Pharmacy Risk Highlights Captive Insurance's Role in Enterprise Risk Management

Employers have long understood the potential impact of catastrophic medical claims. A single serious cancer diagnosis, premature birth, or transplant can suddenly turn an otherwise predictable year into a very expensive one.

More recently, many of those employers have learned that pharmacy costs and advanced therapies account for an increasingly significant share of their healthcare spending. From GLP-1 medications to cell and gene therapies, innovative treatments are having a profound impact on employee well-being and an ever-growing impact on the cost of pharmacy benefits.

That impact is compounded by the changing pharmacy benefit manager (PBM) landscape. Industry consolidation has brought mail-order and specialty pharmacies under the same roof as rebate aggregators. Manufacturer rebates play a greater role in determining formulary status, and the drugs generating the most rebate dollars aren't necessarily the ones that carry the lowest net cost for plans.

For employers that use captives to gain greater control of what they spend to keep employees healthier and happier, these developments aren't just about benefits. They're critical risk management issues.

That isn't splitting hairs—it's an important distinction. Captives are most effective when they mirror an organization's broader approach to risk: knowing and understanding exposures, deciding which risks to retain and which to transfer, and constantly working to reduce the frequency and severity of losses. Employers that apply that philosophy to property, casualty, and other risks but choose to leave medical and particularly pharmacy spending on autopilot have disconnects in their risk management strategies.

Pharmaceutical innovations have improved the quality of people's lives and cured conditions that were long considered to be life sentences. That's the good news. But making those treatments available to covered employees can blow right through a budget. GLP-1 medications may be today's most visible example. Decisions about covering these treatments for weight loss involve much more than simply whether to make them available. Employers also need to consider clinical programs, patient utilization, and the likely long-term impact on the patient and the plan.

Even when lower-cost alternatives to some drug classes, such as biosimilars, are available, the PBM's rebate arrangements may favor originator products that carry higher net costs.

Then there are cell and gene therapies. Treatments carrying six- and seven-figure costs are moving from extraordinary events toward risks employers increasingly need to anticipate. The questions that arise are familiar in the captive landscape: How much of that risk should we retain, how much should we transfer, and what can we do to manage the retained portion? The employer's best interests may not always align with PBM contracts, plan documents, and stop-loss arrangements.

These issues are transforming the relationship between employers and the PBMs that oversee this growing portion of total benefits. Historically, employers would sign multiyear PBM agreements and devote relatively little attention to the numbers between renewals. Often, the PBM agreement was part of the medical third-party adminstrator or insurer offering. Given the complexity and volatility in the pharmacy universe, companies can no longer afford to take that multiyear autopilot approach. Seeking employee benefits consultation specialized in pharmacy contract and clinical protocols is central to managing the growing risk.

The situation isn't completely bleak, and that's largely because employers now have access to information that wasn't available to them just a decade ago. Improved data and more sophisticated analytics deliver a much clearer picture of how employees utilize their benefits, the effectiveness of treatments, and emerging risks. Captive owners can use retrospective analyses to project how a proposed change might have affected actual costs in the past, along with predictive modeling to gain insight into what's ahead.

Another advantage of today's wealth of data is that it creates opportunities for earlier intervention. For example, a prior authorization or an initial prescription may reveal an emerging high-cost situation. Clinical engagement early in the process may help determine whether the prescribed medication and dosage are appropriate, whether step therapies were considered, or whether a different provider or center of excellence might provide a better long-term outcome for the employee.

That doesn't mean the employer's objective is to simply deny an expensive claim. Instead, it's a matter of making sure the employee achieves the best clinical outcome while managing the financial impact. Those goals don't have to conflict.

Taking this type of approach makes employee engagement increasingly important. Conversations about benefits can no longer happen only during annual enrollment. As treatment modalities become more complex and employees struggle to understand why their prescriber's recommendation isn't covered, employers need to provide more proactive education and support. Doing so can reduce frustration, build trust, and help employees understand decisions that might otherwise seem arbitrary.

Again, today's issues related to pharmacy risk are tied to a larger question for captive owners: Are we managing the benefits with the same risk philosophy we apply to the rest of the enterprise? It's a question that shouldn't be answered by human resources alone. Leadership needs to understand the exposures within the health plan and make the key decisions about risk retention, risk transfer, and the resources devoted to managing those risks.

There's a fundamental difference between buying insurance and managing risk. Captives are designed for organizations willing to do the latter. As pharmacy becomes a larger and less predictable component of healthcare spending, captive participants have another opportunity to demonstrate that philosophy in practice.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.