Is a Pharmacy Carve-out Right for Your Group Health Plan?
Pharmacy spend in the US is significant. Six in ten adults tell KFF.org they are currently taking at least one prescription drug and a quarter say they currently take four or more prescription medications.
PwC’s Behind the Numbers predicts a 6.5% medical cost trend in 2022, while drug cost trend reports show ongoing increases year over year and make up 20% of overall medical costs for employers.
Besides the cost burden on employers, employees can find that certain medications are not covered by their health plan. This increases pressure on employers to develop a sustainable strategy that provides cost-effective pharmacy benefits.
As a solution, many employers consider pharmacy carve-out plans as an option; however, carve-out plans are debated vigorously by health plan experts. By understanding what a pharmacy carve-out is and considering important factors, employers and brokers can work together to make the right decision.
What is a pharmacy carve-out?
A pharmacy carve-out is when an employer separates (carves out) their prescription drug benefits from their medical plan and contracts directly with a pharmacy benefit manager (PBM). A pharmacy carve-out is commonly used under the self-insured model. In comparison, fully insured medical plans typically have the pharmacy benefit as a built-in feature (bundle).
Pharmacy carve-outs can provide transparency, flexibility, control, and accessibility to employers in the form of:
- Better control over pharmacy benefit costs.
- Access to the costs and data to evaluate program performance.
- Greater flexibility to customize solutions in plan design and clinical programs to help reduce costs.
- Standardized language in the PBM contract to allow increased transparency into pharmacy benefits, allowing employers to better understand and control spending, negotiate better deals, and ensure the program performs as promised. The contract itself can allow:
- Access to pharmacy claims data.
- Audit rights, such as a claims audit, operational assessment, and rebate audit.
- Annual review to ensure rates are competitive.
- Service performance guarantees.
- Credits to help cover administration expenses or costs incurred when switching to a new vendor.
There are a lot of variables that affect whether a pharmacy carve-out is the right solution for your company. It’s critical to understand the disadvantages of carve-outs before making your next move:
- Carved-out plans offer short-term savings, though the savings might not be beneficial to an employer over the long term.
- A July 2021 study compared the costs of bundled and carve-out plans and found that bundled pharmacy benefits are associated with reduced medical expenditures over the long term, resulting in annual per-member, per-month savings compared with a carve-out.
- Another study found that savings from a carve-out plan may seem beneficial on the surface, but medical costs are 7.5 times higher in the long run. Therefore, any savings promised by a carve-out should be weighed against potential increases in medical spending by employers.
- Managed Healthcare Executive also reported carve-outs could deliver short-term savings, but not long-term savings, due to PBM vendors’ approach to utilization management. For example, many employees are denied access to their prescribed medications and are unlikely to have their denial overturned on appeal. This results in employees paying for medicine out-of-pocket, added costs for employers if they pay multiple vendors, and a poor member experience overall.
Besides long-term costs, carve-out contracts for medical and pharmacy require multiple vendors, increasing the administrative burden on the employer.
After reflecting on the advantages and disadvantages of carve-outs, making the decision may still be no small feat. Fortunately, you can ask yourself important questions to help you with your decision.
- How much are pharmacy benefits currently costing your plan?
- How are you currently overseeing the pharmacy benefits program?
- What changes would be necessary for the new arrangement?
- How will the fees from your medical health plan vendor be impacted?
- Is now the right time to search for a PBM vendor (and possibly a medical health plan request for approval)?
When deciding to carve-out pharmacy benefit programs, employers and brokers should work together to consider critical factors such as internal staff expertise, current and future costs, and appropriate timing. However, your top consideration should be, “Does this make the most sense for our organization and our employees?”
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