Universities Save Millions by Carving out Drug Plans from Health Insurance

Universities Save Millions by Carving out Drug Plans from Health Insurance
May 02, 2011/Crain's Detroit Business


By Jay Greene


In 2002, the University of Michigan contracted with eight health insurers and HMOs to offer group health coverage to its employees and manage rising prescription benefits.

But Keith Bruhnsen, UM’s prescription drug plan manager and assistant director of benefits, did not like the rising cost trend he was seeing with employee prescriptions.

“We had been seeing 15 percent to 20 percent annual cost increases” for UM’s prescription benefits, which were managed by insurers and health plans, Bruhnsen said.

So in 2003 UM “decided to carve out prescription benefits” from the health plans, most of which had been contracting that service out to large pharmacy benefit management companies, Bruhnsen said.

“We saved $8.6 million the first year,” he said.

Over the past eight years, UM has saved nearly $57 million on its self-insured prescription drug plan, according to a recent university report.

In 2010, UM saved $7 million on the $85 million it spent on drugs for its 38,000 employees.

While UM drug costs on employees continue to rise – up 5.4 percent in 2010 – UM officials say the increase is below the national average of 7.4 percent.

In a recent national survey by Mercer, 17 percent of companies with 500-999 employees have carved out pharmacy benefits from their medical insurance plans.

Under a carve-out, prescription drug coverage is handled separately from other medical coverage, either self-insured with a third-party administrator or through a different insurer. The goal is to bring more specific expertise to the management of prescription benefits and save money while providing needed medications.

The larger the company, the more likely they are to carve out pharmacy, Mercer found. For example, the numbers of companies that carved out pharmacy was 37 percent among those with 5,000 to 9,999 employees and 58 percent of those with more than 20,000 employees.

Jerry Konal, a health and benefits principal with Mercer in Detroit, said smaller companies also can take advantage of more favorable pricing arrangements with pharmacy benefit managers by banding together in pharmacy collectives.

“Effective trend management does not necessarily result from the carve-out arrangement itself, it results from a variety of things such as pharmacy discounts, effective clinical management, plan design cost-sharing and communications,” Konal said.

Mercer manages three pharmacy collectives that help negotiate lower prices for services that pharmacy benefit managers provide to employers and for lower drug costs, Konal said.

Five of the state’s other 11 universities, including Wayne State University, Central Michigan University and Michigan State University, have achieved similar savings by carving out their own prescription benefits and using a pharmacy purchasing coalition to reduce costs, said Patti Klobucar, executive director of the Lansing-based Michigan Universities Coalition on Health. The other two are Ferris State University and Grand Valley State University.

The coalition was formed in 2005 to help the universities manage health care costs.

The other six universities manage medical and pharmacy claims in various ways using the coalition to help negotiate contracts, said Klobucar.

“(University coalition) members have saved an estimated $6.3 million from July 2005 through June 2010,” Klobucar said.

Bruhnsen said UM has developed several strategies to reduce drug costs. They include greater use of generics, negotiating drug discounts and encouraging appropriate “pill-splitting” to obtain a lower dose of the active ingredient to reduce costs.

“Pill-splitting savings is fairly small,” Bruhnsen said. “We only saved $145,000 last year.”

The primary savings, he said, come from switching to generic drugs from brand names.

For example, nearly 76 percent of the prescriptions in 2010 were filled with generics, up by 5 percent since 2009.

“To put the numbers in perspective, every percent increase in our use of generics saves the university nearly a half-million dollars,” Bruhnsen said.

National averages for the use of generic drugs range from 64 percent to 71 percent, he said.

Other changes included increasing drug copayments by going to a three-tier drug benefit level and controlling how drugs are dispensed by limiting the number of retail outlets or using mail order only for certain drugs, he said.

To process drug claims at pharmacies, UM contracts with informedRx, a Lisle, Ill.-based pharmacy benefit manager. The manager also conducts prior authorization and staffs a customer service help desk, Bruhnsen said.

“We handle all the clinical programs and plan design,” he said. “Although some plans carve out drugs from medical to better control cost they still need a pharmacy benefit manager for tech support and to administer their plan.”

Bruhnsen said another way UM saves money is through its e-prescribing system installed last year in UM Hospitals and Health Centers. He said the system makes it easier for university clinicians to access plan information and better determine prescription options.

Most of the recent cost increases are for highly expensive protein-based biological medications that continue to rise at double-digit rates, Bruhnsen said.

“Managing specialty drugs is a huge concern to us, health plans and payers,” Bruhnsen said. “Some are terrific drugs and are life-saving. But they are very expensive.”

Specialty drugs account for 1 percent of UM’s employee drug use, but 15 percent of costs.

“We expect these specialty drugs to climb each year to up to 30 to 40 percent of costs,” Bruhnsen said.

Some of the areas include treatments for hepatitis C, tumors and rheumatoid arthritis, said Sandy Goel, a UM pharmacist.

This year, Bruhnsen said the benefits staff is working on several initiatives to continue to drive down pharmacy costs.

Under an existing federal program, UM is allowed to purchase certain drugs at discount prices if patients or employees use the university’s hospital and outpatient health centers. UM’s hospital is eligible because it is classified as a disproportionate share facility, meaning it treats a high number of low-income patients.

“About half of our employees get care at our health centers. If those prescriptions are filled in our pharmacies we can get additional discounts,” he said.

Bruhnsen said UM is planning to expand the program under new federal guidelines to allow its patients and employees to also receive the discounts at local pharmacies.

“Last year the federal government set up a program to allow it but you have to develop a cooperative effort with the pharmacies,” he said. “We could save another $5 million to $6 million.”

Jay Greene: (313) 446-0325, jgreene@crain.com



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