It’s no secret that growing prescription drug costs are causing concern for plan sponsors and their members. Formularies can often include drugs that have little to no clinical value and drive up costs. These are often referred to as wasteful or low-value drugs.
Looking at the latest statistics, costs are projected to rise, and by 2024, drug spending in commercial plans will grow on average 5% per year, up from 3.7% in 2021 through 2023.1 By taking a closer look at your drug mix and formulary approach you can combat wasteful spend to lower costs.
WHAT ARE WASTEFUL DRUGS?
A recent report noted, "Wasteful drugs are those drugs which don’t provide additional clinical value when compared to other drugs that are used for the same condition which are less expensive."2 And, in a traditional PBM model, "Both branded and generic drugs can be wasteful. There is a financial incentive for PBMs to prefer drugs with high prices and large rebates or large spreads, which often results in having wasteful drugs on the formulary."2
WHY ARE WASTEFUL DRUGS INCLUDED ON FORMULARIES?
Managing your formulary is critical to your plan’s performance. Unnecessary costs can multiply if left unchecked, so it’s important to consider what approach to formulary management your plan is using. Two types of formulary options exist, with a third or hybrid somewhere in between.
A rebate-focused approach focuses on attaining higher rebates, which can lead to selecting higher-cost drugs that may be wasteful. Big rebates may appear to generate more savings, but it’s important to pay attention to the drug cost. You may be spending more to get more rebates, but your overall costs may actually be higher.
How much more will you be spending? A recent article noted, “Prescription drug rebates are paid to PBMs by manufacturers after the point of sale and can make up 40 percent or more of the drug’s list price.”3 For those doing the math, it would be hard to get enough rebates to offset the final cost of the drug, compared to what you can achieve with a lower-cost alternative.
A lowest-net cost formulary chooses drugs that provide clinically sound, cost-effective alternatives using generics or less expensive brands. Each drug is selected using evidence-based treatment guidelines and achieves substantial rebates without paying more, costing you less overall.
HOW PBM BUSINESS MODEL CAN IMPACT THE CHOICE OF DRUGS ON YOUR FORMULARY
Traditional PBMs may use a rebate-focused approach to generate spread (also known as margin or mark-up) on rebates. With the goal of achieving higher rebates, these PBMs may select drugs, such as wasteful drugs, that increase spread or are most profitable for formulary placement.
Here, the PBM may offer higher rebate dollars returned to you, which looks great on paper. However, since many of the higher rebated drugs cost more you may actually be spending more to get those rebates. Ultimately, it’s better to look at all-in costs to determine which formulary approach works best for your organization.
The pass-through PBM model fully supports a lowest-net-cost approach by making sure 100% of all rebate revenue is passed directly back to the plan sponsor. Since its only revenue source is an admin fee and no spread is involved, the pass-through model ensures the PBM does not have misaligned incentives to prioritize higher-cost drugs for formulary placement to increase spread.
Now that we’ve defined and discussed why wasteful drugs are included on formularies, you can apply what you’ve learned to remove them and start lowering costs. Removing wasteful drugs goes beyond ‘first-year’ or a ‘one-time’ savings. When you switch to a waste-free formulary, you’ll benefit year after year from lower costs, helping you keep drug trend low over time.
Download our e-book to learn more about wasteful drugs and how you can start saving now.
- Minemyer P, Health spending is likely to grow by 5.4% per year through 2028. Here's why, Fierce Healthcare, fiercehealthcare.com/payer/cms-actuaries-say-health-spending-likely-to-grow-by-5-4-per-year-through-2028-here-s-why, Published March 24, 2020, Accessed September 2020.
- Anderson G, Ph.D., Cordeiro T, R.Ph., Socal M, M.D. Ph.D., Vela L, M.B.A., Removing waste from drug formularies, The Pacific Business Group On Health, pbgh.org/storage/documents/resources/PBGH%20Wasteful%20Drugs%20Guidebook%20FINAL.pdf. Published October, 2019. Accessed September 2020.
- Seeley E, Kesselheim A, Pharmacy Benefit Managers: Practices, Controversies, and What Lies Ahead, commonwealthfund.org/publications/issue-briefs/2019/mar/pharmacy-benefit-managers-practices-controversies-what-lies-ahead, Published March 26, 2019. Accessed September 2020.