Mar 27, 2018

The Value of Drug Carve-Outs

According to recent reporting in Reuters, U.S. spending on prescription medicine is expected to escalate to $610 billion by 2021. This startling statistic is a major concern for many of our nation’s employers, as prescription drugs account for about 15 to 20 percent of an organization’s overall healthcare expenditures.

As companies struggle with the increase, unfortunately, the main solution often involves shifting costs to employees or even reducing benefits. However, one alternative to consider is drug carve-outs, which can effectively reduce costs for an employer, without sacrificing overall value for employees.

What is a drug carve-out?
A drug (or pharmacy) carve-out is when the plan sponsor “carves-out” part of its benefits plan by purchasing that portion from a specialty vendor, rather than having one carrier handle the entirety of the plan. For example, if a company identifies one aspect of the plan – such as prescription coverage – is driving up costs, it can partner with a vendor that will help better manage and control those costs.

How does this benefit the employer?
In a drug carve-out, the plan sponsor chooses a Pharmacy Benefit Manager (PBM) to work with directly. The PBM can utilize their pharmaceutical knowledge and clinical oversight to better manage costs for the organization. This creates several benefits, such as:

  1. Increased cost transparency: With a drug carve-out, contractually employers have heightened visibility and therefore can better understand the true costs of the prescriptions. Under certain contracts, employers can also receive access to pharmacy claims data and audit rights to ensure they are receiving competitive rates and service performance guarantees from the PBM.
  2. Competitive pricing: Because the first step in implementing a drug carve-out is selecting a PBM, this puts the plan sponsor at a competitive advantage. The employer can evaluate bids from several PBMs, which allows them to better negotiate drug pricing, discounts and rebates which can create significant savings in the long run.
  3. Plan flexibility: Although traditional plans use just one medical vendor, which can simplify management for the employer, these plans are less flexible as they are a one-size-fits-all approach. With carve-outs, plan sponsors can evaluate the specific needs of their employees and their operation to design pharmacy plans that will lessen overall costs.

It’s important to remember that implementing a drug carve-out strategy won’t guarantee a plan sponsor will save money on healthcare costs. The success of the strategy depends on several factors, such as the size of the employer and the arrangement with the medical plan carrier. Because the first step to a successful drug-carve out is proper implementation, it is recommended that companies work directly with their benefits broker during this process.
Regardless of the size of your organization and whether a carve-out is the right solution, consulting with your benefits broker is the best first step to identify a healthcare plan that meets your operational goals.

Adam Karalius
Assistant Vice President, Underwriting & Compliance
The Graham Building
Philadelphia, PA, 19102
(215) 701-5379

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