Pharmacy Carve-Out: 7 Advantages Employers Need to Know

Why Carve Out Your Pharmacy Benefits?

The first step is the process is to define the difference between a pharmacy “carve-out” and a pharmacy “carve-in”.

A Pharmacy Carve-Out

A pharmacy “carve-out” is when a plan sponsor chooses a Pharmacy Benefit Manager (PBM) to administer and manage prescription drug benefits that is separate from the PBM contracted with the health plan administering their medical claims. The carved-out Rx plan can be fully insured or self-funded.

Carving out the pharmacy benefit removes the health plan as an intermediary for pharmacy benefits. Typically, the health plan charges a “fee” as the intermediary. This fee can be embedded in the PBM pricing or expressed as an “administrative” fee. Under either fee structure, the plan sponsor ends up paying more for pharmacy benefit management than they would pay by contracting directly with a PBM on a carved-out basis. It follows logically that carving-out the pharmacy benefit management offers plan sponsors the opportunity to save money without cutting employee pharmacy benefits.

By negotiating contract terms and conditions, audit rights, clinical management, and risk management programs directly with a PBM, plan sponsors are able to remove fees that bear no relationship to the performance of their plan or the cost of providing a pharmacy benefit. Just as importantly, the plan sponsor gains the direct business relationship necessary to maximize control and selection of programs that drive effective cost and clinical outcomes.

A Pharmacy Carve-In

A “carved-in” pharmacy plan is when the health plan providing medical claims administration also provides a PBM contract that the plan sponsor “joins” and under which the plan sponsor has no say in the terms and conditions that were negotiated. Many health plans and medical insurance carriers subcontract their pharmacy benefit management to a stand-alone PBM. The plan sponsor is not a party to this contract and it is considered proprietary by the health plan or insurance carrier providing the medical benefits. Therefore, the PBM contract is not shared with the plan sponsor for whom pharmacy benefit management is being provided under a carved-in arrangement.

The contract provided to the plan sponsor subsequently does not describe or share the critical definitions underlying the pricing terms, audit rights, or any of the other important definitions necessary to understand the true cost of drugs or create accountability for the PBM that are found in a carved-out PBM contract.

An Example of a Carved-In Pharmacy Benefit Plan

Contracting with one of the Blue Cross Blue Shield (BCBS) health plans that provide and manage the medical benefits and subcontract the prescription drug benefit is a classic carve-in example. The PBM choice for large health plans are typically one of the three big PBMs – Express Scripts, Medco, or CVS Caremark. In this situation, the plan sponsor has no access to the terms of the PBM contract and no right to negotiate its terms. Some large medical carriers, such as United Healthcare, have acquired their own PBM and offer carved-in plans without having to subcontract Rx benefits.

What are the Advantages of a Pharmacy Carve-out?

There are significant advantages to pursuing a carve-out strategy, both for the plan sponsor and plan participants. Among the advantages are the following:

1.  Transparency – A carved-in plan has little or no transparency for the cost of the prescription drugs, the size of the mark-up, the rebates earned by the health plan, the contract volume pricing concessions negotiated by the health plan, or other financial incentives, all of which drive up cost to the plan sponsor. The health plan administrator provides none of the details critical to lowering cost, managing risk, and creating better clinical outcomes.

2.  Lower Total Pharmacy Costs – A carved-out PBM contract allows for aggressive price negotiations and more competitive Request For Proposals (RFPs). Separating the medical and prescription drug benefits enables a plan sponsor to compare pricing for both benefits on an apples-to-apples basis. A direct PBM contract will also include the critical terms that govern pricing, including discounts, rebates and soft dollar programs. In addition, administrative costs are not hidden within the healthcare benefits fee. As discussed earlier, carved-in plans have increased fees and costs that reflect the health plan receiving compensation from their PBM arrangement.

3.  Better Contract Terms – Carved-in plans are based on a single, pre-determined contract that does not allow a plan sponsor or its advisor to negotiate non-pricing terms critical to managing cost trends. For example, carved-in Rx plans seldom have audit rights and, if they do, they are frequently toothless. Detailed clinical programs are also usually missing. Conversely, a carved-out PBM contract, if correctly negotiated by the plan sponsor or an advisor specializing in pharmacy benefit contracting, will clearly outline all of the important non-pricing terms.

4.  Improved Data Management – Stand-alone PBMs with carved-out plans and direct contracts with plan sponsors capture and report all claims elements, allowing for accurate modeling, forecasting, and strategic planning. Data feeds and FTP interfaces between the PBM and the medical claims administrator allow automated delivery of pharmacy benefit claims and integration with medical claims. Plan sponsors and advisors can use the combined analytics to track trends and make informed benefit decisions.

5.  More Detailed Analytics – The enhanced data management described above means more detailed reporting capabilities, more sophisticated analytical tools, and more accurate forecasting and modeling. All of these contribute to lower annual drug spend and better long-term planning.

6.  Customized Clinical Programs – Better data management and detailed analytics enable clinical licensed pharmacists, whether at the PBM or within a specialized advisory firm, to recommend, implement, and manage customized clinical programs based on the plan sponsors unique population. Examples of this include opioid management, diabetes management, and oncology programs.

7.  Carved-out Specialty Rx – A carved-out PBM also permits the plan sponsor to install a carved-out specialty pharmacy benefit. Because specialty pharmacy is the fastest growing and most expensive portion of any pharmacy benefit plan, carving-out specialty drugs provides all of the advantages listed above.

Medical and Rx benefits are completely different. The core strength of health plans and medical carriers is managing discounts with hospital chains and building provider networks. These skills are not transferable to managing prescription drug benefits, which are very different and, in many ways, more complex and more dynamic.

Driven principally by Specialty Rx, pharmacy benefit costs are forecast to increase between 15 and 18% per year for the foreseeable future.[1] By carving out pharmacy benefits, plan sponsors create the potential to save up to 18% per year on pharmacy benefits costs. Whether the pharmacy benefit plan is self-funded or fully insured, any employer with more than 100 active employees should consider and investigate a carve-out strategy for their pharmacy benefits.

[1] The Pharmacy Benefit in the Year 2001: More Tiers, More Therapeutic Substitution, More Red Ink? January 25, 2012. <>