HR innovation

Winter 2012/2013

02Who will pay and who will play? It depends on myriad factors

10The evolving landscape of pharmacy benefit administration: Five factors fuel value

18Ever-increasing health benefit costs: Have you misdiagnosed the causes?

24Play, pay, or exchange: Decisions loom in the new healthcare benefits environment

Contents

Foreword 01

Scott Olsen, US Leader, Human Resource Services

Who will pay and who will play? It depends on myriad factors 02

Barbara Gniewek and John Stenson

The evolving landscape of pharmacy benefit administration: 10 Five factors fuel value

Allan Zimmerman

Ever-increasing health benefit costs: Have you misdiagnosed 18 the causes?

Ron Barlow and Don Weber

Play, pay, or exchange: Decisions loom in the new healthcare 24 benefits environment

Mike Thompson

The time for sitting back and waiting

for someone to lead you in the right

direction or wondering where the

competition is going is over.

Foreword

Perhaps the most critical of these choices will be defining what their role relative to employee healthcare should be. At the highest level, employers can choose to: play (offer affordable minimum essential health benefits), pay (remit penalties to the IRS or provide a lump sum for employees to buy coverage through insurance exchanges set up under the ACA), or join a multi-employer exchange. Whichever strategy they pursue, certain nuances and considerations will be critical in helping employers execute and optimize their path forward.

In this issue of HR Innovation, we’ll bring to light where the opportunities and obstacles might lie post-health reform and where different paths might lead. We will also explore initiatives for ‘bending the cost curve,’ from getting the most value from your pharmacy benefits manager to reducing the cost generated by the 5% of employees who spend the most on healthcare.

You can read more in these articles:

• The impact of health reform on employers: It depends: Employers must assess health reform’s impact on their benefit costs and talent strat-egies. The ACA creates a uniform

set of standards that apply to all employers, but the impact on indi-vidual companies can differ vastly.

• Five things to know about the evolving landscape of pharmacy benefit administration: Plan spon-sors responsible for the administra-tion of pharmacy benefits for their members should be aware of the changing landscape in pharmacy benefit management. An awareness of five factors, an understanding of their potential impact, and the development of a strategy that derives the most benefit from them will provide an opportunity to derive greater value from the dollars spent on healthcare.

• Have you misdiagnosed the causes of increasing health benefit costs? It might be time to reassess the under-lying causes of healthcare cost creep within the context of the broader benefits package and develop new strategies for mitigation. A more holistic approach aligns wellness, disease management, workers’ compensation, disability, and other health benefit programs.

• Play, pay, or exchange: The new healthcare benefits environment. While the ACA does not require

1 HR Innovation

Never before have employee health benefits packages presented greater

challenges and opportunities. As the dust clears on the implications of

the Affordable Care Act (ACA), employers face a slew of choices that will

determine their immediate next steps as well as their long-term role

in providing affordable, accessible, quality care for their employees.

Scott Olsen US Leader, Human Resource Services

that employers continue to provide coverage, it can penalize those with 50 or more employees significantly if they don’t. Employers have several options under health reform, each with its own pros and cons.

Pre-election uncertainty has yielded way to the imperative to adjust to healthcare reform realities and implica-tions. ACA is not the end but rather the first step in defining a new post-reform reality for healthcare. Now is the time to rethink, reposition, and execute a fresh approach to healthcare benefits in the context of your company’s total rewards philosophy to achieve a more sustainable and effective result for both your organization and your employees.

We hope you enjoy this issue.

Who will pay and who will play? It depends on myriad factors

2

By Barbara Gniewek and John Stenson

What to do in response to the requirements of the Affordable

Care Act (ACA)? Many employers, hoping to see some post-election

relief, took a wait-and-see approach, rather than developing a specific

strategy. Now, with President Obama firmly in place for four more years,

and a divided Congress, ACA looks to be here to stay. While we can

expect some additional guidance and tweaks, we also can expect that

ACA’s basic foundation will remain intact.

3 HR Innovation

Although the circumstances are not universally welcomed or embraced, it’s tough to argue that the healthcare delivery system in its current form can be sustainable. It costs too much and yet fails to provide consistent quality and access to all Americans. Something has to change—and we have courtside seats to watch the evolution or participate in it.

ACA’s goals of improved access, reduced costs, and higher-quality care, depend on several crucial factors:

1. Large employers must continue to provide employee health benefits (or pay penalties).

2. Individuals not covered by employers must obtain health insurance through the state Medicaid expansions, exchanges or an individual market (or pay a tax).

3. States must implement exchanges (or default to a federal exchange).

4. The healthcare system must transform the way care is delivered to make it more effective and efficient.

Employers will play a significant role in the success of ACA, and, if they choose not to provide benefits, potentially a bigger role in its failure.

ACA variables in playAlthough healthcare reform more directly affects the healthcare industry itself, the issue remains top-of-mind for the ‘C-Suite’ across the industry

spectrum. Employers must assess reform’s implications on their specific benefit costs and talent strategies.

In addition to basic patient protections (the insurance mandates), the ACA dictates not only what benefits you will provide, but how much you can require employees to pay, when you have to cover employees, and whom you have to cover. In effect, the ACA creates a uniform set of standards that apply to all employers, but the impact on indi-vidual companies can vary widely.

The cost of compliance will fluctuate significantly depending on your employment practices. Employers should consider:

• Benefit costs: Employers must consider the degree to which benefit design, contributions, and eligibility status will change based on ACA requirements to provide affordable, minimum value coverage. Keep in mind that current practices may have tax implications if they are deemed to be discriminatory.

• Administrative requirements: As with most healthcare legisla-tion, employers will face new communication and documentation requirements. Consistent with ACA’s far-reaching nature, reporting and eligibility mandates will require new administrative processes.

• Workforce composition: Employers may need to change benefit eligibility to include those ineligible now. They may need to revisit their use of part-time and contract employees, as well as the implications associated with

4

changing the mix of part-time and full-time employees (e.g., recruiting, onboarding, training, productivity changes, and turnover costs).

• New tax and penalty exposure: Employers must decide which taxes and penalties are avoidable and how to size those that are not. HR’s approach to limiting risk will be a critical part of employers’ compliance decisions.

