Benefits Strategy

Taking Action on Pharmacy Benefits: A Business Group on Health Viewpoint

With over a quarter of employers’ health care dollars (in the U.S.) attributed to payments for prescription drugs, growing concerns about the cost of pharmacy benefits and medication affordability are driving change. More diversified strategies are emerging, requiring action, vigilance and more nuanced approaches.

February 21, 2025

Introduction

According to the Business Group on Health 2025 Employer Health Care Strategy Survey, 27% of employers’ health care spend in 2023 was attributed to pharmacy, up from 21% 2 years earlier.¹ High-profile products such as GLP-1s and cell and gene therapies have contributed to this cost acceleration, while casting a bright light on the pharmacy supply chain. Furthermore, projected pharmacy trend consistently exceeds overall health care trend estimates.

Given this forecast, employers have been voicing growing concern about pharmacy benefits overall, including patient affordability and adherence. These concerns are driving development of new programs and innovative, broader approaches to addressing long-standing foundational issues within the many layers of the pharmacy supply chain. More diversified strategies are emerging, and the growing number of choices require action, vigilance and a deeper understanding of one of the most complex and at times opaque aspects of health care purchasing.

Employers and their partners are, and have long been, seeking alternative cost and utilization management solutions as well as greater transparency. While the issues are not new, in this environment, many are once again reassessing their appetite for disruption, revisiting strategies implemented and calling for partner accountability. Against a backdrop of growing complexity, continued lack of transparency, patient confusion and affordability concerns, new strategies are emerging. For many employers, gone are the days when their selected PBM partner managed all aspects of the pharmacy strategy execution. Navigators and other programs offering transparency of choice and price see a market opportunity to become the guiding source of information for patients. New formulary options and new pricing models are being offered to payers.

While the level of pharmacy spend and innovative thinking reaches new heights, employers' ability to act strategically is hindered by lack of transparency into true net costs as well as contracting complexities. In the current state, many reluctantly use rebates as a tool to reduce cost, but looming large is the adverse impact of rebates on the industry’s collective ability to deliver transparent offerings for patients and payers alike. The existence of Group Purchasing Organizations (GPOs), acting as rebate aggregators and used by nearly all PBMs, introduced an additional level of opaqueness, as employers are not parties to the contracting arrangements between their PBM and a GPO.

Pharmacy in Legislative Spotlight

Adding to the collective cost challenge is a set of external factors at play, requiring vigilance and advocacy on behalf of employers, for example:

PBM reform has bipartisan support and some meaningful transparency proposals but also risks including government intervention and control that does not yield favorable results for employer plan provisions and vendor arrangements.
The overall impact of legislative price controls in Medicare is still unknown and subject to debate; however, few believe that employers or patients with employer or other private coverage will benefit from government pricing interventions in the short term.
The possibility of tariffs raises questions about the sustainability of low generic prices.
In general, industry lacks adequate competition and would further benefit from additional transparency to support fair dealing and a more robust market approach.

The Reasons Behind Growing Pharmacy Costs and What Can Be Done About It

The challenge with pharmacy costs starts with prices set by manufacturers. A variety of factors drive how manufacturers set prices, including the complexity and cost of research and development. Driven by simplified financial benefits and relatively shorter approval pathways, many manufacturers prioritized research on rare diseases to develop medications that achieved orphan designation, such as sickle cell therapies. Clinical innovation has produced amazing breakthroughs but also necessitates different approaches to product pricing and overall cost volatility management by employer plan sponsors and insurance issuers.
While growth in drug prices is a global issue, it is worth noting that the costs of research and development are almost fully subsidized by U.S. payers, including some research paid for by government grants, creating higher pricing pressures in the U.S. compared to other developed countries. Direct-to-consumer (DTC) advertising is also predominantly a problem in the U.S., one of only two countries allowing that type of drug marketing to consumers. The seemingly unchecked growth in DTC marketing as a strategy for bringing new products to market and protecting pharmaceutical companies’ market share raises questions about the correlation between advertising cost and drug prices. In the U.S. in 1996, $550 million was spent by pharmaceutical companies on drugs ads. That number increased more than 10-fold by 2020, reaching $6.58 billion annually.²
Some pharmacy cost growth is a result of more care shifting from clinical settings covered by a plan’s medical benefit rather than its pharmacy benefit. In particular, some cancer treatments have moved to oral medications, potentially reducing the need for surgeries and infusions. Greater use of pharmaceutical therapies in lieu of higher-intensity interventions in medical settings is driving reductions in the total cost of care despite contributing to growth in pharmacy spend.
Those and other factors are a call to action for PBMs to act with greater transparency and offer a broader set of tools to payers. PBMs should compete on transparent net cost with removal of rebates and other forms of manufacturer payments. Currently, PBMs seem to be competing on the price of specialty medications and on trend guarantees, responding to the demand by employers to reduce volatility and curb specialty cost. These guarantees in turn may result in shifting spend to higher volume, lower priced generics. Simplification of decision-making for payers is possible but requires collaboration between PBMs and consultants and recognition of changing market demands.
Strategies necessary for patient safety and cost management, such as prior authorization and step therapy, increasingly need thoughtful oversight of the related cost and experience consequences.

