Preferred Pharmacy Networks Can Cut Costs

Analysis shows value for employers adopting innovative approach to pharmacy benefit plans

By Stephen Miller December 14, 2010

Employers can experience significant annual cost savings by adopting a preferred pharmacy benefit strategy, according to a report, The Value of Alternative Pharmacy Networks and Pass-Through Pricing, researched and written by the actuarial and consulting firm of Milliman Inc.

“These findings show that significant savings could be available to employers willing to adopt a strategy that cuts the fat from the traditional pharmacy benefit model,” said David Kwasny, president of pharmacy benefit manager Restat, which commissioned the Milliman study. “This approach helps eliminate the confusion and misunderstanding some employers may have over a pharmacy benefit system that has become much more complicated in recent years.”

Preferred Pharmacy Benefit Model

The analysis, authored by a team of actuaries led by Bruce Pyenson from Milliman’s New York office, broke apart the traditional pharmacy benefit model by studying the key cost and distribution components among drug manufacturers, wholesalers, drug stores and pharmacy benefit managers (PBMs). The study sought to determine if there were savings for employers in adopting a preferred pharmacy model that reduces drug costs and eliminates price spreads.

According to Kwasny, the preferred pharmacy model is a strategic approach to pharmacy benefit design that tears a page out of the preferred provider organization (PPO) health care model, where network hospitals or physicians accept a reduced fee to be included as a favored health care provider. Pharmacies in a preferred network offer lower drug prices and reduced dispensing fees to attract customers from competing drugstores and increase use by members enrolled in the employer’s pharmacy benefit plan.

Milliman’s findings show that, depending on the benefit design, an employer’s overall costs could be reduced by up to 13 percent by using a limited, preferred pharmacy benefit design and pass-through pricing model rather than a traditional model that includes most retail pharmacies. For example, the study showed that by adopting a closed network, where coverage is only through network pharmacies, an employer with approximately 10,000 members could save up to $845,000 annually. Additional savings could be earned with plan changes that encourage member use of generic drugs over branded drugs.

“Milliman’s findings reinforce our own client experience,” said Kwasny. “By creating plans that use preferred pharmacy networks and favor generic drugs, Restat has found that a company with 5,000 to 6,500 employees can save up to $2 million annually," he noted.

Transparent PBM Pricing

In addition, Kwasny said, reduced program costs are achieved with transparent PBM pricing. Under this approach, the PBM charges an explicit administrative fee for drug administration services. It collects no revenue from rebates or “spread”—the difference between the price the pharmacy collects from the PBM and the price the PBM charges employers, which is a common feature of traditional PBM contracts.

According to Kwasny, the preferred pharmacy benefit network model is “clearly a better approach to managing prescription benefits and one that offers greater transparency in services offered by PBMs by delivering savings directly from the pharmacy to the employer.”

Related Articles:

Most Still Uninformed About Prescription Drug Costs, SHRM Online Benefits Discipline, December 2010

Individuals' Behavior Costs Billions Annually in Pharmacy Costs, SHRM Online Benefits Discipline, April 2010

Stephen Miller is an online editor/manager for SHRM.

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Health Care Reform web page

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