Ultimately, employers will need to decide whether they will play (continue to offer benefits) or pay (accept penalties for not offering affordable, minimum value benefits to employees who work 30 hours or more a week). But the deci-sion isn’t as simple as comparing the cost

Ultimately, employers will need to decide

whether they will play (continue to offer

some level of benefits) or pay (accept

penalties for not offering affordable,

minimum value benefits to employees

who work 30 hours or more a week).

of providing benefits with the cost of incurring a $2,000 penalty for each full-time employee.

Many other complexities should also figure into the equation, including workforce, administrative, and penalty costs (including the consideration of the tax-favored status of benefits); tax-advantaged status of employer-provided benefits; and the financial impact on employees. Typically, the biggest differentiators in costs are triggered by:

• Workforce composition (use of part-time, contract or union employees, turnover)

• Wages

• Benefit levels and design

• Age and health status of workforce

The effects of these variables differ from industry to industry, as does the industry response. While retail and hospitality have been vocal about the impact to their business models and have undertaken lobbying efforts, others have been less visible.

Here’s a look at what might be anticipated across sectors.

5 HR Innovation

Benefit impact Workforce impact Overall impact/comments

AutomotiveManufacturers Suppliers

n n n MediumCosts could trigger a Cadillac tax; unions might affect eligibility; suppliers’ benefit levels could be a problem.

n Low n n n MediumImpact differs somewhat between big manufacturers and suppliers.

Energy n n n MediumCosts could trigger a Cadillac tax, and unions may control benefit levels.

n Low n LowBenefits in this industry tend to be better than average, and eligibility and use of part-time employees are not significant.

Entertainment, media and communications

n n n n n n HighBenefits may not be offered uniformly.

n n n n n n HighUse of contract employees and seasonal nature of some employees might be a challenge.

n n n n n n HighOne of the biggest challenges is that freelance and some professional employees are not provided benefits even though they may work full time for one company.

Financial servicesBanking/capital marketsInsurance companiesPrivate EquityReal Estate

n n Medium/lowBenefit levels are not typically an issue, but eligibility can be.

n n n MediumTreatment of agents and brokers may create problems.

n n n MediumNot covering ‘self-employed’ workers may be an issue for some; eligibility will need to be reviewed.

HealthcareLife science/med deviceHealth plansProviders

n n Medium/lowBenefit levels are not typically an issue, but eligibility can be.

n n n n n n HighPrevalence of union, part-time and per diem workers typically creates challenges.

n n n n n n HighWorkforce issues can be huge, especially with providers who use per diem workers. All three sectors will experience significant business impacts.

Industrial products/manufacturing

n LowUnion benefits may result in a Cadillac tax.

n LowEmployment stints may create eligibility problems.

n LowHow employees are covered when not working in construction could be an issue. Because of the prevalence of unions, industry typically provides good benefits.

Law firms and professional services firms

n n n MediumDue to high cost of benefits, Cadillac tax may occur. Executive reimbursement plans will cause non-discrimination issues.

n Low n n Low to mediumWhile impact on benefits and work-force are low to medium, law firms’ costs tend to be higher even with ‘middle of the road’ benefit designs, so Cadillac taxes are a concern.

Public sector and higher education StatesLocal governmentsColleges and universities

n n n MediumUnion benefits may result in a Cadillac tax. Benefits may not be offered uniformly.

n n n MediumCoverage for visiting, adjunct and part-time staff may create problems.

n n n MediumCadillac tax likelihood is strong across the industry. Many colleges and universities will have workforce issues.

Power and utilities n n n MediumBenefit levels and costs could result in Cadillac tax.

n Low n LowUnion prevalence typically protects against eligibility issues, but Cadillac tax may be a concern.

Retail, consumer goods and hospitalityRetailRestaurantsHotels and resortsCasinos

n n n n n n HighBenefits may not be offered uniformly.

n n n n n n HighPart-time and seasonal nature of significant part of workforce and lower wages could create problems.

n n n n n n HighLike healthcare, these industries have the biggest impact due to the workforce characteristics, uneven provision of benefits, and cost of benefits for low-wage earners.

Technology n LowBenefit levels and costs could result in Cadillac tax.

n n Medium/lowUse of contract employees may create issues.

n LowOnly real issue, other than costs due to taxes and industry fees, would be the use of contract employees.

Potential ACA impact by industry

6

This list is meant to provide insight into the impact a company within an industry classification might expect. However, actual experiences often vary from expectations. Some specific experiences from employers across industries follow.

Healthcare: ACA impact varies among the segments of this fast-growing industry: life sciences, health plans, and providers. No industry segment is more affected than hospitals and other medical providers.

• For life science and medical device companies, the ACA means complying with industry taxes and fees in addition to benefit requirements.

• For health plans, the ACA means limiting profitability (medical loss ratio requirement), removing benefit restrictions, changing products (Medicaid, wellness, etc.), and meeting communication requirements.

• For hospitals and other medical providers, the ACA means changing the business model. The act will change revenue streams and the way care will have to be delivered in what is often called ‘the new normal.’ This transformation will require providers to hire new types of employees (technology), redesign the care delivery model, and use more nonphysician practitioners. HR will have increased recruiting, onboarding, and training responsi-bilities. HR also will need to address significant change management issues in addition to those related to benefits and administration.

In consulting with two provider organizations to assess the ACA issues they faced (an inner city academic medical center and a large suburban trauma center), both were shocked by the impact of the law on their respective workforces.

The AMC encountered benefit issues in dealing with unions. The organization also faced significant recruiting and change management issues as it recon-sidered completely changing its care delivery model in a post-ACA environ-ment. But the biggest challenge, and the biggest surprise to the CEO and CFO, was that the use of per diem personnel had created benefit issues requiring new processes and systems.

The trauma center, on the other hand, discovered a different challenge with its per diem practices. The center was using per diem help as a hiring tactic to streamline the onboarding process and get clinical help when needed. Again, significant process redesign was necessary.

Financial services: We find that this broadly defined group has different compliance challenges based on sector. For insurance companies not offering health plans, most of the changes concern benefits and administration. The treatment of agents creates a work-force issue that calls for review. While rules and tests for employers to verify contracting employee status exist, the Department of Labor, IRS, and Congress have indicated that they will place more scrutiny on this classification to confirm that employers are not using contractors to skirt responsibilities.

7 HR Innovation

In consulting with a large insurer, two unexpected issues arose. First the company owned a small entity employing seasonal workers. This created a potential compliance issue, which may or may not be mitigated with ‘look-back’ and shared responsi-bility guidance.

