4 Practical Steps for Employers to Lower Prescription Costs

Prescription drug prices have been steadily rising for years, creating financial challenges for individuals and families trying to afford even basic healthcare. Increasing costs tend to hit employers first, who face inflated healthcare expenses up front—and risking higher employee stress and lower productivity due to untreated health issues. 

Several practical strategies and resources are available that can help both employers and employees manage and reduce prescription costs effectively. Every business will require a tailored combination of methods, from rethinking insurance to adopting low-cost alternatives, and should consider the unique circumstances of the organization alongside the diverse needs of the workforce.

Understanding the Factors Driving Prescription Drug Costs

Prescription drug costs can vary widely depending on the type of medication, insurance coverage, and geographical location of your business. However, it's evident that prices have been increasing significantly in recent years, with the cost of some drugs—like Nerlynx, used to treat early stage breast cancer—jumping nearly 21% since 2020. Several factors contribute to this trend.

Drug Development Costs

One of the most significant factors is the overall cost of drug development. The process of bringing a new drug to market involves extensive research, testing, and regulatory approval, all of which are expensive.. On average, it takes 10 to 15 years for a new drug to complete the journey from initial discovery to market availability, with an average cost of over $2.6 billion. This massive investment in time and money is often recouped through high drug prices, especially in the early years after a drug is released.

Patent Protections

When a medication is under patent, the manufacturer has exclusive rights to sell it,. This exclusivity period typically lasts for 20 years from the date the patent is filed, though the effective patent life after the drug hits the market is usually shorter, often around 7 to 12 years. During this time, the patent holder is the only entity allowed to manufacture, market, and profit from the drug

The rationale behind patent protection is to incentivize innovation by allowing pharmaceutical companies to recoup the substantial costs associated with the research, development, and clinical testing of new drugs. Given that developing a new drug can cost billions of dollars and take over a decade, the patent period is crucial for companies to make a return on their investment. However, this also means that until the patent expires, generic versions are not available.

Moreover, during the patent period, the original manufacturer may engage in strategies to extend their market exclusivity. These strategies can include making slight modifications to the drug's formula, delivery method, or dosing regimen—known as "evergreening"—and subsequently filing for new patents on these changes. While these practices can further delay the introduction of cheaper generics, they also contribute to the ongoing debate about balancing the need for pharmaceutical innovation with the need for affordable healthcare.

Once the patent expires, other companies can produce generic versions of the drug. Once FDA approved, generic or biosimilar versions of the brand-name medication are typically sold at a fraction of the branded price. The introduction of generics and biosimilars often leads to a significant drop in the drug's price due to increased competition and numerous manufacturers entering the market space for the drug. This shift can make the medication more accessible to a broader population but will also help to reduce overall healthcare spending.

Supply Chain Markups‍‍‍‍‍

From the manufacturer to the pharmacy, each step in the supply chain adds a markup to the price of a drug. These markups can significantly increase the cost by the time the medication reaches the consumer. Multiple intermediaries play a role in ensuring the drug is safely and efficiently delivered to patients, all of which contribute to the final cost.

• Manufacturers produce the drug, then sell it to wholesalers or directly to pharmacies. At this stage, the manufacturer sets a price known as the "Wholesale Acquisition Cost" (WAC), which is the price sold to wholesalers before any discounts or rebates are applied.
• Wholesalers purchase large quantities of drugs from manufacturers and distribute them to pharmacies, hospitals, and other healthcare providers. Wholesalers add a markup to cover their operational costs and generate profit, which can vary depending on factors such as the volume of drugs purchased and the terms negotiated with pharmacies and other purchasers. 
• Pharmacy Benefits Managers act as intermediaries between insurers, pharmacies, and manufacturers. They negotiate prices, manage drug formularies (the list of covered drugs), and determine the reimbursement rates for pharmacies. PBMs also secure rebates from manufacturers for placing certain drugs on their formularies, which can influence the final price paid by insurers and consumers. However, the savings from these rebates are not always passed on to consumers or the insurer—and because traditional PBMs also tend to charge a variety of hidden fees for their services, patients often end up with higher copays and premiums, as well as other out-of-pocket costs.
• Pharmacies purchase drugs from wholesalers or directly from manufacturers and sell them to consumers. Pharmacies can add their own markup to the price of the drug, which covers their operational expenses, such as staffing, storage, and dispensing, as well as their profit margin and typically labeled as a dispensing fee and may come as a flat fee or % of drug costThe markup can vary based on the type of pharmacy (e.g., independent vs. chain pharmacy), and the specific market dynamics in a given location.
• Health insurers partner with PBMs to determine the coverage and copayment pricing of medications for their policyholders. Insurers may require patients to pay a copayment, coinsurance, or deductible, depending on their insurance plan.

Practical Steps for Reducing Prescription Costs

Effective management of prescription costs often starts with a thorough understanding of how insurance coverage works. Traditional insurance plans may offer varying levels of prescription drug coverage, and employers can play a key role in optimizing these plans. 

