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Are Carved-out Benefit Plans the Lowest Cost Option?

September 14, 2021 by Brooke Knollman, MBA, CEBS

When it comes time to choose medical and pharmacy benefit vendors, employers have several options, making this quite a complex task. One of the first decisions that needs to be made is whether to carve-in or to carve-out the pharmacy benefit. For a better understanding of carved-in versus carved-out health plans, we’ve detailed some major differences between the two.

  1. Transparency. Transparency is a common term in the benefits world and carving-out typically provides your plan greater levels of transparency. For example, it is estimated that of your total specialty pharmacy spend, 60% occurs under the pharmacy benefit and 40% under the medical benefit.  For many plan sponsors, this comes as a shock because they have not received any type of reporting or insight into this spend under the medical benefit. When pharmacy is combined with medical, it can get lost, which means carriers can do things like charge more for certain drugs or keep rebates.  Employers Health has access to 100% of the claims processed under its carve-out pharmacy contracts and uses those data to find plan savings opportunities.
  2. Administrative Ease. Most carve-in deals do provide some level of administrative ease and simplification for participants. But at what cost? Carved-in deals often also promote integrated reporting. What this typically means is that pharmacy and medical reports are combined in the same binder. It may surprise you to learn that pharmacy and medical benefits operate on separate platforms in a carved-in arrangement, just like they do for carved-out. With carved-out arrangements, employers select the PBM of their choice and have greater access and control of the plan and overall management.
  3. Savings. Clients in a carve-in arrangement are underwritten twice, once by the PBM that provides services to the health plan as part of the health plan’s total book-of-business and again by the health plan itself. When a client’s business contributes to the bottom line of two organizations, it typically means higher costs. For example, one publically-traded health plan reports that its internal PBM achieved a 6%-7% margin over the past year. This is at the high end of most PBM’s profitability range. That same internal PBM outsources most of its services to one of the big three PBMs, which is also earning its margin on the business. Where is all this margin coming from? The carve-in clients’ plans and their participants. Another recent trick is for the medical carrier to keep the rebates from medical specialty drugs and then use those dollars to subsidize the specialty rebates on the pharmacy side. Instead, clients would be better served to demand pass-through of rebates on the medical side and then select their PBMs based on which one provides the best rates and service without the cross-subsidization games.
  4. Contracting. Under a carved-in arrangement, most employers do not have access to the definitions and specific contract terms, which can alter the overall pricing and contract performance. For example, the definition of a brand drug vs. a generic drug and how it might impact rebates and discounts may not be apparent in a carved-in plan. How do the claim guarantees in the contract align with the definitions? Claims are bucketed differently by changing a few words and without proper contract language, the plan may be subject to less-than-expected results. It is also important to recognize how price benchmarks are determined and knowing where drugs fall within the selected formulary.
  5. Plan management. Carved-out plans offer multiple programs and utilization management options. When carving out pharmacy benefits, employers can work with dedicated account and clinical teams to review and strategize how the plan can provide market-leading benefits at a sustainable cost. Both the Employers Health team and the pharmacy benefit management team will help determine the most advantageous opportunities for the plan. Carved-in arrangements provide limited flexibility on plan design and often limit the autonomy of the plan sponsor.
  6. Auditing. Carved-in arrangements do not allow as many direct auditing rights on the pharmacy plan. Carved-out plans audit to help the plan ensure the validation of specific guarantees by channel and utilization in the contract. Employers Health uses the audit verification via an independent third party and provides any findings at the client level.

For further discussion, please reach out to [email protected] or your client solutions executive.

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Brooke Knollman, MBA, CEBS

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