Shifting federal regulations are causing chaos within the healthcare industry, and everyone is trying to adapt to the changing landscape while keeping costs somewhat manageable for employers and consumers. Prescription drugs, which represent the third-largest and fastest-growing cost center in healthcare, are a main driver of these ever-climbing healthcare costs. As a result, the pharmacy benefit manager (PBM) model is under growing scrutiny as industry insiders and outsiders alike are calling this model what it is: an opaque, necessary evil in need of a major overhaul.
Amid this intense period of change, a technique known as therapeutic reference pricing is emerging as a powerful and increasingly popular program for lowering drug costs. Because many brand-name and even generic drugs today have lower-cost equivalents that are equally clinically effective, reference pricing programs can dramatically reduce costs by establishing therapeutic equivalent benchmarks to encourage members to select least expensive alternatives.
While reference pricing has long been used in the federal systems common in European countries with great success, it is only recently gaining traction in the U.S. due to new technological advancements, as well as new research proving the program’s efficacy being featured in journals, such as New England Journal of Medicine. To maintain a competitive edge in the new era of healthcare, forward-thinking employers, benefit administrators, and plan sponsors are looking at implementing reference pricing to achieve optimal savings for their organizations across an array of industries.
How reference pricing works
Historically, there have only been so many levers for plan sponsors to pull in order to affect costs—and most of these levers have been variations on benefit reduction or cost-shifting. Reference pricing is a real cost-reduction lever that results in immediate and ongoing savings of 15% to 20% per year, without reducing benefits or increasing member out-of-pocket costs. A reference pricing model leverages complex algorithms to correlate lower-cost, therapeutically equivalent drugs with the utilization patterns of the specific member population, and then combines customized member communications with changes to sponsor contribution levels to encourage members to switch to the least-expensive medications.
While this may sound like a simple solution—it’s not. Because of the dynamic nature of drug pricing, the frequency of new medications hitting the shelves, and the wide-ranging clinical conditions in any given benefit population, it takes a carefully constructed program combined with finely-tuned algorithms, continuous recalibration, and deep knowledge of behavioral economics to successfully lower costs.
What makes reference pricing unique
By design, reference pricing achieves savings that surpass those from other drug pricing models. For example, step therapy and therapeutic substitution models have experienced some success but are limited by their primary focus on switching from brand-name to generic drugs. For several years now, generic drug prices have been in a state of flux, thanks to loose federal regulations. This has resulted in a market with a wide range of cost differentials between clinically equivalent generic drugs—and between generics and brand-name equivalents—including cases where a generic is more expensive than the brand. Because of these market dynamics, the financial impact of generic-oriented cost reduction programs has become muted at best.
Taking a more holistic approach to medication switches, reference pricing incorporates real-time drug pricing data and a proprietary algorithm that identifies the best equivalents at the lowest cost for each drug, and for every member. It then leverages principles of behavioral economics and other best practices for member communications to minimize member abrasion through the transition to the new copay design.
Compared to traditional programs, reference pricing delivers a dramatic increase in savings on pharma spend. An average reference pricing program will see 41% of therapeutic switches from high- to low-cost generics, frequent swaps from high-cost generic to low-cost brand-name options, and a nominal 7% increase in the generic dispensing ratio (GDR).