Implications for Patients: Affordability and Access

Patients and payers continue to face challenges within the current pharmaceutical supply chain in the U.S. and globally. Their concerns are mostly fueled by affordability and unpredictability of drug prices. In the U.S., high- deductible plans tend to front-load out-of-pocket expenses and for those with high or continuous prescription drug needs may present cash-flow challenges each year as deductibles reset. Globally, medication cost is generally the responsibility of the patient. A growing number of high-cost therapies in the market creates a real affordability challenge and necessitates reassessment by governments and employers around the world how drugs are paid for and how utilization is managed.
The heavy investment in marketing is bringing unintended consequences. The advertisements generally do not fully inform patients of alternatives and can hinder steerage to the less costly, more effective, or more value-driven options.
Cash coupons and manufacturer assistance deteriorate trust in employer-sponsored health plans’ designs and ability to control overall price.
Utilization management used as a cost control measure is effective but requires greater transparency and reporting about patient impact and more frequent assessment of alignment with evidence-based guidelines.

A Call to Action for Employers

Explore new formulary, pricing and utilization management models, both from existing vendors and newer entrants to the market.
Seek innovative solutions that steer patients to the lowest cost and most affordable options at the time of purchase to avoid prescription abandonment. Unlike in a medical setting, it is easier for patients to walk out of the pharmacy if they cannot afford care.
In contract negotiations, expand focus beyond cost control through market checks or RFPs. Contract negotiations and effective employer/ PBM partnerships should also focus heavily on the ability to manage the utilization of medications, especially those that come at high cost, and improvement in the patient experience and out-of-pocket cost.
Capture savings from lower-cost options, such as biosimilars, sooner in more effective collaborations with PBMs. For complex reasons, including rebate structures, the full potential of biosimilars to lower costs was not captured in a timely fashion. According to our survey data, in 2024, 33% of employers lacked clarity regarding how biosimilars were managed within the plan and only 27% adopted a formulary that preferred biosimilars.
Approach pharmacy like medical as the spending shifts. Demand integration, consider vendor diversification and cater to the needs of patients. Do not let opaqueness be a barrier, and demand clarity, transparency and vendor accountability.
Get help by partnering with trusted, specialized consultants and advisors in this complex journey. Hold these partners accountable to transparency and innovation in pursuit of the employer’s interests.
Remove barriers to data access so that data can inform decisions. To control the cost, do not just focus on price. Watch the volume of prescriptions and understand the cost and impact of utilization management programs.
Verify return-on-investment claims made by all vendors and protect your audit rights.
Review and address excess exposure to high drug costs for patients consistently exposed to high drug costs due to chronic conditions through plan design and data analytics.
Rebates as a pricing feature can cause unintended consequences when they are not transparently reported, comprise an outsized portion of employers’ budgets, perpetuate increases in spread between gross and net price, and exacerbate contracting complications with their inherent delays and other features. Transparent pricing is preferable for drug acquisition. Employers should adapt the budgeting process to reduce reliance on rebates.
Be ready to accept more risk to drive lower cost, acknowledging that trend guarantees may come at a price.
Align on advocacy positioning so that employer plan sponsors are one voice on Capitol Hill.

Conclusion

It is essential for all stakeholders to approach the growing challenges and concerns with a strong belief that change is possible and necessary. Change should ideally be embraced and fueled by industry stakeholders without being imposed upon them. However, legislative action, while a blunt tool, may be necessary to drive change. Transparency has been achieved by disruptors for some drug types, and it is possible more broadly if all stakeholders commit to it. But transparency alone will not lower the cost. Financial incentives must be realigned to prioritize consideration of lowest cost and efficacious options.

To achieve these goals, the following conditions must be met:

Demand should lower prices; higher volume on lower margins can be profitable and help more people achieve better health.
Partners need to come to the table with a true and sustained desire for change. To be clear: this is a call for collaboration.
Employers need tools and solutions to make changes. Innovators and established entities alike need to become more effective partners in driving meaningful change.