Second, the company also offered a few health-related product lines. The company found it necessary to further inspect its various businesses to confirm that they were classified correctly and that they weren’t inadvertently subject to new health insurance industry taxes and fees imposed by the ACA.

Public sector and higher education: While we expect nothing significantly different on the administration and benefits front for this industry, the presence of unions will likely create some challenges for public sector employers. Negotiating benefits and eligibility for compliance may require substantial effort. Additionally, for states, the design and implementation of the insurance exchanges will require a sizable work effort, which could include the use of contracted employees and trigger benefit questions.

Some top university HR executives have expressed concerns about eligibility and coverage. Having a diverse workforce

and inconsistent benefit eligibility has created areas of risk under the ACA. If they were to expand coverage, universi-ties would need to consider contribu-tion restrictions because the expansion would apply mostly to low-wage earners. With limited funds, these insti-tutions would need to work with their deans and boards to reconfigure benefit eligibility and employee total rewards packages.

Entertainment and media: The ACA may potentially have a big impact within this industry group. Discussions with a large national newspaper and two mass media companies revealed that their biggest concern was what to do with their contract freelance employees, who work exclusively for them. With regulators putting addi-tional scrutiny on the use of contract employees, this could be a big concern. One CFO indicated that he hoped a competitor would be the first to stop providing benefits because his company would quickly follow suit.

But the media isn’t the only industry facing such challenges. A discus-sion with a national sports league

While we expect nothing significantly different on the

administration and benefits front for this industry, the

presence of unions will likely create some challenges

for public sector employers.

Negotiating benefits and eligibility for

compliance may require substantial effort.

8

uncovered similar issues. Considering that a significant portion of its work-force worked only during the active season, they were not providing benefits. Despite ‘look-back’ and shared responsibility guidance, this employer may need to make changes for a portion of its workforce to avoid or lessen penalties.

Casinos are another segment of the entertainment industry with significant ACA-related workforce challenges. Many of those working on the casino floor often do not have benefits, even though they work more than 30 hours per week. Changing their eligibility will cost casinos significantly. Many casino companies are considering limiting the number of hours worked by adding more part-time resources, a strategy some restaurant chains have reported to the news media that they will use.

Hospitality and retail: While these two businesses’ operations differ, their workforce challenges don’t. The use of seasonal and part-time workers by both industries requires special inspection.

Although the safe harbor look-back guidance may help retailers, they likely will find it difficult to control workforce hours in a highly decentralized model. Some restaurant businesses will face similar challenges because the work-forces of both industries are primarily part time and low wage. Current benefit levels and contributions will not meet

ACA requirements for minimal value or affordable coverage.

In helping several retail and hospi-tality companies assess the cost of ACA compliance, we had to look at afford-ability requirements. This included understanding the demographics of the workforce in a detailed way: who is likely a single wage earner, who may be eligible for Medicaid under expansion (and which states will expand Medicaid eligibility), who will forego coverage, and who will apply to the exchange for a subsidy. These assumptions were critical in calculating the real cost of the ACA so these clients could make decisions on benefit strategy and, in one case, an acquisition.

The low-wage issue extends beyond retail and hospitality. ACA benefit requirements apply to many low-wage workers, such as home health aides and office cleaning service staff, in other industries. This is one way that the impact of healthcare reform can cut across all companies.

To determine the proper compliance strategy, employers should understand the pervasiveness of the regulations and the impact on their particular business. Initially, most employers have focused their compliance efforts on meeting benefit levels and avoiding Cadillac taxes. They might not have been advised to consider the workforce ramifications or the tax implications of not providing benefits in a post-reform era.

9 HR Innovation

To play or to pay? It depends.The ACA is here to stay, so employers must decide whether to play or pay. To make the right decision, executives should employ a strategic approach that considers benefits, workforce, taxes, penalties, and administrative requirements. They also should study the impact of various other stake-holders on their benefits and workforce, taking into account new marketplaces (i.e., state and private exchanges) and delivery models (i.e., accountable care organizations). Watchful waiting is no longer an option for employers; the time to act has arrived.

The ACA is here to stay, so employers

must decide whether to play or pay. To

make the right decision, executives should

employ a strategic approach that considers

benefits, workforce, taxes, penalties, and

administrative requirements.

10

By Allan Zimmerman

Plan sponsors who oversee the administration of pharmacy

benefits for their members find it increasingly challenging to

balance program features in ways that produce the greatest value

for their dollars. They can position themselves to succeed amid the

evolving pharmacy benefit management landscape by equipping

themselves with an awareness of the most critical of these changes

and by remaining agile in their response to them.

The evolving landscape of pharmacy benefit administration: Five factors fuel value

11 HR Innovation

The top fiveAmong the variety of changes reshaping pharmacy benefit administration, five factors appear to have the greatest current and immediate future impact for plan sponsors. These landscape-changers are:

1. Market consolidation

2. Specialty drug management

3. Retail network participation

4. New generics entering the market

5. The 2010 Patient Protection and Affordable Care Act (ACA) and its impact on transparency

These factors provide exciting oppor-tunities for plan sponsors to enhance program administration. Sponsors who are aware of the potential significance of these changes and corresponding windows of opportunity can proactively manage them to raise program admin-istration value. Read on for a closer look at each of them.

1. Market consolidationThe pharmacy benefit management (PBM) industry continues to consoli-date. The industry’s ‘big three’ has become the ‘big two’ with the acqui-sition of Medco Health Solutions by Express Scripts. The ‘big two,’ Express Scripts and CVS Caremark, admin-ister about half of the coverage among US outpatient prescription benefit programs. Another six mid-tier PBMs

administer approximately 30% of the US market, while more than 30 compa-nies with an average share of less than 1% serve the remaining 20%.1

Plan sponsors can expect to see continued consolidation in the PBM industry as the mid-tier PBMs strive to join the top-tier club. Mid-tier companies most likely will acquire select PBMs within the bottom tier rather than buying or merging with other mid-tier companies.

This expectation rests on the essentially equal split of mid-tier PBMs between those owned by health plans and those that are independent. This creates a pool of potential acquisition targets in this PBM segment whose owners are competitors in the healthcare arena, leaving many of the smaller-tier PBMs as more convenient targets.

