Contracting a Cure for Prescription Drug Costs

By Andie Burjek

Jul. 1, 2017

Specialty drug prices were continually creeping up for the American Speech-Language-Hearing Association. And it wasn’t just the media-grabbing drugs like the EpiPen or hepatitis C medication.

Specialty drugs are taking up an increasing percentage of employers’ total drug spend and they want to take action to change this trend.

“[Those are] not what worries me the most,” said Janet McNichol, HR director for ASHA, a Maryland-based professional association for speech, language and hearing scientists in the United States and internationally. “They’re expensive, but have high value.”

Researching claims throughout the year, McNichol has seen prices escalate for medications for more common ailments as well. She found a $9,027 charge for Zegerid, a compound drug that treats symptoms of gastroesophageal reflux disease and whose individual elements could be bought for $20. Similarly, she found a claim for migraine medication Treximet for $1,471, but its two components only cost $37 for a 90-day supply. “I feel like I’m always trying to keep up with drug companies,” said McNichol.

She’s not the only HR leader dealing with a drastic spike in prescription drug prices. Employers have been struggling with this for years. Some experts argue that employers are at a crucial point in their relationship with pharmacy benefit managers, which act as middlemen between employers, pharmacies and drug manufacturers and whose primary function is to keep pharmacy benefit costs low.

Specialty drugs are taking up an increasing percentage of employers’ total drug spend, and employers want to take action to change this trend. That involves shifting their relationship with their PBM, which makes money through service fees, negotiating with pharmacies and manufacturers, and operating mail-order pharmacies.

Other than the drug manufacturer, PBMs make the largest profit in the supply chain of prescription drugs, more so than wholesalers or distributors. Yet PBMs continue to consolidate, as the top three — Express Scripts, Optum Rx Inc. and CVS Health — control 78 percent of the industry. The latest deal saw Express Scripts acquire Tampa, Florida-based MyMatrixx, a provider of pharmacy benefits solutions in the workers’ compensation space, in May 2017.

PBMs do a lot to help employers manage pharmacy costs, said Brian Marcotte, CEO of the National Business Group on Health. They perform prior authorizations on medications to ensure medical necessity; manage quality limits to ensure proper dosage; and make sure people take generics first before moving up to expensive alternatives — in medical terms, step therapy.

Please also read: Employers Wary of PBM Consolidation

Still, pharmaceutical prices are a real concern from the employer perspective, Marcotte added, as specialty drugs are the No. 1 driver for most large employers’ total medical spend, even though it only affects 2 percent of the employee population.

One ongoing issue for employers is a lack of transparency that Marcotte said extends through the entire supply chain — the manufacturer, distributor, PBM, retail pharmacy and employer. “It’s very complex, it lacks transparency and it doesn’t match well with today’s high-deductible plan environment,” he said, adding that most employers now offer high-deductible health plans.

Please also read: EpiPen Scandal Causes Employers to Scramble

He cited 2016’s EpiPen backlash. EpiPen is an injection containing epinephrine and is used to treat severe allergic reactions. “In a co-pay world, where an employee or a consumer would pay $23 for, let’s say, an EpiPen, it never would have gotten the attention it received,” he said. “But because of the $600 list price people were paying when they walked into a pharmacy, all of a sudden there was a lot of outcry and attention focused on the high price of drugs.”

One concern with HDHPs is that companies don’t want employees paying these high costs, he said. Yet it did bring attention to the growing problem of price escalation of drugs. “Now you have a spotlight on it because of how HDHPs work,” he noted.

Transparency has been invaluable to employees using HDHPs, said American Speech-Language-Hearing Associations’ McNichol. Their PBM, Magellan Rx, partnered with drug-price transparency tool GoodRx, which compares prices at different pharmacies. Magellan offers ASHA, a company of 285 employees, a lot of flexibility in its contract, McNichol added. She meets monthly with a pharmacist to modify the contract to add or exclude certain drugs.

In order to improve the quality of care and reduce cost, it’s important to be collaborative, thoughtful and flexible when designing benefit programs, said Matt Mertel, senior vice president of strategic innovation at Magellan Rx, in an email interview. “There’s no one-size-fits-all solution.”

“One of our goals as a PBM is to empower members to be a part of the purchasing decision and to play a direct role in the decision-making process,” Mertel said.

Aside from working strategically with Magellan, McNichol also works with ASHA’s employees. “I try to inform our staff about some of these issues and encourage them to do what they can to avoid overpaying for prescription drugs,” she said.

