Prescription Benefit Carve-Out Pros and Cons

Nationally, a lot of attention has focused on prescription drugs due to significant rising costs. According to GoodRx, most drugs in the top 20 list of most expensive prescription drugs in the U.S. continue to undergo price increases year after year. Prescription drug spending is an important healthcare concern based on an aging population, increased use of specialty drugs and rising pharmaceutical costs.

Many employers are using Pharmacy Benefit Managers, or PBMs, third-party administrators who administer prescription drug plans. Usually, they can maintain discount contracts with a network of pharmacies, adjudicate claims in real-time, provide customer service support, pay pharmacies for covered prescriptions, employ a clinical staff to keep current with the changing pharmaceutical landscape and report plan results to responsible parties. Whether your plan is self-funded/self-administered, self-funded and other administered or fully insured, your prescription benefit is likely to be administered through a PBM.

Many employers may be contemplating a carve-out of their prescription plan. Employers switching from a fully insured health plan to a self-funded health plan funded plan typically show a large first year savings. Why? With the help of our friends at HR360, we’ve put together some prescription benefit carve-out pros and cons. Some of the pros of self-funding include:

  • Reduction of state premium taxes
  • Improved cash flow—the employer pays for actual claims as they occur, as opposed to claims that may or may not be incurred
  • Plan design flexibility and ability to reduce waste within the program
  • Access to better quality data

In subsequent years, employers can continue to reduce or control costs by modifying their plan design and taking advantage of prescription cost management programs such as mail order or step therapy. But depending on your plan’s specific circumstances there may be a downside to carving out the prescription benefit. The cons include:

  • The carrier may charge a penalty for carving out the Rx, or may increase the medical administrative fees
  • Data that was once integrated for large case/disease management programs must now be fed back into the carrier system
    • Cash flow – the employer accepts full financial risk (stop-loss coverage is available) for a benefit that can potentially fluctuate from month to month.

In addition, stop-loss (or reinsurance) is a feature of self-funded plans in which the employer assumes the risk of health care cost up to a certain limit on individual claims (specific) or up to a certain limit on all claims (aggregate). An employer pays an insurance company to assume risk above the specific and/or aggregate levels. Overall, stop-loss coverage can limit the employer’s risk while allowing them to retain control over claims and benefits.

Self-funding the prescription drug benefit can pay big dividends, but it is not for everyone.  A careful analysis of carrier premium credit, stop-loss premiums and expected claims must be completed before heading down this path. Although stop-loss coverage is available, the employer must recognize that they are not immune from risk.

If you have any questions about the pros and cons of the prescription benefit carve-out, please contact the Employee Benefits Management Group (EBMG) at Rose & Kiernan, Inc. here or by calling (800) 242-4433.

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