Skyrocketing Health Care Costs

As the fate of the Affordable Care Act (ACA) and government-sponsored health care continues to evolve, employers have been equally engaged in new and groundbreaking strategies to deliver quality, cost-effective health care to their employee constituents.

US employers provide health care coverage to roughly 60% of the population. This coverage umbrella encompasses over half of the nonelderly population—approximately 150 million people in total.1 Employer-sponsored health care costs remain a top priority for companies in 2017. Over the course of 8 years between 2008 and 2016, both employers and employees saw their out-of-pocket costs increase an average of 50%.2 And this trend continued into 2016 with yet another increase of about 6%, compelling employers to take a distinctly new approach to managing costs and leveraging purchasing power. That’s because while it may seem that plan premiums are rising “modestly,” out-of-pocket health care costs are rising at more than twice the rate of inflation and general wage increases. This means that now, more than ever, employers need to consider future options such as plan designs, network changes, and engagement activities to maintain affordability.

In a 2016 survey, approximately one-third of employers expressed concern about the high cost of specialty drugs to treat chronic, serious, or life-threatening conditions, which can run in the thousands per month.3 In 2014, only 6% of employers rated this as a top concern. By 2016, 80% of respondents put specialty pharma as one of their top 3 highest cost drivers.

Many of these cost-management or mitigation strategies are typically tasked to entities such as the pharmacy benefit manager (PBM) or health plan, as is the case for benefit design. However, in order for these strategies to be maximized, there is a tremendous amount of effort required by the employer in order to oversee the optimal implementation of these programs and evaluate the health and financial impact on employees. Historically, companies may not have had the resources or skills necessary to adequately oversee these programs—especially small- and mid-size employers.

Caterpillar Inc, a large self-insured employer, was an early adopter of a more aggressive and internally managed approach toward controlling health care costs. Caterpillar made the decision to take a more active role in managing drug spend by carving out and internally managing pharmacy decisions historically made by PBMs.

By building its own pharmacy networks rather than relying on the PBM, Caterpillar was able to negotiate pricing methodologies and gain more control over formulary medication selection decisions.

Caterpillar’s decision to manage clinical, pricing, and benefit functions required investing in hiring a team with the necessary skills including physicians and pharmacists. These investments in internal oversight, while not necessarily feasible for companies of all sizes, have been described as a win-win for both management and employees.

The Health Transformation Alliance and Pharmacy Benefit Managers

Dovetailing on the groundbreaking work done by Caterpillar, more than 3 dozen large, self-insured companies came together in 2016 to form the nonprofit Health Transformation Alliance (HTA). The HTA’s goal is “to improve the way corporations provide health care benefits in an effort to create better health care outcomes for their employees. By coming together to share expertise, the companies seek to make the current multilayered supply chain more efficient.”

The alliance seeks to fundamentally transform the corporate health care benefit marketplace by focusing on 4 areas:

  • Greater marketplace efficiency
  • Learning from data
  • Educating employees
  • Breaking bad habits

Changing the financial conversation between employers and PBMs around aligned incentives is a major goal of the HTA. In early 2017, after more than a year working together, the group’s first initiative was announced: lower companies’ health care spending and help employees obtain more affordable prescription medications.

The HTA negotiated contracts with 2 PBMs:  CVS Health (Caremark) and OptumRX—the same PBMs that, at the time of selection, were providing network and benefit administration services to many HTA members.

The HTA represents the first significant shift of employers toward leveraging purchasing and decision-making power. Rather than moving away from the large PBM market dominators, the group recognized that the skills and services offered by PBMs are necessary to administer, manage, and clinically impact large numbers of employees and that replacing those skills with smaller or in-house programs would likely prove to be counterproductive.

As employers become more hands-on in the management of their health care spend, the HTA arrangement can serve as a roadmap for those who seek to improve transparency and create more PBM accountability. This approach also includes enhanced audit capabilities as well as increased visibility into clinical decision making and drug formulary selection, ie, a seat at the Pharmacy and Therapeutics committee table. If anything, current HTA strategies may prove to strengthen and reinforce the continued presence and role of the PBMs in the drug channel.

The Drug Market and Pricing Trends

As new and novel (and generally high-cost) medications continue to come on the market and the pace of FDA approval accelerates, employers will be shifting their attention from a volume discount pricing approach toward more value-based arrangements. In the process, employers may continue to look to their PBM to challenge existing pricing and product selection norms.

PBMs have implemented criteria for formulary positioning of newly approved and newly price-increased, high-cost medications that limits coverage to select drugs within a given therapeutic category, ie, anti-inflammatory injectable medications.5 The main idea, according to the PBMs, is that by enforcing new access limitations, drug companies will be forced to lower their prices to compete, which, in turn, will save insurers and employers money.

Increasingly, the decisions around preferred medication status for high-cost drugs rely on the value frameworks built by organizations like the Institute for Clinical and Economic Review (ICER), an independent nonprofit health care research organization dedicated to improving the interpretation and application of evidence in the health care system since its formation in 2015.

ICER publishes reports that include full analyses of how the drugs work (comparative effectiveness) and the value the treatments represent to patients and the health care system (cost-effectiveness and the potential budget impact). The reports support the goal of getting excellent drugs to market quickly at a price that is affordable to patients and the health system without hindering the development of new and effective drugs.6

As employers navigate an increasingly high-cost, complex, uncertain environment, they continue to prioritize offering a quality health insurance program. Employers seek to attract and retain good talent. To this end, they aim for employees to see them as a critical partner in achieving and maintaining good health.

Ultimately, the engagement, education and buy in of employees relating to these strategies, as well as in all aspects of the health insurance program, is paramount to controlling benefit costs.