While a plan sponsor typically might look at the market as having fewer choices, we see the potential to take advantage of consolidation-related nuances for negotiating enhanced discounts and fees with an existing or alternative PBM:

• The ‘big two’ PBMs have greater negotiation leverage with their supply chain and may be in a position to offer plan sponsors a better financial deal.

• The mid-tier PBMs are aggressively positioning themselves to join the top tier, and therefore may offer more competitive deals to grow market share.

1 Pembroke Consulting. 2011–12 Economic Report on retail and specialty pharmacies.

12

Regardless of the motives behind the opportunity in the marketplace, plan sponsors are in a favorable position to negotiate enhanced financial arrange-ments from their PBMs. Sponsors should explore such arrangements, using their market share of covered lives as leverage with PBMs that are jockeying for posi-tion in a consolidating industry.

2. Specialty drug managementThe management of costly specialty drugs is high on the list of objectives for plan sponsors who administer prescrip-tion drug benefits. Specialty drugs are often self-injectable or bioengineered for use by patients with diseases such as rheumatoid arthritis, multiple scle-rosis, cancer, and other conditions with lower prevalence but intricate treatment protocols (e.g., hemophilia, Crohn’s, and Gaucher disease). Specialty drugs repre-sent over 20% of pharmaceutical costs2 and could possibly represent >40% of all drug expenditures by 2020.3

Plan sponsors should acutely focus specialty drug management for these reasons:

• Specialty drugs are trending at double-digit cost inflation of more than 15% annually2

• Specialty drug costs are projected to represent seven of the top 10 drug costs for plan sponsors by 20144

• Specialty drugs cost an average of more than $2,000 per month, with some topping $100,000 per year5,6

• Specialty drugs have robust pipelines in the pharmaceutical industry

Plan sponsors can proactively enhance their administration of specialty prod-ucts by taking advantage of changes in the pharmaceutical landscape. By 2020, branded specialty drugs with sales of $45 billion will go off patent7, with market availability of less expensive alter-natives for nearly 25% of this amount, including a new class of products referred to as biosimilars.

In addition, an increasing number of injectable specialty drugs are becoming available as oral products, particularly for the treatment of cancer, providing less expensive alternatives, not only in terms of ingredient costs but also in drug administration.

Plan sponsors who stay current with these changes in the specialty drug landscape can take advantage of increased competition and availability of specialty drugs in the following ways:

• Implementation of more aggres-sive clinical benefit administration programs, such as prior authoriza-tion and step therapy, and member cost-sharing configurations to promote the use of the most cost-effective products

• Negotiation of deeper discounts through existing specialty channels

• Consideration of more deeply discounted specialty distribution channels, such as retail-based specialty networks

2 Modern Medicine. US price hikes on branded drugs far outpace 1012 inflation. November 28, 2012.

3 Terhune, C. Insurers forcing patients to pay more for costly specialty drugs. Los Angeles Times. May 29, 2012.

4 Fein, A.J. Connecting patients with specialty products; Part 2: The future of specialty drug distribution. Biotechnology Healthcare. Fall 2012.

5 Pyrillis, R. Specialty drugs appearing as the next wave of health care costs. Workforce. September 28, 2012.

6 McIlvaine, A.R. Specialty drugs, spiral costs. Human Resource Executive Online. September 2, 2012.

7 Kelly, L.F. Health plans, PBMs continue to ramp up generics efforts as wave reaches its peak. Drug Benefit News 2012; April 6.

13 HR Innovation

• Exploration of channel migration strategies from medical channels (doctors’ offices and clinics) into pharmacy channels

• Accessing more prevalent pharma-ceutical company rebates that are now available through PBMs

A plan sponsor should use these changing dynamics in the specialty drug landscape as an opportunity to seek out a PBM partner capable of providing and delivering the most comprehensive specialty management programs and services available. The sponsor should require the PBM to identify and quantify the most effective channels for specialty drug distribu-tion and clinical programs to push market share to less expensive alterna-tives, including biosimilars when they become available. The PBM also should confirm access to and retention of rebates from pharmaceutical companies and implement cost-sharing options that will potentially lead members to the most cost-effective products.

3. Retail network participationWhile the concept of limited, preferred provider organization (PPO) retail pharmacy networks is not new, the level of interest by plan sponsors in exploring the impact of using more limited retail networks has picked up. This enhanced interest most likely originated from a recent major PBM’s successful elimina-tion, albeit temporary, of the largest retail pharmacy chain from its network when neither party agreed to contract terms. Historically, evidence suggests that plan sponsors with a high density of members in a geographical location have been able to successfully execute limited PPO strategies while main-taining acceptable member access and lowering plan costs.

Plan sponsors can proactively enhance

their administration of specialty products

by taking advantage of changes in the

pharmaceutical landscape.

14

While effective channel management has always been an important element of pharmacy benefit administration, plan sponsors should explore the use of PPO retail networks in conjunction with their PBMs or independently. While the ease and lower overhead associ-ated with using a PBM to administer a PPO network is appealing, some plan sponsors of adequate geographical density may find direct negotiation of a PPO network an effective mechanism for eliminating the middleman—the PBM—which often retains a portion of the negotiated discount.

By implementing a PPO network, a plan sponsor likely can preserve acceptable access for members while lowering drug costs by up to 1% to 2% (depending upon whether a PBM is used or direct contracting is deployed). Consequently, plan sponsors should continue to pursue this trend, particu-larly in light of recent successes.

In addition, retail pharmacy channels are expanding into organized specialty drug distribution channels. Most PBMs require use of their own exclusive specialty drug distribution center as part of their administrative services agreements with plan sponsors. But the current evolution of retail-based specialty networks provides a potentially beneficial alternative to the central-fill or mail-service PBM specialty operation in terms of access and cost.

These emerging retail specialty networks, representing one of the fastest growing industries in the United States today, are positioning themselves to

15 HR Innovation

provide private and public payers with alternatives to mail-based PBM specialty operations. Consequently, the plan spon-sors should be aware of these networks when negotiating with PBMs and consider inclusion of these networks—often with deeper discounts and greater access—in their PBM agreements.

