Reference-based pricing could be the solution to rising healthcare costs

It’s no secret that drug costs are rising every year. Spending on retail prescription drugs rose by almost 27% across the drug supply chain between 2012 and 2016, according to a recent study from Pew Charitable Trusts.

While no one is immune from rising drug costs, large employers often bear the brunt of this burden. Employer prescription drug spending alone grew 4.7% from 2016 to 2017, according to the Health Care Cost Institute. While specialty drugs play a role in this trend, non-specialty drugs also are contributing to rising overall costs. In fact, approximately half of overall costs are driven by the non-specialty drugs people take on a regular basis to treat chronic conditions.

Recently, the federal government resurrected the drug cost debate by proposing policies like international benchmarking, listing drug prices in advertisements and even holding Senate hearings with big pharma and pharmacy benefit manager executives.

But that may not be the solution. Many experts are skeptical that public policy can fix this broken system, especially given that pharma’s top trade group, PhRMA, spent $27.5 million on lobbying in 2018 alone. Not only that, but big pharma, PBMs and insurers often blame one another instead of finding innovative solutions.

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Instead, employers and advisers need to step in and find new ways — including reference-based pricing — to reduce excess pharma spend in order to remain profitable while attracting and retaining top talent.

Reference-based pricing programs help employers proactively avoid excess costs on an ongoing basis by identifying all of the prices for a service or product and highlighting cost-savings opportunities. For example, some employers are experimenting with reference pricing to identify lower-cost care settings, like MRI or imaging centers, and more affordable/in-network sites of care. In a recent study published in Health Affairs, Blue Cross Blue Shield saved $8 per member by rewarding those who were seen by lower-cost providers, amounting to $2.3 million saved in just one year.

Pharmaceutical-based reference pricing programs in particular are gaining traction because they make pharma prices transparent. Traditionally, pharma costs have been obscured by the PBM contract and there has been no way for employers to know the actual cost of medications. Using reference pricing programs, employers can compare prices of all brand name and generic drug options within a therapeutic category, identify the lowest cost option in each category and adjust co-pays to encourage members to select the lowest cost alternatives.

Reference-pricing programs are proven to reduce employer drug costs by an average of 20% per year on both an immediate and ongoing basis. Reference pricing solutions leverage the organization’s historical claims data to see which prescriptions have been filled and then predict how much the organization will save by implementing the program. In contrast to cost-cutting initiatives that decrease insurance coverage, reference pricing helps employees stay on track with clinical and financial goals by identifying therapeutically equivalent and affordable medications.

The most important thing that reference-based pricing does is increase transparency.

It’s an important way for organizations to see where the big costs are coming from, why those costs are increasing and find ways to better manage spend. As legislators, big pharma, PBMs and payors continue to pass the buck in Washington, employers and advisers need to grab the reins to be more proactive about managing their healthcare costs.

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