Considering a specialty carve-out?

In the search for savings, beware of the risks

Specialty carve-outs expose employers to ethical and compliance issues, and more

On the surface, it sounds like a good idea. “Carve out” the most costly part of your prescription drug coverage, specialty drugs, by working with a third-party vendor that can focus on savings. But it’s important to understand what is happening behind the scenes and how the methods of carve-outs expose employer groups to potential legal, ethical and compliance issues.

What are specialty carve-outs?

Specialty carve-outs are also known as Alternative Funding Programs (AFPs). These programs seek to shift the cost of specialty drugs to alternative sources known as Patient Assistance Programs (PAPs). PAPs are charitable foundations established by pharmaceutical companies. They are designed to help uninsured individuals, or people with no other available options, who need access to life-saving drugs.

Here’s how it works:

  1. The specialty carve-out, or AFP, will amend your coverage so specialty drugs are excluded from your employees’ benefits.
  2. Your employees are left without coverage for specialty drugs, so they are technically “uninsured,” making them eligible for a PAP.
  3. The AFP works with each employee who needs a specialty drug, to secure coverage from the PAP. During this process, special efforts are made to “beat the system,” so the PAP ultimately covers the cost of the specialty drug.
  4. If the funding request is denied, the employer group overrides the exclusion and provides reimbursement to the employee for the specialty drug.
  5. If the funding for the drug is arranged, the AFP bills you a percentage of the savings, or a generous per-employee, per-month fee.

The problem with carve-outs

AFPs never really explain how drug savings are generated or how they earn their profits. Yet, they make bold claims about the types of results they can deliver, from dramatic cost savings to improved clinical care. Before you jump in, be sure you consider the types of issues an AFP could expose you to:

  1. Ethical questions. PAPs are needs-based charitable foundations set up to help underinsured or uninsured patients. When you carve-out specialty drugs, and exclude those drugs from your coverage, your employees are now competing for PAP funds with patients who truly need them. Their business model is, at best, controversial, and at worst, unethical.
  2. Compliance issues. AFPs that exclude specialty drugs from coverage and then use PAPs for funding expose employers and employees to numerous ERISA and IRS-related compliance risks and violations. For a comprehensive list, see this overview from Vivio Health.
  3. Puts the health of your employees at risk. When prescription and medical coverage is separated, care is less streamlined and more fragmented, resulting in poor health outcomes and higher costs. There is also potential for significant delays in medication therapy, as well as inconsistency in therapy. For employees who need these medications to live, it could lead to deteriorating health and higher overall costs.
  4. Unsafe practices. When a PAP detects fraud, AFPs are known to resort to sourcing prescriptions from unlicensed, unsafe pharmacies located outside the United States. This is not only against the law, it can be dangerous or even deadly.
  5. Impacts employee morale. Carving out pharmacy benefits is confusing and complicated for your employees. It also makes itsignificantly harder for your employees to get the medications they need, contributing to low morale. 
  6. Cost savings is not guaranteed. AFPs must coordinate with the primary PBM who is administering your pharmacy benefit. This means higher fees, lower rebates, and less discounts from your PBM.
  7. There’s danger ahead. Many PAPs are on alert regarding AFPs and are taking legal action to protect their funds. It’s possible, and even likely, that in the near future, they will block AFPs efforts to access their funds.

At Blue Cross and Blue Shield of Kansas, we realize that specialty medications are the biggest cost management challenge for employer groups. We understand the need to find solutions to control these costs, while providing employees with access to the treatments they need.

Find more information about our Specialty Pharmacy program, or contact your account representative for more personalized information about how your employer group can save money without putting your company, or your employees’ health at risk.

Resources: Vivio Health, Drug Channels

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