What you should know about alternative funding
Alternative funding is a recent pharmacy benefits concept. A certain class of vendors promote alternative funding as a way for self-funded employers to make their employees and dependents eligible for “free” medications. Of course, the affected drugs are not free at all. Instead, these vendors arrange for funds to be diverted from vital funding sources like charitable organizations and foundations in order to reduce employer costs.
Here’s a summary:1
- Certain alternative funding vendors may try to convince plan sponsors to exclude some or all specialty drugs from their formulary to save money.
- Once the drugs are excluded from the plan, the member appears to be uninsured or underinsured. The alternative funding vendor can then help the “uninsured” patient apply for needs-based programs to cover the cost of the prescription intentionally removed from the plan’s coverage.
- When approved, the prescription is dispensed from a specific patient assistance program (PAP) pharmacy at no charge to the plan sponsor or patient.
Although this is how alternative funding programs are advertised to prospective clients, the reality can be much different. Unfortunately, alternative funding rarely works as advertised. It may introduce regulatory compliance risk and disrupt care for members.
The truth is that some alternative funding vendors are diverting charitable funds intended for people with little or no insurance coverage to those who actually are otherwise covered. In the process, they may charge fees ranging up to 25% of the cost of each drug.2
Needs-based funding for costly prescription drugs has an important role in the pharmaceutical market. But whether these funds come from manufacturer donations or private citizen contributions to charities, the charitable funding amount available is limited. Those who divert these funds to lower employer plan costs are effectively reducing the money available for people who need it most.
Growing popularity of alternative funding
Despite the drawbacks of alternative funding programs, employers are interested in the promise of lower costs. A recent survey found that up to 10% of self-insured plans with at least 5,000 employees were already using one of these programs. Another 27% said they were considering using one in the next 2 to 5 years.3
We think it’s time for a reality check. Let us explain why alternative funding isn’t a sustainable solution. In fact, it carries unexpected financial, clinical and even legal risks.
Health plans and employer groups are told that carving out parts of their pharmacy plan is simple and will save them money.4 It may be that adopting an alternative funding strategy is easy — at least at first. However, we believe that carving-out will likely have longer, unforeseen complications. Worse, it often causes patient treatment delays or disruptions.
We believe some alternative funding programs are making overstated, unsustainable promises. