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Prescription Drug Pricing Trends

Cost Drivers

In 2022, the United States spent over $400 billion on prescription drugs, according to the most recent data from the Centers for Medicare and Medicaid Services (CMS). Although prescription drug spending has historically been a small proportion of national health care costs compared to hospital and physician services, it has grown rapidly in recent years.
A multitude of factors led to this steady rise in prescription drug costs, including the following.

Influx of Specialty Drugs

Specialty medications account for a smaller portion of U.S. prescriptions than non-specialty drugs; yet, they now command over half of the pharmaceutical market—55% of prescription drug spending in 2022 was for specialty drugs, according to a Segal report. Specialty medications often require special handling and administration, and they can be more complex and expensive to develop, which adds to the cost.
Specialty drug spending is projected to experience rapid growth over the next several years due to pricing increases. In 2023, experts predict a 13.5% increase in specialty drug prices, compared to a 3.2% rise in non-specialty drug prices, according to the same Segal report. Insurers often cite these drug price increases as reasons for rising insurance premiums.

Price Inflation

Specialty drugs are not only commanding the pharmaceutical market; they are replacing lower-cost therapies. According to a separate Segal report, 40% of new products recently launched by drug manufacturers were specialty medications. These drugs are now being pushed at a higher rate than non-specialty drugs, contributing to price inflation. And there is little recourse for anyone seeking a cheaper alternative to these specialty pharmaceuticals.
There are currently more than 40 biosimilar drugs (similar to the specialty drug’s composition, but not identical) that can be used in place of specialty medications. As more of these drugs gain traction, drug manufacturers have been developing strategies to secure their market share, such as price matching and negotiating more favorable rebates with plan sponsors.

Failure to Follow Physician Orders

Reductions in drug utilization may mean patients aren’t adhering to the drug treatments recommended by their doctors. A failure to fill prescriptions can have serious effects on patient health and lead to more costly medical problems down the road. One study found that 31% of prescriptions go unfilled and individuals over the age of 52 were more likely to fill their prescriptions than their younger counterparts. Women were more likely fill their prescriptions than men, and, unsurprisingly, drugs with higher copayments were less likely to be filled.

Prescription Drug Trend Projections

According to a JAMA Network analysis, by 2028, prescription drugs will comprise 9% of the total U.S. health expenditure, approximately $863 billion.
Additionally, the CMS predicts that new specialty drugs will enter the market during this period, and fewer generic drugs will be launched.

Cost Control Strategies

Below are several tactics that insurers, employers and consumers have implemented in an effort to curb rising prescription drug expenses.

Usage Management

Many health plans have responded to rising costs by creating drug formularies, which exclude certain drugs from coverage, and step therapy requirements, which require individuals to try more cost-effective treatments before “stepping up” to more costly drugs. In addition, some insurance plans have increased patients’ out-of-pocket responsibilities by imposing separate prescription deductibles and requiring certain medications to have prior authorization. Prior authorization may be required when an insurer believes a less expensive drug may work just as well as the more expensive drug the doctor prescribed.

Other Payment Methods

Using generic drugs is a well-known way to save money on prescriptions without sacrificing quality, but a lesser-known option may be using cash to buy prescriptions instead of using insurance. No longer bound by gag clauses as of 2018, pharmacists can now tell an individual if they’ll save money by not using insurance and paying with cash instead.

Rebates and Discounts

Some businesses have elected to partner with organizations known as pharmacy benefit managers to negotiate with pharmaceutical manufacturers to receive rebates and discounts on prescription drugs based on factors like volume and market share. Similarly, some employers have joined together to create prescription drug purchasing pools in order to increase their purchasing power when negotiating lower prices for prescription drugs.

Employee Awareness

Employers are not the only ones seeking to reduce costs for pharmaceuticals. As employees’ out-of-pocket responsibilities continue to grow, more people are asking for cheaper or generic versions of drugs rather than paying for a brand name. Consumers are also using the internet and phone apps to make price comparisons between local pharmacies and to locate available coupons. Some consumers are also looking to mail-order pharmacies to obtain 90-day supplies of their medications, which often offer lower drug prices.

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Is Level Funding Right For You?

If you desire the freedom of a self-funded insurance plan but need a little more certainty for your budgeting concerns, level funding might be an option for you.

What is level funding?

Level funding is an option that can accompany a self-funded plan, aiding employers in their health coverage budgeting efforts. With level funding, employers pay a set amount each month to a carrier. This amount typically includes the cost of administrative and other fees and the maximum amount of expected claims based on underwriting projections, as well as embedded stop-loss insurance.