4. New generics entering the marketThe effective uptake of generics remains an important component of cost control and a lower-cost trend for a plan spon-sor’s prescription drug program. While 2011 was the year when the number-one brand drug in the United States lost exclusivity to generic competition, loss of brand exclusivity reached its pinnacle in 2012 when nearly $36 billion in brand drug spend became vulnerable to generic competition.8

This record-breaking figure is expected to drop by 75% in 2013 before rebounding to about $15 billion per year from 2014 to 2016. Starting in 2017, the market will reach a ‘generic cliff’ when the brand drugs reaching expira-tion of their market exclusively with no

The effective uptake of generics remains an important

component of cost control and a lower-cost trend for a plan

sponsor’s prescription drug program.

… loss of brand exclusivity reached its

pinnacle in 2012 when nearly $36 billion

in brand drug spend became vulnerable

to generic competition.

available generic competition will drop to only $2 billon to $4 billion per year, staying in that range through 2021.9

The impact of losing brand exclusivity and the availability of generic competi-tion in the market is significant for any plan sponsor administering a prescrip-tion benefit program. A generic alter-native generally is 30% less expensive during the first six months and often 80-85% less by the end of one year than the brand drug it competes against.9,10,11 This ongoing annuity of expiring brand exclusivity over the next few years provides plan sponsors with substantial savings opportuni-ties, assuming they deploy appropriate generic uptake strategies.

8 Perry, L.E. Record number of 2011 approvals leads to data-heavy, generic-focused year and continued shift to specialties. Drug Topics 2012 January: 16–27.

9 Fein, A.J. Projected brand revenues lost due to generic launches, 2011–2021. DrugChannels.net. September 4, 2012.

10 DeRuiter, J.; Holston, P.L. Drug patent expirations and the “patent cliff.” U.S. Pharmacist 201, 37(suppl): 12-20.

11 Facts about generic drugs. US Food and Drug Administration. December 2012.

16

Plan sponsors might want to consider the following strategies for increasing generic uptake:

• Negotiate new generic effective rate (GER) terms with existing PBM. The PBM should provide financial guarantees that result in an effective discount for generics of at least 75% to 80% off average wholesale price (AWP).

• Negotiate new terms related to generic dispensing rate (GDR). The PBM should provide generic dispensing guarantees that are at least 88% to 90%.

• Assess member cost sharing for generics. A robust differential between brands and generics can improve generic uptake. In general, consider a $25 differential between brand and generic co-payment tiers. Increasing the co-pay spread to ≥$25 has shown a 25% increase in generic utilization.12

• Assess the potential of member cost-sharing incentives and thera-peutic interchange programs to enhance the use of generics that are therapeutic equivalents, not just chemical equivalents, for additional generic penetration.

5. ACA’s impact on transparencyOne of the more interesting industry-changing aspects of recent healthcare legislation, including ACA and the 2003 Medicare Modernization Act

(Medicare Part D), has been the evolving impact it has had on the funda-mental pricing models deployed across supply chains in pharmacy benefit administration verticals.

Plan sponsor pleas for PBMs to provide greater transparency into their financial model and payment structure with providers have been increasing over the past decade. Recent legislation has accelerated the transparency process by seeding the requirements capable of fundamentally changing the basis by which finan-cial reimbursement and payment are conducted in the PBM industry.

AWP has been the standard for payment of claim ingredient costs by plan spon-sors to PBMs, and subsequent payment by PBMs to pharmacy providers. The published AWP database has histori-cally been the source of pricing ambi-guity and, in some cases, manipulation by the PBMs and others in the phar-macy benefit supply chain.

The Centers for Medicare & Medicare Services (CMS) is now compiling and publishing new drug price databases originating from healthcare legisla-tion. These new databases include the National Average Drug Acquisition Cost (NADAC) and the National Average Retail Price (NARP). Both CMS data-bases increase the level of transparency across the pharmacy supply chain and provide additional insights within the

verticals into actual financial revenues and margins that traditionally have been difficult to quantify.

As a result, a plan sponsor may see a surge in alternative pricing offers from an existing PBM or from alternative PBMs in the near future. These new pricing models may be based on the information originating from the new databases and use drug acquisition cost for reimbursement. These alternative pricing models require the plan sponsor to be able to assess the comparative impact of these models with their current financial arrangement.

Regardless of the alternative pricing model a PBM might propose, the plan sponsor has the opportunity to negotiate a financial arrangement that increases the level of transparency, will likely provide better financial results, and fundamentally reconfigures the historical methodologies that have been confusing for the plan sponsor—and profitable for the PBM. Such arrangements will benefit sponsors’ cost control efforts.

Filling a prescription for value amid changePlan sponsors may see these five factors of change in the pharmacy benefit landscape as opportunities to bring additional value to prescription drug benefit administration. An awareness of these factors, an understanding of their potential impact on the prescription

12. Generic drugs: the opportunity the must be realized. HR Management 2012.

17 HR Innovation

program, and the development of a strategy that derives the most benefit from these factors will provide plan sponsors with an opportunity to increase the value of the healthcare dollars they spend.

The contemporary pharmacy benefit landscape offers plan sponsors an opportunity to:

• Renegotiate more aggressive finan-cial arrangements with PBMs based upon market consolidation and changing financial models

• Implement comprehensive and more aggressive administration of specialty drugs, the fastest-growing areas of pharmacy drug spend, based upon additional competition in the market

• Boost the uptake of generic drugs based upon the record-breaking loss of brand exclusivity and availability of generic alternatives over the next few years

• Assess alternative pharmacy distribution channels and limited networks to lower costs while maintaining acceptable access

Focusing on these areas of change will not only provide plan sponsors with immediate payback in terms of lower costs, but also establish a foundation from which they can implement addi-tional administrative techniques for years to come in response to an ever-evolving pharmacy landscape.

18

By Ron Barlow and Don Weber

Despite recent glimmers of hope that health benefit cost

increases might be flattening at last, they still far outpace

inflation—a fact that has challenged employers for decades as

they struggle to provide employees with competitive benefits.

A reassessment of the underlying causes of healthcare cost creep

in the context of the broader benefits package suggests new

strategies for mitigation.

Ever-increasing health benefit costs: Have you misdiagnosed the causes?

