We’re living in a time of great medical innovation, and while new medications are exciting for patients and their families, their growing costs can easily overwhelm the budgets of employer groups, particularly those who self-fund.

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Understanding high-cost pharmaceuticals

What are high-cost pharmaceuticals?

High-cost pharmaceuticals generally fall under three categories:

  • Biologics are diverse, complex products for the treatment, diagnosis and prevention of a broad range of common and rare diseases.
  • Specialty pharmaceuticals are often biologics. They are oral, injectable, inhalable or infusible drug products used to treat more complex or chronic medical conditions.
  • Compound drugs are prepared by a pharmacist—or someone under the supervision of a pharmacist—who combines, mixes or alters the ingredients of a drug to create an individualized medication for a specific patient.

These medications are complex and used to treat conditions like multiple sclerosis, hepatitis C, rheumatoid arthritis and cancer. They’re typically dispensed by a self-funded plan’s pharmacy benefit manager (PBM), but can be supplied by other pharmaceutical providers and administered in a clinic, home or hospital setting.


Growing market, increased costs

Many factors influence the speed that these drugs enter the market and the surge in cost:

  • Direct advertising: The more pharmaceutical companies advertise, the more consumers become aware of these medications. Consumers may indirectly put pressure on providers to prescribe one formula over another.
  • R&D expenses: Costs can be significant for manufacturers who need to create many versions of a formula before finding one that works.
  • “Orphan” drugs: Manufacturers are incentivized by the FDA to develop “orphan” drugs to treat rare conditions. These can be costly because of their small distribution base, and they’re generally dispensed by specialty pharmacies.
  • Use variation: Medications are being prescribed for uses other than what the FDA has approved, leading to increased utilization of certain high-cost drugs.
  • Recommendations: Many physicians prefer to recommend the newest—usually more expensive—treatment option, rather than a more traditional method that could be just as effective and less costly. Stronger checks and balances by the plan sponsor and claims administrator can help keep costs in line.


The role of the pharmacy benefit manager (PBM)

PBMs are responsible for processing and paying prescription drug claims. Since pharmaceutical charges aren’t administered with the self-funded plan’s medical benefits, the PBMs generally only focus on the pharmaceutical portion of an insured’s treatment plan.

Here are some things to consider when looking for a PBM to partner with:

  • Do they contract with a large network of pharmacies?
  • What specialty pharmacy and distribution services do they offer?
  • Does their disease management program ensure patient compliance or should it be required?
  • Do they perform drug utilization reviews?
  • Will they adhere to provisions in the employer’s plan document regarding generic, formulary brand name and non-formulary drugs?
  • Do they recognize that most compound drugs are not FDA approved and may be excluded by the employer’s plan document?
  • Are they transparent when it comes to drug cost pricing and manufacturer rebates?


The impact on self-funded medical plans

Due to inconsistencies in how providers bill pharmaceutical expenses, some drugs are covered under a self-funded employer’s prescription drug plan while others are covered under the medical plan. These variances stem from where medications are administered—a hospital, a doctor’s office or under supervision at home. As a result, charges may be filed under different service codes, which can directly impact the self-funded plan’s budget.

The high cost and complexity of these drugs, as well as lack of consistency in billing practices, highlights the importance of validating charges and managing them effectively. Plan sponsors should have guidelines outlining when and how they review prescription drug charges, and claims administrators must work closely with the prescribing physician to ensure all treatment plans and records are up to date.