Not a Member? Get access to HR news and resources that you can trust.
Change can be scary, but deploying new HR software doesn't have to be.
Is your employee handbook ready for the New Year? With SHRM’s Employee Handbook Builder get peace of mind that your handbook is up-to-date.
Get the HR education you need without travel expenses or time out of the office.
We don’t just visit a city, we take it over. Join the HR community in NOLA -- June 18-21, 2017.
Recent price surge caught many employers by surprise
Rising prescription drug cost trends have been an unpleasant surprise for many employers over the past year. A 2014 pharmacy benefit survey of 170 employers conducted by Buck Consultants found that 77 percent of employers are spending 16 percent or more of their total health care budget on pharmacy benefits and nearly 5 percent of employers are spending more than 30 percent of their annual health budget on pharmacy costs.
A key driver of those costs is the specialty drug category, which includes oncology drugs and new treatments for multiple sclerosis, rheumatoid arthritis and hepatitis C, among other conditions. “Overall, specialty medications currently represent only about 1 to 2 percent of all drug claims, but about 30 percent or more of all pharmacy costs,” according to Allan Zimmerman, national pharmacy practice leader for PricewaterhouseCoopers (PwC). “The cost increases over the last year or two have caught a number of employers by surprise because these inflation numbers are unprecedented for almost the last decade.”
With these specialty drugs sometimes costing thousands of dollars per dose and tens of thousands for each course of treatment, it is not surprising that they are a key cost driver for pharmacy benefit programs. PwC’s research shows cost increases of 12 percent annually for pharmacy benefits that are “almost exclusively fueled by increased utilization of high-cost specialty products,” Zimmerman said. With more specialty drugs coming to market, the cost pressures are likely to increase.
Pharmacy Benefit Cost Trend Raised for 2015
In April 2015, The Segal Group consultancy said it was raising its pharmacy benefit cost trends forecast for 2015 to range from 13 to 15 percent. Segal’s initial pharmacy benefits cost trend forecast for 2015, issue in late 2014, had been 8.6 percent.
“This increase is driven by substantial expansion in the use of higher cost specialty medications being dispensed to patients as well as higher manufacturer price increases being passed along to consumers on often-prescribed brand and generic drugs,” commented Dr. Ritu Malhotra, PharmD, vice president and national pharmacy benefits practice leader at the firm. “We are also seeing excessive prices as well as misuse in prescribing compound medications. Another factor is that there are limited cost offsets coming from new generic launces in the near term.”
Added Edward A. Kaplan, senior vice president and national health practice leader for The Segal Group, “Pharmacy benefit costs per covered employee are approaching levels equal to what group health benefits plans spend on inpatient hospital claim expenses. We are looking at prescription drugs as potentially the biggest driver of cost increases for providing group medical coverage in the next few years. Employers and plan sponsors will need to examine new cost containment strategies requiring more financial and clinical data about treatment choices and coverage options in order to get drug cost trends to more sustainable levels.”
So what can employers do about this? The good news is that the specialty drug market is starting to mature. A more mature market is likely to have more than one option in each drug category, a development that increases competition and could help bring prices down. It also provides an opportunity for employers to introduce more cost-control strategies.
In addition, now that some of these drugs have been on the market for several years, generic equivalents are more likely to be available.
From an employer’s perspective, perhaps the best thing about a maturing specialty drug market is having multiple choices available for treating specific conditions. With four or six different specialty drugs available in a given category, “we are moving into a period where employers can start managing some therapeutic classes of specialty drugs [as they do with] traditional drugs,” Zimmerman said.
For example, employers have an opportunity to create tiers of coverage for classes of specialty drugs with multiple alternatives. Separate tiers for preferred and non-preferred drugs within a therapeutic category allow employers to apply specific cost-sharing to each category to drive usage away from more expensive and/or less effective non-preferred products to preferred products with lower cost and equal efficacy.
This type of structure is commonly used to manage traditional drug use, but it is not an option with only one or two drugs available in a therapeutic category.
In some cases, formularies can even exclude coverage of certain drugs if the market is robust enough, as long as individuals can still obtain the drug if medically necessary by using a medical exception process.
Employers can also identify who is the best fit for specialty drugs and can require certain patients to try alternative therapies before using a specialty drug.
Emerging generic alternatives for specialty drugs is another development that could help with cost control. But there is both good news and bad news in this area. The good news is that some specialty generics are now available or will be soon. The bad news is that the savings associated with using these generics will not be as pronounced as they are with traditional non-specialty drugs.
The manufacturing process for specialty drugs is so complex that the cost of manufacturing these drugs is still quite high. “The best price for the generic version of the specialty biotech drug is usually only about 20 percent or so less [than the brand name drug],” said David Dross, pharmacy consulting leader for Mercer.
Moreover, the number of generics available for each specialty drug may not be as high as it is for traditional drugs. Again, this is because of the “difficulty in manufacturing and replicating the same chemical entity as that found in the brand drug in the specialty category,” Zimmerman said. “Because of the complexities in bringing some of those products to market, you may only have one manufacturer that is providing that generic alternative.”
As a result, employers should manage their expectations with regard to cost control. “These approaches may be able to moderate a big hit in terms of costs, but these drugs will still be a significant line item,” Dross said. If the specialty drug “cost trend is 20 to 25 percent, employers may be able to reduce that trend by 5 percentage points or so.”
