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Is PBM Spread Pricing Increasing The Cost of Your Self-Funded Employee Health Plan?

December 28, 2011 By: Nadia Category: HealthCare, Medicine Advice, Medtipster, Prescription News, Prescription Savings

www.Medtipster.com Source: Terrance Killilea, Pharm.D. and Scott Haas, 12.08.11

Pharmacy benefit managers (PBMs) are contractors hired by health plans to administer health plan pharmacy benefits, and PBMs that practice spread pricing, charge plan sponsors (employers) more for prescription drugs than what’s actually paid to the pharmacy.

Spread pricing is largely unknown to employers and those who pay health bills. The practice is occasionally understood by some participants in the health system (health plans, brokers), but often not acted upon due to relationships. Spread pricing has a significant impact on health plan costs. For example, when a PBM pays a pharmacy a minor amount (say $6) for a prescription, but charges the employer and patient a much higher price (say $30). This higher amount is reflected in both the co-pay and the billing to the employer.

Clearly, this has an impact on the cost of a self-funded program, but it also impacts the premiums of fully insured programs through experience. Health plans providing fully insured coverage, where spread pricing is occurring, either do not know about spread pricing or know about it and share in the revenue. This revenue sharing often amounts to a per prescription fee paid to the health plan by the PBM. This arrangement occurs in both self-funded and fully insured situations. Regardless of the setting, spread pricing increases the cost of prescription claims above the actual cost paid to the pharmacy.

Health plans often use terms such as “transparency” or “pass-through” to explain pricing, but this does not address the actual issue of spread pricing. Elimination of spread pricing lowers claim costs for patients and plan sponsors, increases the affordability of medications, and is likely to improve overall health outcomes.

Until recently, spread pricing did not affect members of a health benefit plan. When a PBM reported a claim cost of $45, paid the pharmacy $12, and charged the member a $10 co-pay, the member was not affected by the higher claim cost. The plan, however, experienced a charge of $33 more than what was actually paid to the pharmacy. In this type of copayment  design, it’s the plan sponsor (employer) who bears the increased cost of spread pricing. 

Now, with increasing frequency, employers are establishing high deductible health plans (HDHP). An estimated 18 million Americans were covered under this type of plan in 2010*. A HDHP typically has an annual deductible of at least $1,200 for individual coverage and all expenses (except some preventive visits), including pharmacy costs, go toward the deductible. In the most common claim scenario, it’s the prescription drug cost that accumulates to satisfy the member’s deductible and out-of-pocket expenses. In some families, the prescription cost is the primary source of medical care cost, particularly in plans where maintenance check-ups and other wellness services have no co-pay or out-of-pocket exposure.

Spread pricing results in higher consumer costs. It is not unusual for generic prescription charges to be $30-$50 above the actual claim cost.** But more important, may be the affect on compliance and cost of care. While not being specifically studied, it’s reasonable to believe that compliance diminishes as the cost of prescriptions increase by 400% or more. The impact of multiple members of a family, on multiple medications, can be dramatic. The effect of high patient prescription costs on decreased adherence to therapy was the subject of a 2010 Wall Street Journal article.*** Spread pricing was not mentioned as a factor.

If higher medication costs lead to lower compliance, it’s likely to be more significant in patients with multiple or complex disease states. While the extent of lower compliance is variable, higher cost results in lower affordability and is likely to affect disease outcome. This is particularly true in situations where members are paying all of the drug cost, such as in a HDHP.

According to a recent Consumer Reports poll, 48% of adults have taken steps to save money due to the economy. Included among the actions taken were:

  • Putting off a doctor’s visit (21%)
  • Delaying a medical procedure (17%)
  • Taking risks to save on medications (28%), including;
    • Not filling a prescription (16%)
    • Taking an expired medication (13%)
    • Sharing a prescription with someone else (4%).

When one considers that a complex patient with hypertension, hyperlipidemia, and type-2 diabetes can be effectively treated with generic drugs cumulatively costing less than $300 per year, substantial compliance and successful treatment is likely. The likelihood of compliance decreases, however, when spread pricing drives the cost of that same therapy up to $2,000.

Finally, prescription cost increases due to spread pricing, places members and their families above the deductible ceiling quicker. Thus, the cost of therapy impacts the plan sponsor sooner, and negates the fiscal value of a HDHP. While this may not have a direct impact on care, it certainly increases net costs to plan sponsors, in spite of the establishment of a HDHP.

