The Lynx Group

Drug Costs, and Employers as Purchasers of Care

April 2017, Vol 8, No 2
F. Randy Vogenberg, PhD, RPh, FASHP
Partner, National Institute of Collaborative Healthcare, and
Access Market Intelligence
Greenville, SC

Unlike other countries around the world, the United States does not regulate or negotiate drug prices. In general, the European Union members (eg, United Kingdom, France, Germany), Australia, and other countries incorporate pricing at the time of new drug approval, and allow the use of a new drug when it provides a significant clinical benefit over existing drugs, relative to the drug price.

Currently, commercial plan members in the United States pay more for drugs than people in other countries, and face a drug pipeline that is replete with specialty drugs, in which immunology and oncology drugs lead the way. Thus, employers are now actively engaged in driving efficiencies in patient care for better, quality-driven outcomes and lower costs. Employers typically represent a purchasing majority of commercial insurance lives, either as a self-funded plan sponsor or as a purchaser of a fully funded benefits plan.

According to the 2016 Employer Survey on Specialty Drugs conducted by the National Employer Initiative on Biologics and Specialty Drugs, although the majority (88%) of employers continue to rely on traditional health plan designs (eg, copays and coinsurance), most employers are ready to focus on new and novel approaches to the management of specialty drug costs, as indicated in their top 5 responses1:

  • 80%—Cost trend management is a top priority
  • 71%—New and innovative solutions are needed
  • 68%—Prior authorization is crucial to managing cost trend
  • 66%—Quantity limit is crucial to managing cost trend
  • 58%—Specialty drugs can contribute to lower cost of care for some conditions.

In addition, 57% of employers were concerned about the number of specialty drugs in the pipeline and what that may mean for the sustainability of their health benefit program.1 This feedback, in addition to the market trend activity reported in various news outlets, illustrates the broad-based efforts by employers as purchasers of healthcare to be more engaged in setting the framework for benefit coverage decision-making by their health plan vendors.

Projected Changes for 2017-2018

New cancer drugs and expanded indications for previously approved drugs lead the market growth among specialty drug categories, including immunologic agents for conditions such as rheumatoid arthritis and multiple sclerosis. The ongoing trend of increasing annual plan costs or claims costs has the attention of purchasers, who are seeking change throughout the drug distribution system.

Although oncologists have predominantly become employees of hospitals or health systems, independent oncology dispensing is growing overall, counter to many other trends in managed care.2

As drug pricing for Medicare continues to be debated in Congress, drug manufacturers remain under scrutiny; however, several drug manufacturers (ie, AbbVie, Allergan, Johnson & Johnson, Merck, NovoNordisk) have pledged to contain drug price increases to under 10%.3 Nonetheless, Medicare Part B drug pricing and the Centers for Medicare & Medicaid Services’ ability to negotiate drug prices have been pegged for change by Republicans and by some Democrats in Washington, DC.

Hospital or health system and health centers’ use of the 340B drug pricing discount program is again under scrutiny, because it creates a margin of profit versus the cost to a retail pharmacy that is purchasing the same drug from a wholesaler. Such reimbursement claim discrepancies between the billed price and the actual price have been a cost-shifting issue for self-funded employers.

Despite the executive orders that launched the process of repealing the ACA, employers continue to seek the repeal of the Cadillac tax through the Trump Administration, while shifting to high-deductible health plans, with or without a health savings account, in response to the uncontrolled drug spending. Remaining competitive in benefit offerings is an important tool for employer recruitment and for employee retention and satisfaction.

Finally, addressing middleman, third-­party vendor costs has emerged as a new priority for employers as part of seeking efficiency in care delivery, while lowering overall health plan costs. Improving health plan administrative service or pharmacy benefit administration would be short-term economic keys to performance of employer-based healthcare.

Continuing Challenges

Employers assess all models of care and medical conditions when making benefit coverage changes as they look to 2018. In the meantime, a slowed FDA approval process of new drugs in 2016 offered some respite from the increasing drug costs. However, 2017-2018 will likely result in the increased growth of drug costs, because of the 21st Century Cures Act of 2016 and potential regulatory changes by the Trump Administration.

Although 2017 remains at the surface similar to what was seen in the 2016 health benefit plans, we can expect deeper and broader health plan design changes for 2018 that will continue to affect oncology care in the commercial marketplace. Such major shifts, in combination with the fast-paced change seen in the 2017 marketplace, will present additional challenges to oncology practices, regardless of their size or ownership.


  1. National Employer Initiative on Biologic & Specialty Drugs. 2016 Employer Survey on Specialty Drugs. Accessed March 15, 2017.
  2. Access Market Intelligence. Oncology practices: in-office dispensing. January 2017. Accessed March 16, 2017.
  3. Beasley D; for Reuters. Pharma company executives debate drug pricing increases. January 12, 2017. Accessed January 12, 2017.

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