19 HR Innovation 19

PwC’s 2012 Touchstone survey shows results similar to our “Behind the Numbers” report. This table displays

0%

1%

2%

3%

4%

5%

6%

7%

8%

2010 2011 2012 2013 (projected)

Source: “Medical Cost Trend: Behind the Numbers 2013” by PwC’s Health Research Institute, May 2012

7.5%7.0%

7.5% 7.5%

the percentage of respondents based on their self-reported trend rates:

Percentage of companies with trend rates in the given range (prior to the impact of any plan changes)

Expected calendar year 2012 over 2011

Calendar year 2011 over 2010

Decrease 6% 10%

Unchanged 7% 4%

1–4% increase 17% 11%

5–9% increase 42% 38%

10–14% increase 21% 23%

15% or greater increase 7% 14%

Current estimate of trends (before benefit plan design changes)

The following graph illustrates the average US medical plan trend rates based on research by PwC’s Health Research Institute.

20

Many employers focus on health benefit costs in a silo, expending significant time and money on various cost control initiatives, such as disease manage-ment and wellness programs. Well over half (58%) of employers responding to PwC’s Touchstone survey offer disease management programs, and 72% provide wellness programs. Yet 88% of respondents indicated they can’t deter-mine the return on investment from these programs.

Are employers considering the total picture? Disease management and wellness programs focus narrowly on health benefit costs. For the most part, employers disregard other employee health-related costs, such as disability, workers’ compensation, and other unplanned absences. Should employers consider these additional programs as well as some components of their compensations programs in developing their overall workforce strategy?

Develop a holistic approach to managing employee benefit costsA more holistic approach to managing employee benefit costs starts with gaining an understanding of how you structure your current programs and then aligning their components for the most impact. Important steps in that process include:

1. Inventory current programs and strategies.To develop a new strategy, you must first understand your current environ-ment. Look at your company’s various

health-related programs and how they are organized and managed. Programs to review include:

• Health benefit structure and management programs

• Short-term and long-term disability

• Workers’ compensation

• General absence programs (e.g., sick time, paid time off)

The inventory should help you under-stand the current management of these programs and identify the costs associated with them. Combining these costs and identifying which employees or covered members generate the most expense will provide you with the foun-dation necessary to properly diagnose the underlying cost drivers in your benefits package.

2. Apply data analytics.Healthcare program costs essentially can be boiled down to six basic factors:

1) The covered population and their associated health status

2) The tendencies of the covered population in engaging healthcare providers (i.e., consumer patterns)

3) The health treatment practices of the engaged providers

4) The providers and vendors you use and the negotiated cost structures

5) The plan designs and premium contribution structures that deter-mine cost sharing

6) Random events

Although they are constantly evolving and changing, the first five factors have some consistency from year to year for a given population. The best way to understand these five factors and be able to predict their impact is to examine recent historic data. Only through a thorough analysis of the data can you have the knowledge to address the issues specific to your organiza-tion and employees. Strategic health program management starts with a foundation of analytics; you simply need to understand the numbers.

3. Focus on the main cost drivers.Most companies and health plans today focus on diseases—either treat-ment of diseases or management of chronic conditions that lead to diseases. Significant resources are devoted to attempting to manage the diseases of covered employees and their depen-dents. Yet diseases aren’t necessarily the main culprit. There are really two main drivers of your company’s health-care costs that you may not be fully aware of:1

1. Incentives in your company’s work/life, compensation, lost-time, and healthcare policies, which influence and drive health benefit utilization and costs

2. A small handful of individuals, the sickest 5% or so, with significant co-morbidities and excessive utilization of medical services

1 Research by HCMS Group. www.hcmsgroup.com

21 HR Innovation 21

4. Align incentives.Rewards policies, whether compensation or benefits, are intrinsically connected in how they influence employee behavior. Data show that misaligned incentives that have become embedded in a company’s business policies can actually encourage employees to consume more health benefits.

A company’s policies dictate how employees are rewarded for their actions through compensation and benefits. They also dictate what the employees’ respon-sibilities are in return. Finding the right balance between shared rewards and shared responsibilities is critical to strong business performance.

Research has shown that companies that have strong and aligned incentives perform better, have higher productivity, 2 Research by HCMS Group

and have lower benefit costs, especially paid time off and healthcare.2 Aligned incentives can improve productivity by as much as 10% while reducing benefit expenditures by 30% or more. Conversely, when incentives are weak or misaligned, companies experience higher rates of sick leave and disability, above-average medical costs, and higher accident rates.

Shared rewards include pay for perfor-mance, profit sharing, stock ownership, cash for unused time off, company-funded health savings accounts (HSAs), and training programs. Shared respon-sibilities include PTO banks, health plan cost sharing (e.g., high deductible plans), disability benefits less than 100%, and involvement in business decisions.

22

Aligning incentives in a company’s rewards policies in the same direction creates a compound effect, strength-ening the impact of all incentives. When they are misaligned, they create conflicting and confusing influences, weakening the impact of each of them. Research indicates that strong shared rewards results in employees adopting healthier habits, recovering more quickly from illness and disabilities, and missing less work.

Employees who focus on personal asset growth, such as in response to generous 401(k) matching or strong continuing education programs, also are likely to embrace opportunities to practice healthy behaviors and invest in their own health. Employee ownership is important because employees tend to protect their own assets more diligently than those of the company. Ownership of decisions, such as having consumer choices in healthcare, is important to encouraging the right behaviors.

5. Pay special attention to the 5/50 rule.In any given year, the top 5% of health-care spenders typically generate about half the total medical costs (see illustra-tive chart on the right). When disability and lost-time costs are included, this increases to over 50%. The average medical cost for the top 5% is approxi-mately $75,000 per employee per year. In virtually every employer’s healthcare plan, these individuals have hit their out-of-pocket maximums, so they might view utilization as ‘free.’ 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Population

Costs

3%

5%

50%

17% 32% 48%

30% 15%

A significant amount of waste can be found in the healthcare spending for these patients. This is due to many factors, including:

• Over-medication

• Duplicative testing

• Uninformed decision-making

• Misdiagnosis

• Poor access to primary care

• Poor use of care management programs

These cases usually involve multiple diagnoses, tests, and treatments by multiple providers, often over many months, if not years. Adding to the complexity, this population does not usually include the same people each year. Their turnover rate is typically about 20%–25% each quarter, so it can be difficult to predict who will comprise this group.

3 Research by HCMS Group

Research demonstrates that combining data from disability and medical plans can be more predictive of the 5% high-risk group than analyzing medical plan data alone.3 Sophisticated health-risk scoring, using combined health plan and disability/lost-time data, is neces-sary to adequately predict the 5% high-risk population and develop actionable care management strategies for them.

