Why is creating a state purchasing pool for prescription drugs a good strategy for states?
State purchasing pools for prescription drugs leverage public buying power to reduce drug costs. Today, every state purchases prescription drugs for its employees through its state employee health benefit plan. States are among the largest employers in the state and therefore the state employee health plan – or any other public plan a state administers – can leverage the size of its prescription drug purchasing pool to negotiate better prices for entities participating in a state purchasing pool for prescription drugs.
NASHP’s proposal for a state purchasing pool for prescription drugs provides additional details about this approach. NASHP has also developed model legislation to establish a state purchasing pool for prescription drugs.
How does creating a state purchasing pool for prescription drugs save money?
By expanding the number of people buying prescriptions through a plan, the pool’s purchasing and bargaining power grows to benefit both current state employee health plan enrollees and those who join the prescription purchasing pool.
What about adverse selection?
Concerns about adverse selection, which would be relevant to medical benefits, are not a factor for this model because prescription drug plans do not “pool risk”. Unlike health insurance plans – in which the health of enrollees influences premium costs – prescription drug prices are based on the volume of drugs purchased, not individuals’ health status. The discounts for prescription drug plans are based on the number of covered lives so the more covered lives in a purchasing pool, the greater the savings due to the increased purchasing power of the plan.
Who could join a state purchasing pool for prescription drugs?
Health insurance carriers offering plans to individuals and small and large businesses could all participate in a state purchasing pool for prescription drugs. Self-funded employer plans could also participate.
Non-state public employers such as municipalities, counties, state universities, and public school teachers could also participate.
Could the uninsured participate?
Uninsured individuals could be given access to a drug discount card to allow them to access the discounted drug prices available to state employees and other members of the purchasing pool. While the state would enable access to the discounted prices it negotiates, it would not pay for the drugs purchased by the uninsured who use the discount card. Uninsured individuals using the discount card would pay for their own prescription drug costs, but they would benefit from the deep discounts the state was able to negotiate via the purchasing pool.
Would a state employee prescription drug plan lose its ERISA-exemption if it allowed non-state employers to participate in the purchasing pool?
A state employee prescription drug plan can maintain its government exemption under the Employee Retirement Income Security Act (ERISA) by creating an administratively separate – but coordinated – state drug purchasing pool in which both the state employee prescription drug plan and self-funded employers can participate. NASHP’s proposal for a purchasing pool provides details on strategies for structuring and implementing a state drug purchasing pool to avoid potential legal and regulatory challenges.
How could potential purchasing pool participants determine if they would save money?
Potential purchasing pool participants could share information about specific drugs and quantities they currently purchase for their members with the administrator of the purchasing pool, such as a sample claims file for a given period of time. All information would be treated as confidential. Proprietary information about pricing for specific drugs would not be required.
The administrator of the state purchasing pool could run the prospective participant’s sample claims experience through the pool’s cost model and the state could then offer aggregate information detailing what the potential pool participant would spend for those drugs if they joined the pool. The potential pool participants could then compare that number to their current costs in order to determine whether they would save by joining the pool.
Would it be necessary to align prescription drug benefits and formularies to participate in the drug purchasing pool?
Depending on the pharmacy benefit manager (PBM) and the plans in question, it may not be necessary to align benefits (e.g., copays, deductibles, and coinsurance) and formularies, in order to achieve savings. However, an even deeper level of savings could be realized if participants do elect to align benefits and formularies.
Are there examples of this approach working successfully?
The City of Hartford joined a prescription drug purchasing pool with the Connecticut state employee drug benefit plan in 2012 after legislative authority opened up the state employee drug plan to municipalities and other public employers. Hartford maintained its own drug benefit design. The contract between Hartford and the PBM was separate from the state’s, but included the same base contract terms found in the PBM and state employees’ contract. This alignment allowed Hartford to access the larger drug discounts available to state employees and to realize significant savings – more than $1 million annually – or about 10 percent of its prescription drug spend.
As more entities join a drug purchasing pool, the increase in participants creates a win-win scenario. As the volume of drugs purchased grows, the purchasing pool’s negotiating power increases, resulting in lower drug prices for all participants.
How does the purchasing pool model fit in with NASHP’s model PBM contract terms?
The efficacy of NASHP’s model legislation to allow buy-in into state purchasing pools for prescription drugs depends on the ability of a state’s employee drug plan to secure favorable contact terms with its PBM in order to secure the best pricing deals for participants. The first step in implementing this model is to ensure that the state’s contract with the PBM managing its drug benefit reflects best practices in PBM contracting. NASHP has released model PBM contract terms for that purpose. NASHP developed the model PBM contract terms based on input from states that have secured favorable terms in their PBM contracts to maximize cost-savings on prescription drugs. Key provisions include:
- Administrative-fee only compensation;
- 100 percent pass-through of rebates and revenues;
- Cost-trend and pricing guarantees;
- Transparency; and
- Member cost-sharing protections.
Once a state has established a favorable contract with a PBM that includes these terms, the next step is to allow other purchasers (insurance carriers, self-funded employers, and other public employers) to benefit by establishing a state prescription drug purchasing pool.
NASHP helps state leaders advance legislation to contain prescription drug prices and tracks states’ efforts at its Rx State Legislative Tracker. State officials who are interested in developing a state purchasing pool for prescription drugs can contact Jennifer Reck (firstname.lastname@example.org) for additional information.