Effective Strategies for Prescription Drug Cost Containment for Self-Insured Employers

Introduction

Prescription drug costs are a major expense for self-insured employers, often accounting for 20% to 25% of total healthcare spending. With the average annual cost of prescription drugs per employee reaching over $1,200, it's crucial for employers to adopt effective cost containment strategies. This guide outlines four key areas: formulary design, prior authorization processes, biosimilars, and pharmacy benefit manager (PBM) contract terms that can significantly impact your bottom line.

Formulary Design

A well-structured formulary can help manage costs effectively by guiding employees towards lower-cost medications. Here are some strategies to consider:

• Tiered Formularies: Implement a tiered structure where generic drugs are at the lowest cost tier, followed by preferred brand-name drugs and non-preferred brand-name drugs at higher tiers. Data shows that tiered formularies can reduce spending by 10% to 20%.

• Regular Reviews: Conduct bi-annual reviews of your formulary to ensure it aligns with the latest clinical guidelines and pricing trends. Keeping the formulary updated can lead to savings of 5% to 15% annually.

• Value-Based Formulary Design: Focus on medications that provide the best health outcomes for the cost. For instance, consider including drugs that control chronic conditions, which can prevent costly hospitalizations.

Prior Authorization

Prior authorization (PA) is a cost-control mechanism that requires healthcare providers to obtain approval before prescribing certain medications. Implementing an effective PA process can lead to significant savings:

• Target High-Cost Drugs: Focus on high-cost specialty drugs where the average cost can exceed $30,000 annually. A well-executed PA process can save employers up to 30% on these medications.

• Streamlined Processes: Utilize electronic PA systems to reduce administrative burdens. A study indicated that automating the PA process can cut approval times by over 50%, increasing compliance and reducing unnecessary spending.

• Clinical Criteria: Establish clear clinical criteria for PA requirements to ensure that only appropriate medications are approved. This can help avoid unnecessary costs and improve patient outcomes.

Biosimilars

Biosimilars are biologic medical products highly similar to already approved reference products. They can provide substantial cost savings:

• Cost Savings: Biosimilars typically cost 15% to 30% less than their reference biologics. For example, the introduction of biosimilars for drugs like infliximab has resulted in average savings of about $2,000 per patient annually.

• Adoption Strategies: Encourage the use of biosimilars through educational campaigns for healthcare providers and patients. Employers that actively promote biosimilars can see utilization rates increase by 20% to 30%.

• Formulary Inclusion: Include biosimilars in your formulary as preferred options to drive down costs further. This can result in overall pharmacy spend reductions of up to 10%.

PBM Contract Terms

Negotiating favorable terms with your PBM is crucial for effective cost management. Here are key contract terms to consider:

• Transparent Pricing: Seek contracts that include transparent pricing structures. Avoid PBMs that use spread pricing, which can inflate costs. Aim for contracts that offer pass-through pricing to ensure you only pay the actual cost of drugs plus a fixed administrative fee.

• Rebate Agreements: Establish clear terms regarding rebates. Ensure that your PBM shares a significant portion of the rebates negotiated with drug manufacturers. Ideally, aim for at least 80% of rebates to be passed back to the employer.

• Performance Guarantees: Incorporate performance guarantees into your contract that tie PBM compensation to specific cost-saving metrics. For instance, contracts that include accountability for reducing drug spend by 5% to 10% can incentivize PBMs to prioritize lower-cost options.

Bottom Line

To effectively contain prescription drug costs as a self-insured employer, focus on these actionable strategies: optimize your formulary design, streamline prior authorization processes, promote the use of biosimilars, and negotiate favorable PBM contract terms. By implementing these measures, you can achieve significant cost savings and improve health outcomes for your employees. Start assessing your current strategies today to identify areas for improvement and drive down prescription drug expenditures.