Continuing to find innovative ways that optimize how care is accessed and delivered is key to controlling health care costs. Today, a majority of self-insured employers offers nurse coaching for condition management, lifestyle management, and telehealth services to better accommodate the immediate health care needs of employees. Helping employees understand and navigate their options and costs through coaching and support tools will increase awareness around benefit offerings and deliver on value.

Employer-Direct Health System Contracting

In the past, self-insured employers delegated the responsibility of contracting with hospitals and doctors and designing health benefits to their partner health insurance companies.

Under these arrangements, a health system takes on financial risk much like an accountable care organization and manages the health of a large population or group of patients with common diseases or procedures.

For example, in 2018, the HTA will contract with physicians and other health care providers in Phoenix, Chicago, and Dallas-Fort Worth to care for employees with diabetes, hip and knee replacements, and lower back pain. The arrangement will structure the contracts to pay physicians based on how well they meet certain targets such as quick recovery times, rather than for each authorized procedure and test. The alliance will use their data repository to help member companies choose the drugs and doctors that provide the best value.

The HTA has dominated the headlines with increased employer-direct control of health care costs over the last decade, but other large corporations have also been leveraging their purchasing power. As early as 2010, Lowe’s partnered with the Cleveland Clinic to establish a cardiac center of excellence (CoE) partnership to drive quality, better outcomes, improve value, and reduce cost. Another early adopter of novel hands-on approaches to managing medical spend was Walmart. Both companies extended the CoE model to other common surgical conditions. And Boeing announced last year that it would contract directly with California-based MemorialCare Health System to provide health benefits to its employees in southern California.7 At the time, this was the first direct contracting agreement between a health care system and an employer in California.

Employees who chose this option are offered additional benefits like smaller paycheck deductions and lower copays on certain services. Over time, these employers may also leverage data on surgery outcomes and other quality measures for procedures and common diseases in order to provide their employees with the highest quality local health care while controlling costs through direct arrangements with local providers and health systems.


More and more, employers are directly involved in decisions that enable a healthy, productive workforce that impacts bottom-line business.

Therefore, having a corporate culture focused on the prevention and management of chronic diseases can facilitate access to quality care and better health outcomes, thereby allowing employees to focus on their jobs when they’re at work.

In addition to the HTA, national, state, and local organizations are increasingly devoting their agendas to employer-targeted health benefits education and research. As more employers begin to explore some of the nontraditional benefit functions in house, access to knowledgeable experts will become a priority. Sharing best practices and developing sophisticated tools and resources will be required to continue to move this process forward in new and meaningful ways.

Employer-sponsored coverage is a central component of the American health insurance system and both employers and employees continue to believe that offering quality health benefits and coverage is an important part of recruiting, retaining, and valuing talent. As they face higher and higher costs year after year, employers are increasingly stepping into key decision maker roles and exerting influence in new and nontraditional ways. Employers are no longer satisfied with delegating the operational implementation of their benefits to outside entities; they are now ensuring that optimal clinical and financial performance of the health benefits they provide is achieved for their company and their employees.

For more information, contact Aventria Health Group at 215.489.9000
or email us at info@aventriahealth.com.

1. Garfield R, Majerol M, Damico A, Foutz J. The uninsured: a primer – key facts about health insurance and the uninsured in the wake of national health reform. http://www.kff.org/uninsured/report/the-uninsured-a-primer-key-facts-about-health-insurance-and-the-uninsured-in-the-wake-of-national-health-reform/. Published November 1, 2016. Accessed September 8, 2017.
2. Cox C, Damico A, Claxton G, Levitt L; Kaiser Family Foundation. Examining high prescription drug spending for people with employer sponsored health insurance. Peterson-Kaiser Health System Tracker Web site. https://www.healthsystemtracker.org/brief/examining-high-prescription-drug-spending-for-people-with-employer-sponsored-health-insurance/?_sft_category=access-affordability#item-start. Published October 27, 2016. Accessed September 8, 2017.
3. Claxton G, Rae M, Long M, et al; Kaiser Family Foundation; Health Research & Educational Trust; NORC at the University of Chicago. Employer Health Benefits 2016 Annual Survey. Menlo Park, CA; Kaiser Family Foundation, Health Research & Educational Trust; 2016.
4. Weinberg N, Langreth R. Drug costs too high? Fire the middleman: Caterpillar’s lowered drug bills show why pharmacy benefit managers are under fire. Bloomberg Business Week Web site. https://www.bloomberg.com/news/articles/2017-03-03/drug-costs-too-high-fire-the-middleman. Published March 3, 2017. Accessed September 8, 2017.
5. Thomas K. A push to lower drug prices that hit insurers and employers the hardest. The New York Times Web site. https://www.nytimes.com/2016/09/09/business/express-scripts-urges-narrower-coverage-of-anti-inflammatory-drugs.html? Accessed September 8, 2016. Accessed September 8, 2017.
6. ICER launches new drug assessment program with $5.2 million award from the Laura and John Arnold Foundation [news release]. Houston, TX, Boston MA. Institute for Clinical and Economic Review, Laura and John Arnold Foundation; July 21, 2015. https://icer-review.org/announcements/icer-ljaf-drug-assessment-announcement/. Accessed September 8, 2017.
7. Terhune C. Boeing contracts directly with California health system for employee benefits. Kaiser Health News Web site. http://khn.org/news/boeing-contracts-directly-with-california-health-system-for-employee-benefits/. Published June 21, 2016. Accessed September 8, 2017.
8. CDC Foundation. Healthy workforce: lowering costs, improving safety, health and productivity. https://www.cdcfoundation.org/businesspulse/healthy-workforce-infographic. Accessed September 8, 2017.