How to Reduce Drug Spend Without Sacrificing Plan Quality by Using Drug Formularies

Despite the devastation caused last year by the COVID-19 pandemic, over 800 drugs have seen price increases since the beginning of this year, and it is expected that we will only continue to see price increases from major drug manufacturers. For employers that want to provide their employees with access to affordable prescriptions – given the continued increase of drug costs – it’s critical that employers work with their benefits broker to assess their formulary to offer more economic alternatives that can reduce plan costs.

Formularies – the list of prescriptions covered by plan sponsors – need to offer the greatest possible value to both plan sponsors and the members of the plan. However, they often times include wasteful prescriptions that have little to no clinical value that ultimately increase the overall cost of plans. By removing these high-cost, low-value prescriptions from their formularies, employers could save anywhere from 3% to 24% on pharmacy spending overall.

Working with pharmacy benefits managers (PBMs) is a good solution for plan sponsors looking to get the most out of their formulary. PBMs help identify an appropriate balance of prescriptions for both clinical effectiveness and cost, generating continued savings while also keeping drug usage and expenses down over time. The below action steps can help you to evaluate, identify, and establish a waste-free formulary plan and reduce plan costs:

1. Review Your Current Formulary and PBM Contract

There are many reasons why formularies go through continued updates including the approval of new products and the availability of lower-cost alternatives. Therefore, understanding your current list of prescriptions and contract with your PBM is an important first step to creating a formulary that is waste-free and a PBM contract that meets the needs of your organization’s members.

There are two types of formularies. Rebate-focused formularies – which attain better rebates for plan sponsors – incentivize PBMs to select higher-cost drugs that generate more revenue. This causes wasteful drugs to be included in your formulary, resulting in higher plan costs. Lowest-net-cost formularies – which include cost-effective alternatives that lower costs for plan sponsors – do not incentivize PBMs to promote high-rebated drugs because they are not receiving a portion of the rebate as revenue. The entirety of the rebate is given back to the plan sponsor.

Consider whether your current PBM establishes transparency and a pass-through model and if it allows customization to the formulary for your business. Full pass-through PBM models remove the incentive to add wasteful prescriptions to formularies because their only revenue is the administration fee. This creates an alignment between the PBM and the plan sponsor’s interests. Contracts that are transparent, both operationally and financially, are in the plan sponsor’s best interest as they assure the PBM acts accordingly. Additionally, a pass-through model allows for plan sponsors to better manage their pharmacy benefits by granting the plan sponsor full audit rights.

To assure that your members receive the most effective and affordable pharmaceutical solutions, consider just how much flexibility is needed to best customize the formulary. Some PBMs might offer low administration fees, however, additional services like formulary customization might come with a fee. Alternatively, pass-through PBMs provide customizable formularies at no additional cost to the plan sponsor.

2. Eliminate Spending on Low-Value and Wasteful Drugs

To create a mix of prescriptions with a proper balance of clinical effectiveness and cost, it is important for plan sponsors to work with their PBMs to best identify prescriptions that offer less expensive alternatives. PBMs are able to identify low-value and wasteful drugs that cause inflation of overall plan cost by performing an analysis of claims data. For example, a PBM can help to review combination drugs – which combine more than one active ingredient and are often more expensive – to provide a more cost-effective alternative.

Pass-through PBMs continuously review and refine their formularies to exchange higher-cost medications with newer lower-cost alternatives. Plans sponsors can also forecast future claims to project net costs on newly proposed drugs by working with their PBM to compare cost differences against claims data. This will proactively reduce costs, assure affordability, and improve overall member health.

3. Develop a Better Formulary and Benefit Plan Design

Once you have evaluated your formulary and PBM contract, and identified wasteful drugs, you should then work with your PBM to develop a new plan with a lowest-net-cost formulary. By developing such a plan, plan sponsors can better achieve more effective rebates and reduce member expenses per month.

Pharmacy benefit plans that move formularies into theirs and establish a cost-sharing structure will reward members for selecting the lower-cost pharmaceuticals. Low-tier or generic drugs are inexpensive and have lower out-of-pocket costs. Therefore these drugs in the formulary would have lower or no copay, ultimately, promoting their utilization. These kinds of utilization management strategies (i.e. step therapy) will also help to improve the overall quality of care for members while also limiting expenses.

With drug costs continuing to rise, plan sponsors need to learn to better navigate and identify high-performance strategies in order to generate better savings and maintain member satisfaction, and their drug formulary is one area that can help. Wasteful drugs create a financial burden to both plan sponsors and members, and they are entirely avoidable. Plan sponsors can prevent unnecessary spending by working with PBMs to develop a lowest-net-cost formulary to provide members and as a result, both plan sponsors and members will benefit from substantial long-term savings and ultimately, help them achieve their pharmacy benefits plan goals.