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Controlling Your Self-Insured Plan's Exposure to High Cost Prescription Drugs

The Steady Price Increase of Prescription Drugs

Now more than ever employers are intensely focused on controlling their drug coverage costs; however, there are legal and practical considerations that employers with self-insured group health plans must keep in mind. As employers continue to deal with thehigh cost of prescription drugs, drug prices continue to steadily rise. Politico recently reported that 104 drug prices increased at an average of 31.5% in June and the first two days of July 2018. Despite mitigating their risk through stop-loss coverage (if they can get it), employers that self-insure their group health plans may still face financial jeopardy even if only a handful of participants suddenly require a high cost prescription drug. Depending on the drugs and the number of participants involved, the cost impact on the business could threaten the going concern of the company.

In 2016, America’s Health Insurance Plans (AHIP) published a report focused on high-priced drugs, in which it estimated that 225 new specialty drugs would be coming to market over the next five years. Some specialty drugs are close to reaching the $1 million threshold for treatment. For example, the cost of Luxturna (a gene therapy drug that can restore sight to children with retinal disease) is set at $850,000. Novartis manufactures a leukemia treatment named Kymriah; it’s a one-time treatment but it costs $475,000. AHIP’s report listed several other examples of expensive medications, including Ravicti ($793,632 per patient per year), and Carbaglu ($585,408 per patient peryear) (both prevent a build-up of nitrogen in the bloodstream that can rapidly lead to coma and death).

After experiencing significant, budget-busting medication costs, employers that have exhausted their options in reducing their future financial risks are taking a serious look at limiting their cost exposure by limiting the plan’s drug coverage. Consideration is typically focused on specialty drugs, either limiting coverage for some or eliminating coverage for specialty drugs altogether. The term “specialty medication”has no standard definition—they are usually expensive, difficult to administer, require special handling, and patients need constant clinical assessment to manage possible side effects.

Essential Health Benefits—ACA’s Link to Self-Insured Plans

Under the Affordable Care Act (ACA), small plans (plans with either 50 or 100 participants or less, depending on each state’s definition) and individual insurance coverage must include prescription drugs as an essential health benefit (EHB) at a minimum level. Self-insured group health plans are clearly not required by the ACA to offer EHB (e.g., prescription drugs). This frequently leads employers to mistakenly believe that they can simply offer any level of prescription drug coverage—including the elimination of all specialty drugs—as determined in their plan sponsor (or insurer) capacity. However, if a self-insured group health plan offers EHB it must have a permissible definition of EHB under the ACA.

A permissible definition of EHB under the ACA is required by self-insured group health plans because the Public Health Service Act (PHS Act) provision that prevents the imposition of annual and lifetime dollar limits on EHB does apply to self-insured group health plans. In addition, the PHS Act requires self-insured group health plans to apply an out-of-pocket maximum which limits overall out-of-pocket costs across all EHB, not just prescription drugs. The maximum out-of-pocket requirement can only be applied if the group health plan has a permissible definition of EHB. The Secretary of the Department of Health and Human Services (HHS) has the authority to determine a permissible definition of EHB, and the HHS definition includes any available benchmark offered by a public exchange established under the ACA.

Practical and Ethical Considerations

The legal parameters imposed on employers that want to control the prescription drug costs of their self-insured group health plan depends entirely on the benchmark their plan has adopted. The benchmark will determine the number of drug categories and classes, and the number of different drugs that must be covered within each category/class. Generally, benchmarks will not specify required coverage of any specific drug and this allows employers the flexibility to determine which drugs are to be included in compliance with the benchmark.

The process of determining which specific drugs to include in order to satisfy the benchmark requires serious practical and ethical consideration. Practical considerations include to what extent cost savings can be achieved if removing a particular drug from coverage results in other additional, future medical procedures/costs. Ethical considerations include the impact of excluding specific drugs that your participant population requires. Clinical experts can help employers with both practical and ethical decisions because they can provide the efficacy statistics and data on all drugs, analyze prescription drug usage experience by plan participants, and advise on overall prescription drug coverage concerns. Clinical experts can also help employers understand the effectiveness of lower cost drug alternatives.

A Need for Legal, Clinical, Administration Expertise

As long as the level of drug coverage meets the plan’s benchmark, all other drugs may be deemed to be non-EHB. Any drug that is not considered to be EHB under the plan may have an applicable lifetime and/or annual dollar limitation for coverage purposes. In addition, any participant costs associated with a non-EHB drug would also be excluded from the participant’s annual maximum out-of-pocket calculation. The plan’s pharmacy benefit manager (PBM) should be an integral part of all strategic drug coverage decisions because the PBM can provide both the required clinical expertise and the administration of what will ultimately be a customized preferred drug list (PDL).

Given the significant liability associated with failing to comply with the PHS Act and the technical requirements of the ACA, legal counsel will certainly be a necessary partner in implementing a strategy to control prescription drug costs for self-insured group health plans. Accurate legal documentation and disclosure of which drugs are EHB and which drugs are non-EHB will be important for successful implementation.


Self-insured group health plans do not have complete discretion to include or exclude high-cost prescription drugs. However, the laws do provide some flexibility to self-insured plans to help employers lower their prescription drug coverage costs. In order for employers to take full advantage of the regulatory flexibility for self-insured group health plans to lower prescription drug costs, careful planning and appropriate legal, clinical, and plan administration expertise must be part of the process.

If you have any questions about this article, please contact a Boutwell Fay attorney.

© Boutwell Fay LLP 2018, All Rights Reserved.This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us.The information contained in this article is effective as of August 31, 2018.

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