Pros

    • No community premiums

You only pay the claims, stop-loss insurance and admin costs vou incur. Stop-loss insurance can protect against large claims.

    • No lost money

You’ll get any leftover money back if low claims lead to a fund surplus.

    • Better utilization reporting

You can better pinpoint potential areas where employees could use more education to make wiser health care decisions.

Cons

    • Potential for higher administrative fees

You pay more than just the cost of claims.

    • Out-of-pocket claims costs

Consider the worst-case scenario of a high volume of claims.

    • Contractual impact

You’ll need an experienced expert to guide you through this plan type, as different businesses have different needs.

Want to learn more?

We’re here to help you make the best decision for your company and its strategic goals. Contact Consociate Health for more information about coverage options.

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Comparing HSAs, HRAs and FSAs: Which Approach Is Best?

Employers are increasingly looking to consumer driven health plans to help soften the blow of continually rising health care costs. Depending on the model, consumer driven health plans typically include health reimbursement arrangements (HRAs), flexible spending accounts (FSAs) or health savings accounts (HSAs).
Consumer driven health plans generally increase employees’ stake in their own health care costs. In most cases, a consumer driven health plan covers a wide range of medical expenses, but also includes more cost-sharing for participants (for example, higher deductibles). Some plans incorporate an HRA, health FSA or HSA to help employees pay for their out-of-pocket medical expenses on a tax-free basis. This article provides some basic information about the similarities and differences between HRAs, FSAs and HSAs.


HSAs

Due to their tax-favored status, HSAs have strict rules regarding eligibility and contributions. In order to make or receive HSA contributions, individuals must meet the following qualifications:

  • Be covered by a high deductible health plan (HDHP)
  • Not have any other health coverage (with some exceptions)
  • Not be claimed as a dependent on another person’s tax return
  • Not be covered by Medicare

The employer and employee can contribute to the HSA in the same year, subject to annual limits. Employers may allow employees to make pre-tax salary reduction contributions to fund their HSAs. Individuals may roll over unspent funds in the HSA from year to year. Since the HSA is a tax-exempt account owned by the employee, he or she may keep the account upon termination of employment or retirement.


Health FSAs

Health FSAs provide a means for employees to reduce their income tax liability through salary reduction. Employees can contribute a portion of their own salary to an account designated to pay for health care expenses. These pre-tax contributions are exempt from income and payroll taxes. The Affordable Care Act (ACA) limits employee’s pre-tax contributions to their health FSAs to $3,200 (adjusted for inflation for future plan years).

There are some strict design requirements for health FSAs that have negatively impacted their popularity. While any individual who satisfies the HSA eligibility criteria can make HSA contributions, only employees can participate in a health FSA. This means that, while self-employed individuals can establish health FSAs for their employees, they cannot set up their own accounts.

In addition, FSAs have a “use-it-or-lose-it” provision. In general, employees are required to elect a specific amount of salary reduction at the beginning of the year, and then must use every dollar in the account by the end of that year. Because annual medical expenses are hard to predict, employees often overfund the accounts and then spend unnecessarily at the end of the year to avoid forfeiting the money in their accounts.

To help avoid this problem, the IRS allows health FSAs to incorporate either a grace period or carry-over feature. Health FSAs with a grace period allow participants to access unused amounts remaining in an FSA at the end of the plan year to pay for expenses incurred during a grace period of up to two and a half months after the end of the plan year. Alternatively, health FSAs may allow participants to carry over up to $640* of unused funds remaining at the end of a plan year to be used for qualified medical expenses incurred during the following plan year.

Health FSAs are also subject to a uniform coverage rule, which requires the health FSA to operate like an insurance plan, with the employer assuming the risk of loss. Under this rule, an employee’s maximum reimbursement amount for a year must be available at any time during the coverage period, even if a reimbursement would exceed the year-to-date contributions to the employee’s FSA.

Health FSAs are group health plans that are subject to laws such as the ACA, the Health Insurance Portability and Accountability Act (HIPAA) and the Consolidated Omnibus Budget Reconciliation Act (COBRA).


HRAs

HRAs allow employees to use employer contributions to pay for (or reimburse) eligible medical care expenses. HRAs can only be funded with employer money; employees cannot make contributions to their HRAs. Unlike health FSAs, unused HRA balances may accumulate from year to year.