While spread pricing has been a common practice in the PBM marketplace for years, the impact on member costs and member quality of care is now greater. It’s advisable for all plan sponsors to assess the extent of spread pricing that is occurring in their pharmacy benefit and examine methods to eliminate it.

Footnotes

  • *American Association of Preferred Provider Organizations. APPO 2010 study of consumer-directed health plans.
  • **Based on competitive claim analysis where a transparent PBM has reported actual costs paid to pharmacies. There is no reason to believe that a larger PBM would be paying the pharmacy more than the smaller PBM for which the actual claim price is known.
  • *** http://online.wsj.com/article/SB10001424052748703927504575540510224649150.html

About the Authors

Dr. Killilea and Mr. Haas both work in the Portland, OR office of Wells Fargo Insurance Services USA, Inc.  Terrance Killilea, Pharm.D. is Vice President, Integrated Healthcare Metrics -Clinical and Fiscal Integration.  Scott Haas is Vice President, Integrated Healthcare Metrics.

Employer healthcare costs expected to rise 9% in 2011, according to PricewaterhouseCoopers

June 15, 2010 By: Nadia Category: HealthCare, Medtipster, Prescription News

www.Medtipster.com Source: www.pwc.com – June 14, 2010

The nation’s employers can expect medical costs to increase by 9% in 2011, a decrease of 0.5% from the 2010 growth rate, according to the annual Behind the Numbers report published today by the PricewaterhouseCoopers LLP (PwC) Health Research Institute. For the first time, the majority of the American workforce is expected to have a health insurance deductible of $400 or more, as more employers return to “indemnity style” cost-sharing by raising out-of-pocket limits, replacing co-pays with co-insurance and adding high-deductible health plans.

The Behind the Numbers report includes findings of the PricewaterhouseCoopers’ Health and Well-Being Touchstone Survey of more than 700 employers from 30 industries, as well as interviews with health plan actuaries and other executives whose companies provide health insurance for 47 million American workers and their families.

Improving wellness programs and increased cost-sharing lead the planned changes employers will make in the benefit plan designs they will offer for next year. According to PricewaterhouseCoopers’ Touchstone research:

  • Two-thirds (67%) of companies intend to expand or improve wellness programs inside the US
  • 42% intend to increase employee contributions for health insurance coverage.
  • 41% intend to increase medical cost-sharing, including higher deductibles and co-pays, while only 26% intend to increase prescription drug cost-sharing.
  • More employers are dropping health benefits for retirees. One-third of employers with over 5,000 workers subsidize pre-65 retiree medical coverage, down from 47% in 2009. Only 22% of employers with over 5,000 employees subsidize post-65 retiree medical coverage, down from 37% in 2009.

In 2011, the Behind the Numbers report outlines three primary deflators that will help employers hold down medical costs:

  • Employers are moving toward pre-managed care benefit design by increasing deductibles and replacing co-pays with co-insurance. By requiring workers to spend more out-of-pocket at the point of care, employers believe they will rein in utilization of services and drugs. The number of employers using co-insurance for physician visits has nearly doubled, and one-third use co-insurance for brand-name drugs.
  • Drug costs are tempered by generics. Insurers are benefitting from the growing use of generic drugs. Drugs representing about $26 billion in annual sales are expected to go off patent in 2011, including the world’s best-selling drug, Lipitor. Generics account for as much as 80% of all prescriptions.
  • COBRA costs are expected to return to more normal levels in 2011. COBRA subsidies passed by Congress in 2009 created a 1% increase in the medical cost trend, according to PricewaterhouseCoopers’ analysis. A combination of declining unemployment and expiration of the COBRA subsidies is expected to lead to reduced enrollment in COBRA.

The biggest inflators of the medical trend in 2011 will be in hospital and physician costs, which make up 81% of premium costs. 