Employers have several options to help their employees manage and reduce prescription drug costs. Remember that clear communication is essential for helping employees make informed decisions about their prescription drug benefits. Employers should provide straightforward guidance on how to maximize benefits and manage costs effectively, including tips on choosing cost-effective medications and understanding coverage.

Below are 4 practical steps businesses can take throughout the coverage cycle to reduce spend without limiting access to treatment.‍

1. Switch to Generic, Biosimilar or Low-Cost Medications

Generic drugs and biosimilars are “bioequivalent” to their brand-name counterparts. A bioequivalent  has the same effect on the body as the brand name version: they are absorbed into the bloodstream at the same rate and to the same extent, so they work in the same way. This means that if you take a generic drug that is bioequivalent to a brand-name drug, it should have the same benefits (and risks) as the original. 

Even with the same efficacy, these drugs typically cost significantly less. Employers can educate their employees on the benefits of generics and biosimilars and ensure their health plans encourage the use of these cost-effective alternatives.

It’s also important for employers to ensure that their health plans make generic options easily accessible to employees. This can be done by offering lower copays for generics compared to brand-name drugs, thereby incentivizing employees to choose the more affordable option. Additionally, employers can work with their PBMs to ensure that generics are included in the plan’s formulary, which is the list of drugs covered by the insurance plan.

2. Evaluate & Optimize Insurance Options

Employees, especially those approaching retirement, should regularly review their insurance plans to ensure they provide adequate prescription drug coverage. Employers can assist by offering resources or guidance during open enrollment periods, helping employees choose plans that best meet their needs while offering good coverage for medications. Employers should also regularly review the prescription drug coverage provided by their health insurance plans. This evaluation should include an analysis of which medications are covered, the cost-sharing structure (such as copays and coinsurance), and any restrictions that may apply, such as prior authorization requirements.

A critical part of optimizing insurance options is conducting an annual review of the prescription drug coverage within the organization’s health plans. This review should not only assess the current coverage but also consider any changes in the drug market, such as new generics becoming available or shifts in the cost of certain medications. Employers should also consider gathering feedback from employees about their experiences with prescription drug costs, which can provide valuable insights into how the current plan is meeting their needs. Based on this feedback, employers may decide to make adjustments, such as adding new coverage tiers or renegotiating terms with their PBM to ensure better pricing and coverage.

3. Tap into Rx Discount Programs

Several programs and discount cards are available that can reduce the out-of-pocket costs of prescription drugs. Employers can either partner with these programs or simply raise awareness among employees, making these resources more accessible. Numerous discount programs offer substantial savings on prescription drugs. Employers can promote these programs to their employees, making it easier for them to access discounts and manage their medication expenses.

In addition to national discount programs, many local pharmacies and healthcare providers offer their own discount plans, like the Walmart $4 Prescription Program or Costco’s Member Prescription Program (CMPP). Employers can take the initiative to research these options and compile a list of recommended programs for their employees. This list can be included in employee handbooks or distributed during open enrollment periods. Furthermore, employers can consider partnering with PBMs who directly work with discount programs to offer employees exclusive savings opportunities or group discounts, further enhancing the value of these programs.

4. Patient Assistance Programs & Community Resources

Many pharmaceutical companies offer assistance programs that provide medications at reduced costs or even for free to eligible individuals. Employers can help employees navigate these programs by providing information on how to apply and what documentation may be required. 

Additionally, local organizations, clinics, and pharmacies may also offer discounts or financial assistance for prescription drugs. Employers can compile a list of these resources for their employees, helping them access support within their communities. Moreover, employers can organize workshops or informational sessions where employees can learn more about patient assistance programs and how to apply for them. By proactively educating their workforce, employers can empower employees to take control of their healthcare costs and access the medications they need without financial strain.

Partnering with a PBM for More Practical Pricing

Managing prescription drug costs is a multifaceted challenge, but with the right strategies, employers can make a significant difference in the financial well-being of their employees. From optimizing insurance coverage to promoting cost-saving programs and educating their workforce about available options, fluctuating drug prices can be tackled from a variety of angles. 

Partnering with a modern PBM can provide employers with additional leverage when negotiating drug prices and coverage options. Theoretically, PBMs should have the expertise and market influence to secure better pricing on behalf of their clients, which should then translate into lower costs for both employers and employees. They should also offer tools and resources that can help employees better manage their prescription drug benefits, such as online portals where they can compare prices, track their medication history, and find participating pharmacies. 

But legacy PBMs have recently faced high scrutiny as a result of doing the opposite, instead leveraging their status as liaison between pharmacy and employer to generate profits at the expense of both. Employers should consider evaluating their current PBM relationships to ensure they are maximizing the value these partnerships can offer, and retaining all of the available savings.

Connect with SmithRx today to understand how your business can lower prescription drug costs while maintaining and optimizing critical healthcare coverage for employees.