There is no specified cap on the amount an employer is allowed to contribute to an HRA. Also, an HRA is not subject to the uniform coverage rule that applies to health FSAs. However, like health FSAs, only employees can participate in an HRA, which means that self-employed individuals cannot participate in an HRA on a tax-favored basis.

Like health FSAs, HRAs are group health plans that are subject to laws such as HIPAA and COBRA. Under the ACA, most HRAs must be “integrated” with another group health plan to satisfy certain market reforms. However, there are exceptions to this requirement for certain types of HRA designs, including retiree-only HRAs.


Deciding on the Right Approach

Introducing consumerism into your health plan requires an evaluation of the benefits and disadvantages of HSAs, FSAs and HRAs. No one solution is right for every employer. If your organization is considering implementing a consumer driven health plan, your Consociate Health representative can help you decide which plan is best for you.

HSA HRA FSA
Type of account Health Savings Account Health Reimbursement Arrangement* Health Flexible Spending Account
Who owns the account? Individual/employee Employer Employer
Who may fund the account? Anyone can make contributions to an individual’s HSA, including employer and/or employee. Employer Employer and/or employee
What plans must be offered with the account? A high deductible health plan (HDHP) that satisfies minimum annual deductible and maximum annual out- of-pocket expense requirements. An employer must offer a health plan and the HRA must be considered integrated with group health plan coverage. Most Health FSAs must qualify as excepted benefits to satisfy ACA reforms. To qualify as an excepted benefit, the FSA must meet a maximum benefit requirement and other group health plan coverage must be offered by the employer.
Is there an annual contribution limit? $3,850 Ind. $7,750 Family (2023) $4,150 Ind. $8,300 Family (2024) Catch-up contributions: $1,000/year– age 55 by end of tax year No, there is no IRS prescribed limit For plan years beginning in 2023, employees may not elect to contribute more than $3,050. The limit is $3,200 in 2024.
Can unused funds be rolled over from year to year? Yes Yes No, with two exceptions. A health FSA may include a grace period of 2-1/2 months after end of plan year or it may allow employees to carry over up to $640 (as adjusted for inflation) in unused funds into the next plan year.
What expenses are eligible for reimbursement? Section 213(d) medical expenses, including: -COBRA premiums -QLTC premiums -Health premiums while receiving unemployment benefits -If Medicare eligible due to age, health insurance premiums except medical supplement policies Section 213(d) medical expenses Effective for 2014 plan years, cannot reimburse health insurance premiums for individual coverage Employer can define “eligible medical expenses” Section 213(d) medical expenses for insurance premiums are not reimbursable Employer can define “eligible medical expenses”
Must claims be substantiated? No Yes Yes
May the account reimburse non- medical expenses? Yes, but taxed as income and 20% penalty (no penalty if distributed after death, disability, or age 65) No No
Does the uniform coverage rule apply? No No Yes

*For purposes of this comparison chart, an HRA refers to a traditional HRA that is properly integrated with a group health plan. It does not include retiree-only HRAs, qualified small employer HRAs, individual coverage HRAs or excepted benefit HRAs.


This Benefits Insights is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice. © 2015, 2017-2023 Zywave, Inc. All rights reserved.

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Wellness Programs for Smaller Companies

Many companies do not have the resources to create a complex wellness program. However, targeting wellness is important for smaller companies because a successful wellness program can reap the following benefits:

  • Improved employee morale and increased productivity
  • Reduced overall health care costs
  • Improved employee well-being and reduced absenteeism
  • Attraction of employees

Though your organization may not be able to fund a comprehensive wellness program, you can still implement some low-cost activities to improve the health and wellness of your employees. The following are some suggestions for low-cost wellness initiatives:

  • Ask a local hospital, nonprofit or other health care organization to provide presentations to your employees on the importance of a healthy lifestyle.
  • Ask Consociate Health if your health insurance carrier offers free health risk assessments.
  • Create a wellness committee consisting of employees at various levels and in different departments to lead your wellness efforts. Start with simple activities, such as healthy eating days and lunchtime walks.
  • Make your workplace smoke-free.
  • Offer on-site flu shots for free or at a reduced cost.
  • Provide healthier vending machine choices.
  • Encourage employees to go outside during lunch or during their breaks for a quick run or walk. Encourage them to take the stairs instead of the elevator whenever possible.
  • Provide educational materials on the benefits of eating well, exercising, not smoking and other healthy lifestyle changes. Ask Consociate Health about the Live Well, Work Well newsletter series and other communication resources to support your workplace wellness efforts.

Contact Consociate Health today for a variety of low-cost wellness activities to benefit your employees and improve your bottom line.

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