance between cost savings and plan member needs. Your benefits consultant can help you decide what works best for your organization.

1. Formulary management

Managing the list of drugs a plan will cover – its formulary – is one way for plans to control drug cost increases. Some plan sponsors simply follow the provincial formulary. This is a simple solution that allows a plan to tag along on decisions made by the public payer. However, some of the factors that go into public payer calculations aren’t relevant to private payers. For example, public payers consider cost.

“On the other end of the spectrum is what we have with our TELUS Health managed formularies,” says Vicky Lee, manager of the pharmacy consulting team at TELUS Health. “We do full health technology assessments similar to public payers like Canada’s Drug and Health Technology Agency (CADTH) or the Institut national d’excellence en santé et en services sociaux (INESSS) in Quebec. We do an analysis of the clinical efficacy and safety, and we do a full economic evaluation using pharmacoeconomic models and budget impact assessments. Then we make decisions about whether a drug should be listed on [private payer] formularies based on that full, in-depth analysis.” 

TELUS Health’s team of pharmacists and a health economist oversee two distinct managed formularies, with external review provided by health technology assessment experts. The traditional one focuses primarily on clinical data. A newer alternative considers both clinical and economic factors. Custom formularies are also an option, managed by the plan sponsor or insurer. This may be appropriate for plan sponsors who want to start with an existing formulary but adapt it to, for example, add coverage for certain additional classes of drugs.

However it’s structured, formulary management helps ensure value for money, and looking at your formulary through a private payer lens can help you zero in on the cost inputs that matter to you without factoring in broader health system costs that don’t. It’s an important way to ensure that high-cost medications that provide only a minimal incremental benefit to patients don’t overwhelm a plan’s budget.

2. Utilization management

With a formulary in place and monitored so it’s kept up to date, plans can look at strategies to manage utilization. Many high-cost drugs do, in fact, provide value for money, significantly improving plan members’ health – so they’ll be on the formulary. However, two approaches in particular can help make sure they’re being used appropriately so your plan derives the biggest benefit from them. Utilization management strategies include mandatory generic substitution, prior authorization and step therapy. Each can be layered onto a plan to help keep drug costs manageable.

Mandatory generic substitution limits the reimbursement amount for drug claims based on the lowest-cost generic drug equivalent, even if the prescriber has indicated “no substitution” on the prescription.

Prior authorization manages the use and cost of certain prescription drugs by requiring pre-approval based on medical criteria. It ensures plan members receive drugs according to guidelines and prescribed by appropriate medical specialists. This strategy doesn’t aim to stop patients from getting high-cost medications if they need them. A good way to think about it is as a double-check that’s in place to make sure high-cost medications are being used as they should be.

You’re making sure that the patient who was seen to get the benefit from the clinical trials is getting access to the drugs,” Lee explains. “It’s also a way to control off-label use in setting where maybe the evidence isn’t as great.” 

This strategy’s main drawback is that it’s labour-intensive. Human resources are required to develop approval criteria, create the required forms, review the completed forms, make decisions and communicate them. Nevertheless, because it can be a very effective way to target utilization of specific high-cost drugs across all treatment areas, prior authorization had been adopted by 84% of plans in 2021.

Step therapy proposes, as a first line therapy, the most clinically accepted and cost-effective drug therapy, and authorizes a more costly second line therapy only if the initial treatment isn’t effective. By moving, step by step, from less expensive to more expensive medications, plans can make better use of limited drug spend resources.

An automated approach that demands fewer human resources than prior authorization, step therapy is rules-based. It simply draws on a patient’s claims history to determine whether the second line therapy should be made available. 

Lee offers an example of how step therapy works: “We have [a program] in the diabetes space where the guidelines clearly show that patients with less severe disease should start with a drug such as metformin first before they move on to the most costly and more aggressive therapies.” 

3. Channel management

Channel management looks for ways to save money by looking at how plan members access drugs. One of the biggest cost-saving opportunities in this area is for plan sponsors to leverage a preferred provider network. Generally, these are established by pharmacy benefits managers who have the scale to negotiate guaranteed lower markups on high-cost drugs with specific pharmacies.

A “closed” preferred provider network requires plan members to get specific drugs only from the pharmacies on the list. An “open” preferred provider network attracts plan members to the pharmacies on the list with discounts and services such as home delivery that benefit them. 

A virtual pharmacy can be layered into a plan alongside a preferred provider network to decrease exposure to high pharmacy fees. By providing 90-day fills, a virtual pharmacy can cut both pharmacy dispensing costs and ingredients costs. One analysis found this can result in savings per person per year of $7.70 for statins, $10.80 for antihypertensives, $18.52 for SSRIs, and $26.86 for hypoglycemics. 

Multiplied across a plan, relatively modest cost reductions on very commonly prescribed drugs can add up to significant savings.

4. Patient health management

A virtual pharmacy can help with patient health management as well, because it removes barriers to taking medications as prescribed. Automatic refill reminders means refilling can’t be simply forgotten and home delivery eliminates the challenge of fitting a pickup at the pharmacy into a busy day. 

Medication adherence failures are a widespread problem, with 43% of employees in one survey acknowledging that they don’t always take their medications as prescribed. And the consequences can be extremely serious. The U.S. Centers for Disease Control and Prevention (CDC) found that when patients with a chronic illness neglect their medication, their treatment plans fail between 30% and 50% of the time, resulting in 125,000 deaths per year.

Yet surprisingly simple solutions can help. A study of OptumRx paid claims over the course of 2018 found that choosing home delivery for the majority of fills had a measurable effect on medication adherence, improving it by 6.6% for diabetes, 4.1% for hypertension and 5.8% for statins.

“If you have better adherence and patients are taking their medication better, then you’re less likely to see patients’ disease progressing so they have to escalate to a much costlier medication,” says Lee. 

Virtual care can complement a virtual pharmacy by making it easier to access healthcare quickly – again, so conditions don’t worsen and require more expensive drugs. A quick way to reach out for advice about mitigating side effects, for example, can also improve medication adherence.

5. Digital tools

Technology can be very supportive of an organization’s efforts to reduce drug costs and improve employee health. Apps for virtual pharmacy and virtual care services give employees an easy way to take control of their own wellness. Digital enrollment tools engage plan members in the process of choosing a plan that works for them. Meanwhile, plan sponsor reporting tools let plan sponsors identify their highest spend areas in order to identify strategies that will have the biggest impact on their bottom line. 

“Our data enablement team can do different analyses to figure out cost-saving opportunities, looking at the patient’s journey to see the benefit of implementing various programs,” Lee says. “We can also do custom reporting internally … [For example,] maybe there’s a lot of spend in the diabetes space. Reporting can help guide what kinds of programs plan sponsors may want to implement.”

Time to pull some levers?

Plans aren’t set in stone when they’re created. Levers like the five discussed here can be incorporated into a plan at any point – though changes are usually timed to coincide with a benefit cycle. Some of these strategies are more complex to implement – most notably, adjusting a formulary – but many aren’t. All can work well in large and small plans.  It’s always a balance between managing costs and plan member impacts,” Lee emphasizes. “Plan sponsors have to balance making sure employees are getting access to drugs that are effective and safe but also cost-effective, and making sure there are programs in place to protect the plan so costs don’t get exponentially out of control.” 

That said, taking action to control drug costs can have spillover effects that go beyond ensuring that plans remain financially sustainable – though, of course, that’s a critical goal. Levers like these can also improve employee health, which has a positive impact on productivity and helps to minimize the costs of absenteeism, short-term disability and long-term disability. 

“If you have more well employees, they’re able to be more present and productive. That has benefits for the employer as a whole,” Lee says.