Benefits March 3, 2015

Pharmacy Benefits a Big Chunk of Employer Health Care Costs

A survey from Buck Consultants indicates how employers can look to spend their pharmacy dollars more effectively.
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More than three-fourths (77%) of respondents to Buck Consultants’ Prescription Drug Benefit Survey reported spending 16% or more of their health benefit cost on pharmacy benefits, up from 72% in the previous year.

The most common range selected for the percentage of health care cost spent on pharmacy benefits was 16% to 20% (selected by 37% of survey respondents). In this year’s survey, 4.6% of respondents indicated spending more than 30% on pharmacy benefits, which is twice the percentage in last year’s survey (2.3%).

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Buck notes that many plan sponsors are concerned that their pharmacy benefit program is not maximized or as cost-effective as it could be. There is an array of cost and quality-control strategies (coverage rules and clinical programs) to consider when building a pharmacy benefit program, Buck says. A strategy and specific policies for the coverage of all medications is necessary to meet an employer’s philosophical and budgetary needs. This requires a comprehensive review of the plan design, coverage rules, and clinical programs currently in place and those that are available to meet plan sponsors’ needs and objectives, in addition to ensuring that vendor pricing is marketplace competitive.

The target cost-sharing range (i.e., percentage of total pharmacy benefit plan costs paid by participants) for their current plan chosen by most survey respondents (35%) was 16% to 20%. Thirty-nine percent selected cost-sharing range targets that were 21% or more, and 26% chose ranges with target cost-sharing levels of 15% or lower.

Buck says plan sponsors need to set plan participant cost-sharing policy based on their plans’ specific claim and utilization experience, in addition to industry-specific benchmarks and other factors. It recommends plan sponsors evaluate their current participant cost-sharing to determine the current level and whether changes are needed.

The survey asked respondents to indicate their use of 16 different tools and programs. Nine of the 16 tools were reported as “in use today” by more than 50% of respondents.

The percentage of survey respondents that reported using a formulary was 89%. Formularies have been a popular tool for the past three decades, Buck notes. The majority of survey respondents use three-tier formularies, but value-based formularies have increased in popularity.

More respondents in this year’s survey than in the previous one (52% compared to 42%) reported using programs that address “gaps in care,” with 18% indicating plans to implement such programs in the next 12 months. The percentage of survey respondents that have implemented or plan to implement programs that address patient adherence was higher in this year’s survey than in the previous one, 73% compared to 68%. Buck notes studies have shown that, for many chronic conditions, patients who comply with their prescription drug regimens have lower overall health care costs.

Another tool used by more survey respondents in this year’s survey than in the previous one (37% compared to 31%) is mandatory use of mail-order pharmacies (or penalties for use of retail pharmacies) for maintenance medication refills.

In addition to these cost-saving strategies, Buck recommends plan sponsors take advantage of current marketplace conditions, which make 2015 an excellent time to negotiate aggressive renewals. Plan sponsors can also conduct a pharmacy benefit manager competitive bidding process to achieve optimal pricing terms and other contract provisions that influence a plan’s financials and service levels.

The survey report is available for $395 and can be ordered from https://www.bucksurveys.com/BuckSurveys/.

Data and Research March 3, 2015

Largest Pensions Troubled By Longer Lifespans

The United States’ 19 largest pension funds hold roughly 40% of the nation’s pension obligations, according to Russell Investments, so it’s no big surprise they are struggling with longevity trends.
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An assessment of Russell Investments’ “$20 Billion Club,” an index tracking the largest private U.S. pension funds, finds “actuarial losses” had the most significant impact on pension performance during the last year.

Russell defines actuarial losses as those pinned to interest rates and mortality assumptions, among other factors. Since early 2014, both interest rate declines and updated mortality assumptions have seriously dampened mega-plan funded status, Russell says.

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Russell’s $20 Billion Club comprises the 19 largest corporate defined benefit (DB) plans that together represent roughly 40% of the pension assets and liabilities of all U.S. publicly listed corporations. New Russell data shows these corporate DB plans have seen a ballooning projected benefit obligation hit their balance sheets in the past year, largely underpinned by the adoption of updated mortality assumptions for accounting/actuarial purposes.

These lackluster results come after a resurgent 2013 for large pensions. At the start of financial year 2014, Russell says, these mega-pensions faced a combined deficit of $114 billion, the lowest it had been since 2007.

“However, by the end of 2014, that figure had risen to $183 billion, hit by a double blow of an unexpected decline in interest rates and updated assumptions about how long retirees are expected to live,” Russell’s analysis explains. 

Russell says the impact of investment returns has actually been neutral or positive in every year for the past decade or so, discounting 2008’s meltdown. “Plan sponsor contributions outpaced new benefit accruals and hence had a steady positive impact over this period,” Russell adds. “The big headwind has come in the shape of ‘actuarial losses.’”

As explained by Russell’s Bob Collie, chief research strategist, Americas Institutional, yearly actuarial gains and losses can be traced largely to changes in interest rates. Falling rates lead to higher values being put on the liabilities, while rising rates lead to lower liability values. 

In 2014, the median discount rate used for U.S. plans fell by 0.83%, to 4.02%, pushing liabilities up and hurting funded status. In an added twist, this fairly sizable and largely unpredicted drop in interest rates came during the same year as significant changes in commonly used mortality tables that help plans make assumptions about life expectancy.

“The widespread adoption of newly published mortality tables added some $29 billion to the combined liabilities [of the $20 Billion Club], turning an already negative year into a significant setback,” Russell says.

Industry experts have noted that pension plans should expect more frequent mortality assumption updates—likely leading to additional funding stress. However, the Russell analysis goes on to suggest liabilities are about as high today as they will ever be, though knowing exactly when liability values may peak is tough.

“When interest rates rose in 2013, we concluded that liabilities most likely had indeed peaked and that they would never regain the high of 2012,” Collie says. “But that conclusion reckoned without the combined impact of a fairly sharp fall in interest rates and the speedy adoption of the new mortality tables. Together, those effects have led to a 2014 liability value that is even higher than 2012: against the odds, pension liabilities have re-peaked.”

Given this turn of events, Collie says Russell currently “offers no predictions as to whether 2014 now represents peak pension liabilities or whether liability values will go higher still.” The main source of uncertainty is actuarial gains/losses: the combined effect of the other variables (service cost, benefits, interest cost, and others) is relatively stable and can be expected to tamp down the combined liability value by perhaps $5 billion to $10 billion, or more if there is substantial pension risk transfer activity in 2015.

The $20 Billion Club was launched in 2011 and at the time represented 16 U.S. pensions meeting the minimum asset hurdle. Additional information and analysis is here. 

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