Bloomberg Law
Jan. 22, 2020, 10:45 AM

Insurers Move to Blunt Employers’ Use of Alternate Drug Plans

Sara Hansard
Sara Hansard

Major health insurers are forcing small and mid-sized employers to use the insurers’ pharmacy benefit management services, a move that is preventing the employers from taking steps to reduce their medication costs.

Benefits consultants and insurance brokers say insurers like Aetna Inc. and Cigna Corp. are keeping employers from reaping sizable savings, in some cases by threatening them with punitive administrative fees if they abandon the insurers’ PBMs.

The gambit comes as employers are under intense pressure to hold down rising drug costs. National spending on retail drugs totaled $335 billion in 2018, 2.5% higher than in 2017, according to the Centers for Medicare & Medicaid Services’ National Health Expenditure data. The 2018 increase accelerated from the two previous years and didn’t include many specialty drugs, which are often administered in doctors’ offices or in hospitals.

Many companies that self-insure their employee health plans elect to combat escalating drug prices by “carving out” their pharmacy benefits. That means separating drugs from other medical coverage, typically by using a PBM that isn’t part of the health plan administered by insurers.

PBMs manage drug benefits for employers and negotiate drug prices with manufacturers with the stated goal of saving employers money. But in recent years PBMs have come under fire for their practices, such as not giving consumers the full benefit of negotiated rebates.

Barring Carve-Outs

A top executive for the benefits consultancy Trion said Aetna and Cigna last summer stopped allowing Trion’s employer clients with fewer than 1,000 workers to separate their pharmacy business if they wished to continue using the insurers as medical plan administrators.

Marybeth Gray, Trion’s senior vice president of health and welfare consulting, made her remarks at a December conference in Washington.

“That’s been a strategy for employers to negotiate better pricing, better terms, and a more focused approach to pharmaceuticals,” Gray said of the ability to choose another PBM.

In 2018, Aetna Inc. was acquired by CVS Health Corp. and Cigna Corp. bought Express Scripts Holding Co. CVS and Express Scripts are two of the largest PBMs in the country.

Aetna spokesman Ethan Slavin said in an email that the insurer “does not have any sort of policy that would prevent employers from carving out pharmacy benefits.”

“We do have some employers that keep the health and pharmacy benefits integrated, but that is solely their decision and they have the capability to separate pharmacy benefits if they would like,” Slavin said.

“We often find that there are a number of factors that determine what approach an employer will take, including the size of the company and whether they are fully insured (where Aetna is responsible for the risk) or self-insured (where the employer is responsible for the risk),” he said.

Companies that buy fully insured health plans generally don’t have the option of carving out pharmacy benefits, according to health insurance brokers.

Cigna didn’t respond to a request for comment.

Whether the insurer-PBM mergers are good for plan sponsors has yet to be seen, Julie Stone, managing director of management consulting firm Willis Towers Watson, said in an interview.

“With this reintegration, there’s an opportunity for CVS-Aetna, Cigna-ESI, UnitedHealthcare-Optum to demonstrate a new value proposition that has both a patient health improvement and a financial component,” she said.

“Our point of view is you need to show us evidence of the value” in keeping pharmacy benefits integrated with medical plan management, Stone said.

Making it Hard to Switch

Insurers make it difficult for companies to carve out their pharmacy benefits, David Contorno, founder of health insurance broker E Powered Benefits based in Charlotte, N.C., said in an interview.

A common practice is to sharply raise administrative fees charged by the insurer to administer a company plan if the plan doesn’t use the insurer’s PBM, he said.

That “would force or require the employer to capitalize upon that lower admin fee” by keeping the insurer’s PBM, which is highly profitable for insurers, Contorno said.

PBMs make money through administrative fees, rebates, and through spread pricing. By managing drug formularies on which plan benefits are based, they may negotiate rebates for expensive brand name drugs rather than using less expensive drugs, which raises costs for plan sponsors. Often the full rebates aren’t shared with plan sponsors or consumers, Bill Miller, chief executive officer of Chandler, Ariz.-based PBM Drexi Inc., said in an interview.

In addition, PBMs may pay pharmacies less than what they charge plan sponsors, keeping the “spread” between the two, Miller said.

New PBMs, such as five-year-old Drexi, have sprung up in recent years in reaction to the dissatisfaction many employers have with large PBMs. Drexi charges only a set fee per member per month and it uses 65,000 pharmacies, Miller said.

Saving $200,000 a Year

The savings for small employers that are able to use a PBM of their choosing can be substantial.

Wagstaff Inc., a 500-employee manufacturing company in Spokane Valley, Wash., switched from using Premera Blue Cross as its health plan administrator to UnitedHealthcare for its 2019-2020 plan year, Wade Larson, director of human resources, said in an interview.

The switch allowed Wagstaff to contract with an independent pharmacy benefit manager, RxBenefits Inc., which enabled the company to develop strategies for controlling pharmacy costs, especially high-cost specialty pharmaceuticals, he said.

“The specialty drugs are killing us all,” Larson said.

In previous years, Wagstaff experienced double-digit increases, with pharmaceutical costs a major contributor, Larson said. The company expects to reduce its pharmacy spending from $957,000 under Premera, which used Express Scripts, to $754,000 in the 2019-2020 plan year using RxBenefits, he said.

Keeping pharmacy benefits as part of Premera’s plan made it harder for the company to know how much it was spending on pharmaceuticals and how much on medical claims, he said.

“I could not get the best drug deals, I could not negotiate anything different, I couldn’t go shopping, and it was very restrictive,” Larson said of Premera’s drug benefit.

Under its current pharmacy arrangement, the company has the ability to negotiate prices for both generic and specialty drugs and change its benefit design, Larson said.

Premera spokesperson Dani Chung said in an email that the insurer’s approach “is to deliver an integrated pharmacy and medical program. We believe that this allows us to deliver a better customer experience and control costs. “Integrating these benefits allows for the best clinical decision-making possible, producing better outcomes and more savings for our customers.”

Premera does support “a few customers” in carving out pharmacy benefits, Chung said.

To contact the reporter on this story: Sara Hansard in Washington at

To contact the editors responsible for this story: Fawn Johnson at; Brent Bierman at