GoodRx is only available to ASHA employees with an HDHP; those not in the HDHP plan will only see their co-payments rather than the list price. But McNichol believes it is important to encourage this latter group, which is not motivated by price because all they see is the co-payment, to be proactive about drug prices.

“I’m in the process of rolling out a benefits builder game that will help people see what health care costs and how we’re all in it together,” said McNichol. “Hopefully, that will increase people’s ability to see the connection even if it isn’t as direct.”

Taking a More Active Role 

On a larger scale, employers know they can’t really do anything about the cost of drugs unless the government steps in, said Cheryl Larson, vice president of the Midwest Business Group on Health. But what they can do is review the performance of their PBM and work off that to manage costs.

Employers are frustrated with the current system, she added. But “a lot of large employers don’t want to disrupt the environment they’re in,” she said. “They don’t want disruption for their employees and family members.”

Employers are responsible for finding the best benefits they can to provide high quality cost options for employees, she said. Included is the PBM contract, for which many employers is vague yet ironclad.

“It’s all about the contract,” she said. “You need to demand transparency, and you need to negotiate financial and nonfinancial contracting terms for both direct and indirect revenues for the PBMs administering your plan.”

For instance, if a consumer’s co-pay at a pharmacy is more than the cost of the drug, PBMs often utilize a clawback practice and the consumer still pays the co-pay. The remainder then goes back to the PBM, not the employer or the patient.

Larson recommends that in the contract negotiation phase, employers include language that clearly states if the cost of the drug is lower than the co-pay, the patient pays the lower amount.

“If you don’t do that, the clawback issues can continue,” she said.

The More In-House Approach 

Caterpillar Inc. is one example of a large employer that took an active role and did something disruptive to deal with pharmacy spend. “We carved out a lot of the strategic decisions PBMs make on behalf of employers and made them ourselves,” said Todd Bisping, global benefits manager at the Peoria, Illinois-based heavy equipment manufacturer. This shift of strategic power began in the mid-2000s, he said.

Caterpillar opted to build its own networks — that is, determine which pharmacies to contract with and give its members access to — rather than relying on a PBM to do so. It decided to determine its own pricing methodologies in contracts rather than using PBM-negotiated drug prices. It also designed its own formulary, a list of brand name and generic prescription drugs that employees covered by a specific health care plan can use.

Caterpillar still uses a PBM, Optum, for tasks like prior authorizations, customer support lines and some step therapies. When they started this process over a decade ago, they were using Milwaukee-based Restat, which was bought by Catamaran in 2013. Optum then acquired Catamaran for $12.8 billion in 2015 and renamed the company Optum Rx.

Over the past 10 years, Caterpillar slowly brought more elements in-house. It started in 2005 when Caterpillar began implementing changes in the way it did formularies and continued over the next decade to include changes in supply chain. A team of professionals managed the process, including doctors who help with the clinical aspects of the design, a third-party pharmacy consultant, the Caterpillar benefits team and their PBM.

When Caterpillar began directly negotiating with pharmacies, the largest hurdle was finding someone willing to partner with them. “No one was really contracting directly with pharmacies in the self-insured employer space, ” said Bisping. But “that’s how you bring innovation into the market.” In 2009, Walmart was the first pharmacy to partner with them, he added.

One major aspect of these first contracts was dealing with the transparency issue. While many companies mean transparency in rebates when they use that term, Caterpillar adopted a broad definition, one that took into account transparency in any revenue associated with drug spend, like marketing fees.

Caterpillar’s decision to take over these strategic functions saved the company hundreds of millions of dollars since its inception in the mid-2000s, and it’s saved the employees tens of millions of dollars, said Bisping. The company spent less in 2015 than in 2005, he added. Since then, they’ve seen costs rise but it’s still much less than the industry average, he said.

Fewer than 10 companies have adopted the same strategy as Caterpillar, according to Bisping. It’s a complex, disruptive process that requires commitment and culture change. Also, many companies outsource a lot of their expertise, so they don’t necessarily have the expertise in-house.

But, despite the time commitment to get this internal function operating, he’d recommend it to other companies that want to control drug costs.

Caterpillar accomplished its positive drug price trend without relying on HDHPs or cost-shifting. “We didn’t pass our costs onto employees to accomplish that,” he said. “In that period, we didn’t make any design changes because we were controlling the cost.”

Andie Burjek is Workforce’s associate editor. Comment below or email

Andie Burjek is an associate editor at

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