Perhaps surprisingly, these patients actually may have more of an opportu-nity to be involved in making decisions about their care than a person with just one condition or who is experiencing an urgent, acute care event. It’s critical to provide reasons for such persons to want to be involved in their own care decisions. Use incentives that apply even to the sickest individuals, who may have already met their out-of-pocket maximums, and provide them the means to make intelligent decisions (e.g., education, resources, coaching).

Typical distributions of medical plan costs across an employee population

23 HR Innovation

Implement your new cost management strategyOnce you have performed this analysis, the following steps will help you put your new strategy into action:

1. Identify the areas that require change. Depending on your organization, you may need to change the management structure for different programs, find a common vendor to administer parts of your program, or begin to monitor costs in a more holistic manner. For success, your structure and vendors should complement your new strategy.

2. Alter existing policies and procedures.Create or modify policies required to properly align your incentives, as described earlier.

3. Proactively analyze costs and apply appropriate care management programs.The composition of the high-cost group constantly changes, so you should monitor or manage it on a regular basis. This could require you to reconsider current health management programs and assess whether they truly help you manage your health-related benefit costs.

Alternative management programs and other approaches can help you find ways to alter or adapt existing programs to work within the new strategy.

4. Consistently monitor.Establish clear goals and a method for analyzing your return on investment prior to implementing your new strategy. Then develop a cost-reporting dashboard or scorecard to help you identify and monitor health-related costs and trends. A data warehouse and analytics vendor can help monitor and report on the results of your new strategy.

Implementing a holistic cost control

program can prevent you from

misdiagnosing the underlying causes

of rising benefit expenses.

Break down silos to build holistic solutionsImplementing a holistic cost control program can prevent you from misdiag-nosing the underlying causes of rising benefit expenses. If you can accurately assess where your expense drivers reside, you will have a far greater chance of transcending the tendency merely to treat the symptoms, rather than actually achieving a cure.

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By Mike Thompson

For most employers, healthcare benefits have been a corner-

stone of their total rewards package. But not without consider-

able consternation, as healthcare cost increases have consistently

outpaced wages for over three decades, and employees continuously

express concerns about benefit cutbacks and healthcare hassles.

Play, pay, or exchange: Decisions loom in the new healthcare benefits environment

25 HR Innovation

Yet the expectations and reality have been that employers have had little choice but to continue some form of healthcare benefits—to stay competi-tive, to attract and retain employees, and to offer the benefit of health secu-rity to the workforce and their families. In fact, in the absence of employer-provided coverage, many employees would face significant costs of care, some would find getting coverage on their own unaffordable, and others would find coverage unattainable.

The 2010 Patient Protection and Affordable Care Act changes this landscape considerably. In 2014, individuals who purchase coverage in the open market will no longer be subject to medical underwriting requirements or pre-existing condition exclusions. Insurers will offer coverage on a guaranteed-issue basis, just as most employers do today. In addition, many low- and middle-income indi-viduals and families who are ineligible for Medicaid will receive government subsidies for their coverage.

Public and private exchanges represent the most important ACA-authorized change to the US healthcare system. These new ‘organized marketplaces’ will allow consumers to purchase health insurance plans meeting minimum federal standards.

New public exchanges simplify comparisons, limit variations, and increase transparencyExchanges will simplify comparison of products, limit variation, and increase transparency. Every state must have a health exchange by January 1, 2014. States may set up their own public exchanges, let the federal government operate a ‘federally facilitated exchange’ for their residents, or partner with the federal government. The plans will be organized into four levels, bronze, silver, gold, and platinum, based on their actu-arial value:

Actuarial value 60% 70% 80% 90%

Monthly premiumsn

Lowestn n

Moderaten n

Moderaten n n

Highest

Offer essential benefits? Yes Yes Yes Yes

Must offer in exchange (will vary by state)

NoAt least

1 planAt least

1 planNo

Bronze Silver Gold Platinum

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Insurance companies may offer HMO, PPO, and other plan types within each level, as long as the plans can achieve the actuarial value of the level in ques-tion. With the universal requirement to cover the same ‘essential benefits’ and universal limitations on out-of-pocket expenses, these payers will have limited levers to differentiate their products.

income level will be applied to the silver plan. In addition, for those with house-hold incomes below 250% of the federal poverty limit, the cost-sharing subsidies will substantially enrich the silver plan (raising the actuarial value to as much as 93%). However, neither the premium nor cost-sharing subsidies will apply for consumers who have access to ‘afford-able coverage’ through an employer.

The structure of the public exchanges may vary significantly by state. Every ACA public exchange must impose certain minimum standards related to marketing, network adequacy, accredi-tation, and quality improvement. Some may be ‘active purchasers’ (similar to major employers) that can use their buying power to spur system changes and potentially narrow the market. Some will be ‘passive purchasers’ that allow any health plans that meet minimum standards to participate.

Emerging private exchanges have flexibility to support ‘defined contribution’ strategiesLike the public exchanges, private exchanges offer an organized market-place for health insurance plans with multiple designs and price points. Unlike the public exchanges, private exchanges are sponsored and managed in the private sector and not directly eligible for government subsidies. But they are able to accept large employers as sponsors that can offer subsidies. Because of the availability of myriad choices, many view private exchanges as the gateway to defined contribution for healthcare benefits.

The structure of the public exchanges

may vary significantly by state. Every

ACA public exchange must impose certain

minimum standards related to marketing,

network adequacy, accreditation, and

quality improvement.

This will help simplify consumer choices to focus on differences based on:

• Deductible and co-insurance levels

• Provider network

• Ancillary offerings

• Customer service and satisfaction

• Brand

Government subsidies will enable lower-income people to participate in the exchanges. Those subsidies will reduce the premium costs to no more than 2.0%–9.5% of household income for those up to 400% of the federal poverty limit ($92,000 for a family of four). These premium subsidies by

27 HR Innovation

Private exchanges help organize the health insurance marketplace outside of public exchanges. They serve as navigators for health products and services, including insurance coverage, while helping employees select benefit options that fit their needs and prefer-ences. They provide product choice, decision support, and even personal-ized recommendations for consumers. By personalizing the insurance-buying experience and enabling transparency, they can help contain costs and provide a one-stop shop for employers and individuals.

Private exchanges may be offered on a group or individual basis. Those offered on a group basis may have plan designs that are inconsistent with the plans offered through public exchanges. The plans may have multiple financing options and flexibility in rating struc-ture, including composite rates. Those offered on an individual basis may offer only plans generally available in

the open market on a pooled-insured (community rated) basis. Rates in this case will vary by geographic location and other demographic factors.