While common tactics, like negotiating competitive discounts and rebates for specialty drugs, are still useful when competition exists, “rebates change rapidly,” Zimmerman said. “Employers must continually refresh their pharmacy benefit management [PBM] firm’s discounts and rebates to maximize available discounts.”
Drug Prices Jump Another 3.8% in First Quarter 2015
In 2014, branded drug prices jumped 14.8 percent, specialty drugs rose 9.7 percent and generic drugs increased 4.9 percent, for a combined overall increase of 10.9 percent, according to the
Truveris National Drug Index (NDI).
Prescription drug price inflation shows no sign of slowing. Between January and March 2015, branded drug prices jumped another 5.7 percent, specialty drugs rose 2.5 percent and generic drugs increased 1.4 percent, for a combined overall increase of 3.8 percent.
The index report points to infertility (12.2 percent), menopause (8.8 percent) and hormone deficiency (8.5 percent) as conditions that saw the highest drug price increases during the first quarter, taking into account composite calculations of brand, specialty and generic medications. Generic drugs for menopause notably spiked 11.1 percent, increasing at a higher rate than the composite calculation.
“Prescription drug prices continue to rise at a rate that makes it increasingly difficult for businesses to keep the costs of employee benefits in check,” said Bryan Birch, Chairman, president and CEO of Truveris, a prescription drug analytics company. “This necessitates that benefit plan managers act now to reevaluate benefit plan designs for 2016, or contemplate stop-loss insurance to cover this mounting liability. By taking these precautions, plans can confirm they have all options at their disposal to best meet their bottom line objectives and the needs of their employees.”
Medical vs. Pharmacy Plan
The market is dynamic enough for employers to reconsider their management approach every year, or even more frequently. The key question is, “are these specialty drugs better managed by the medical plan or a PBM?” Dross said. Because the decisions involved in prescribing and often administering these drugs lies with physicians prescribing the drug, some of the costs related to these drugs, especially administering them, will end up in medical claims and should be managed accordingly.
There are compelling reasons for both medical plans and PBMs to be involved in managing specialty drugs, Dross noted. For instance, medical plans often have more sway over physicians in their medical networks to ensure the use of the least expensive and most effective approach to administer or infuse a specialty drug. A PBM may not have that kind of direct relationship with the physician.
On the other hand, whoever is managing these costs on behalf of the employer must ensure that decisions about where and how an infusion drug is administered are driven at least in part by cost considerations. “This decision can have a significant impact on costs, and these costs could be hidden in medical claims and not readily attributed to specialty drugs,” Dross said. He cited an analysis he conducted for one employer that showed that “the cost of administering or having a drug infused was almost 30 times higher under the medical plan than it was under the pharmacy plan, which translated into thousands of dollars per administration.”
While lower-cost results aren’t always the case when using a PBM to manage specialty drugs, it’s important that employers know where costs are being incurred before they can hope to control them, Dross advised.
Beware Specialty Drug ‘Hidden Costs’
“As much as 50 percent of specialty drug spending could be hidden under the medical benefit, not under the pharmacy plan,” said Nadina Rosier, North America pharmacy practice leader for Towers Watson.
“The percentage can vary from employer to employer—it could be 60 percent for one and 45 percent for another—but it’s not based on the size of the employer, Rosier told
SHRM Online. “Instead, it’s based on whether the specialty drugs are self-administered orally or administered through injection or infusion by medical providers in a clinical setting or in the home. Self-administered drugs are covered by pharmacy plans and drugs administered by medical providers are covered by medical plans.”
An important point, she noted, is that “most employers focus only on their drug spending covered by pharmacy plans and ignore drug spending covered by medical plans, which are the source of the hidden costs.”
The biggest challenge for employers when specialty drugs are covered and paid under the medical benefit “is simply getting data from the health plan to determine their financial exposure,” Rosier explained. “The question, ‘How much did we spend on specialty drugs paid under the medical plan?’ would seem like a rather simple question, but unfortunately it is not because many health plans have reporting and data mining limitations.”
Employers that are self-insured have more control and use various strategies to manage costs, she pointed out, so they can better manage how and where specialty drugs are administered, which can be the key to lowering the hidden costs of these treatments. Steps they can take include:
Rosier believes that while the hidden costs of specialty pharmacy benefits is a big problem today, it could be mitigated when
biosimilars become more common. Biosimiliars are less expensive than their parent specialty drugs, in much the same way that generics are less expensive than brand name drugs.
“The first biosimilar approved in the U.S. was for Zarxio, a biosimilar for Neuprogen,” which is used to treat a lack of white blood cells caused by cancer or a bone marrow transplant. “But there are 11 other biosimilars in the pipeline that, once available, could save billions of dollars,” Rosier said.
However with biosimilars, as with other specialty drugs, employers need to pay attention to how and where they are administered, as that will affect whether they are covered by pharmacy or medical plans, she emphasized. “The bottom line, with more biosimilars coming soon, there is a sense of urgency about getting employers to pay attention to the hidden costs of specialty drugs.”
-- Stephen Miller, CEBS
Joanne Sammer is a New Jersey-based freelance writer. Stephen Miller, CEBS,
is an online editor/manager for SHRM
Related SHRM Articles
You have successfully saved this page as a bookmark.
Please confirm that you want to proceed with deleting bookmark.
You have successfully removed bookmark.
Please log in as a SHRM member before saving bookmarks.
Your session has expired. Please log in again before saving bookmarks.
Please purchase a SHRM membership before saving bookmarks.
An error has occurred
Recommended for you
Become a SHRM Member
SHRM’s HR Vendor Directory contains over 3,200 companies