  • Hospitals shifting costs from Medicare to private payers and employers is seen as the Number One reason for higher medical costs trends. In 2011, Medicare, which is the single largest payer for hospitals, will reduce payment rates to hospitals for the first time after seven years of increases that nearly matched or exceeded inflation increases. Some hospitals that benefitted from higher payments in 2008 and 2009 may be able to manage this type of cut by tapping their reserves. Yet, more are likely to shift more costs to commercial payers during their negotiations.
  • Provider consolidation is increasing, which is expected to increase their bargaining power. More physicians are getting out of private practice and joining forces with local hospitals or larger physician groups. The number of physicians involved in mergers or acquisitions in 2009 was 2,910, nearly twice that of 2008. There has been record consolidation activity in 2010, and PricewaterhouseCoopers expects the trend to accelerate in 2011. Payers expect to see more negotiating power and higher prices in the short term, though the benefits of consolidation should create efficiencies that moderate rate increases in the future.
  • Spurred by stimulus funding that begins in 2011 and Medicare penalties that begin in 2015, hospitals will invest billions of dollars in certified electronic health record (EHR) systems. While many hospital systems were planning to implement EHRs in the near future, the government’s new regulations dramatically condensed their timelines to invest in technology, IT staff, training and process redesign. Healthcare CIOs surveyed by PwC said they will make their largest investments to meet the new EHR regulations in 2011. In the long term, EHRs are expected to help control costs. 

“For more than 50 years, US employers have used health benefits as a critical part of their compensation package to recruit and retain workers,” said Michael Thompson, principal, Human Resource Services, PricewaterhouseCoopers. “The value of these benefits is becoming an even more visible part of overall compensation as medical costs grow, and, by 2014, health insurance benefits will shift from being a voluntary benefit to an individual mandate, enforced by new tax levies. Companies are now working with their health plan providers for new post-recession, post-health reform strategies to sustain their programs and promote health and well-being as their next competitive advantage.” 

Each year, PricewaterhouseCoopers’ Health Research Institute provides estimates on growth of private medical costs over the next year and what the leading drivers of the trend are expected to be. Insurance companies use medical cost trends to help set health plan premiums by estimating what the same health plan this year would cost in the next year. In turn, employers use the information to make adjustments in benefit plan design to help offset any cost increases. 

“Health reform delivers only a minor impact on the underlying medical cost trends in 2011 and introduces hundreds of changes in the healthcare system designed to reduce costs and improve efficiencies in the long-term,” said Kelly A. Barnes, US health industries leader at PricewaterhouseCoopers. “These changes could bring significant new cost savings opportunities for employers and payers as well as new choices and transparency for workers buying insurance.” 

PricewaterhouseCoopers’ Behind the Numbers report and survey highlights are available at www.pwc.com/us/medicalcosts2011. The full findings of the PricewaterhouseCoopers 2010 Health and Well-being Touchstone survey are available at  www.pwc.com/us/touchstone2010.For more on the details on the implications of health reform, go to http://www.pwc.com/healthreform

Methodology

The 2010 Health and Well-Being Touchstone survey was completed in the first quarter of 2010. Survey participants included 700 U.S- based companies across the country from 30 different industries. Companies ranged in size from small employers with fewer than 500 employees to large companies with more than 20,000 employees. 

About PricewaterhouseCoopers’ Health Research Institute (HRI)

PricewaterhouseCoopers’ Health Research Institute (www.pwc.com/hri) is an unparalleled resource for health industry expertise. By providing cutting-edge intelligence, perspective and analysis on issues impacting the health industry, HRI assists executive decision-makers and stakeholders worldwide in navigating their most pressing business challenges. PricewaterhouseCoopers is one of the only firms with a dedicated global healthcare research unit, capitalizing on fact-based research and collaborative exchange among our network of professionals with day-to-day experience in the health industries. 

About PricewaterhouseCoopers’ Health Industries Group

 PricewaterhouseCoopers’ Health Industries Group (www.pwc.com/healthindustries) is a leading advisor to public and private organizations across the health industry, including payers, providers, academic institutions, health sciences, biotech/medical devices, pharmaceutical companies, employers and new non-traditional market participants in the dynamic healthcare space. PricewaterhouseCoopers has a network of more than 4,000 professionals worldwide and 1,200 professionals in the US dedicated to the health industries.

PricewaterhouseCoopers’ Health Industries’ clients include 40 of the top 100 hospitals in the US and 16 of the 18 best hospitals as ranked by US News & World Report; all 20 of the world’s major pharmaceutical companies; all of the top 20 commercial payers in the US; municipal, state and federal government agencies and many of the world’s preeminent medical foundations and associations. Follow PwC Health Industries at http://twitter.com/PwCHealth.

About PricewaterhouseCoopers
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

“PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

© 2010 PricewaterhouseCoopers LLP. All rights reserved

 Lisa Stearns
The Hubbell Group, Inc.
Tel: +1 (781) 878 8882
lstearns@hubbellgroup.com

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