Insurers or third parties may sponsor private exchanges. In the insurer-sponsored model, an insurer show-cases multiple plan options from which consumers may choose, and provides comparison tools and support. In the third-party option, a broker, outsourcing company, or retailer runs the exchange, typically with multiple insurers participating.

The best private exchanges will capture consumer behavior and translate that knowledge into decision support to ease navigation, plan comparison, and cost calculations—the ultimate in consumer engagement. From an employer stand-point, it’s equally important that the exchange maintain low costs and a smooth interface with the employer’s human resources and payroll systems.

28

For individuals and families, the exchange provides a single place where they can enroll in private or public health insurance coverage.

Why play?The role of healthcare benefits as a vehicle to attract and retain employees will continue for many. Most employers will continue to sponsor their own plan or plans for employees and retirees because employees view healthcare coverage as a valuable benefit and employers derive advantages such as:

• Full control of plan design consistent with HR strategy and population-specific cost drivers

• Potential to save with self-insurance

• Potential to customize plan and avoid state benefit mandates

• Ability to integrate with health and productivity initiatives

• Ability to conduct cost-reduction efforts directly affecting own experi-ence under the plan

In addition, if employers were to drop coverage, they would have to pay a nondeductible $2,000 tax penalty per employee and might need to substitute taxable compensation for nontaxable benefits. This could negatively impact a company’s competitiveness, recruit-ment, and retention.

The role of healthcare benefits as a vehicle

to attract and retain employees will continue

for many.

29 HR Innovation

Why pay?While the ACA does not require that employers continue to provide coverage, it can penalize them significantly if they don’t. An employer that does not offer health coverage can incur an excise tax of $2,000 for every full-time employee (if any choose to join the public exchange authorized by the ACA). If an employer offers coverage but that coverage is not ‘affordable’ or does not provide ‘minimum value’, as defined by the government, the penalty rises to $3,000, but only for each individual who joins the public health exchange and receives government subsidies. Penalties do not apply for not offering affordable coverage to dependents or retirees.

Dropping coverage and defaulting employees or retirees to the public exchange may make the most sense

Employers will want to evaluate any pull-back

in coverage with a detailed ‘pay or play’

analysis. The trade-offs will vary significantly

by population and sub-population.

for firms with a high concentration of low-wage workers. Potential advantages to dropping coverage include:

• Ability to disassociate rewards strategy from healthcare coverage

• Potential to leverage market reforms, including government subsidies for low- and middle-income families

• Diminishing healthcare coverage as a barrier to global competitiveness

• Substitution of controllable compensation for uncontrollable healthcare costs

Employers will want to evaluate any pull-back in coverage with a detailed ‘pay or play’ analysis. The trade-offs will vary significantly by population and sub-population.

30

Why exchange?Some employers, recognizing that exchanges present a viable option to employer-managed coverage, are contemplating whether to sponsor a private exchange for employees or retirees. By shifting all or a portion of employees into a multi-employer private health exchange, they seek to:

• Move toward a defined contribution approach (facilitates ability to cap contributions)

• Outsource suite of products, networks, and vendors (more choice)

• Adapt to market changes more quickly (e.g., more efficiently intro-duce new delivery models, such as accountable care organizations)

• Achieve greater leverage with vendors through collective purchasing

• Potentially integrate with multiple public exchanges to provide subsidies for those without affordable coverage

Movement to a private exchange requires considerable due diligence. However, by using independent admin-istration and stewardship of healthcare coverage benefits and related costs, employers can reduce their administra-tive burden and enhance their ability to focus on the core business.

Adapting to new directions in healthcareHealthcare reform suggests new alternatives to the current model of employer-sponsored benefits. The public exchanges scheduled for January 1, 2014, will vary significantly by state and will deliver significant subsidies to low- and middle-income families who lack access to affordable coverage through employers. Some states will use their major-purchaser status to effect system changes.

New private exchange models also are emerging, offering employers the option of outsourcing and increasingly disassociating from their healthcare benefits, potentially shifting employees to defined contribution plans. Active models remain immature and widely varied. For those employers who elect to continue sponsoring active medical plans, it will be crucial to evaluate whether and how rapidly they evolve toward a more sustainable model of healthcare benefits.

31 HR Innovation

Healthcare reform suggests new

alternatives to the current model

of employer-sponsored benefits.

32

As a leading provider of HR consulting services, PwC’s Human Resource Services’ global network of 6,000 HR practitioners in over 150 countries, brings together a broad range of professionals working in the human resource arena—retirement, health & welfare, total compensation, HR strategy and operations, regulatory compliance, workforce planning, talent management, and global mobility—affording our clients a tremendous breadth and depth of expertise, both locally and globally to effectively address the issues they face.

PwC is differentiated from its competitors by its ability to combine top-tier HR consulting expertise with the tax, accounting and financial analytics expertise that have become critical aspects of HR programs.

PwC’s Human Resource Services practice can assist you in improving your performance across all aspects of the HR and human capital spectrum through technical excellence, thought leadership and innovation around five core critical HR issues: reward effectiveness and efficiency; risk management, regulatory and compliance; HR and workforce effectiveness; transaction effectiveness; and global mobility.

To discuss how we can help you address your critical HR issues, please contact us.

Scott Olsen Principal US Leader, Human Resource Services (646) 471-0651 scott.n.olsen@us.pwc.com

Ed Boswell Principal US Leader, People and Change (617) 530-7504 edwin.h.boswell@us.pwc.com

Peter Clarke Principal Global Leader, International Assignment Services (203) 539-3826 peter.clarke@us.pwc.com

About PwC’s Human Resource Services (HRS)

HR Innovation Contributors

Barbara Gniewek (646) 471-8301 barbara.p.gniewek@us.pwc.com

John Stenson (678) 419-1216 john.stenson@us.pwc.com

Allan Zimmerman (816) 218-1771 allan.zimmerman@us.pwc.com

Ron Barlow (312) 298-3056 ronald.g.barlow@us.pwc.com

Don Weber (678) 419-1417 donald.p.weber@us.pwc.com

Mike Thompson (646) 471-0720 michael.thompson@us.pwc.com

Please visit our website at www.pwc.com/us/hrs or scan this QR code:

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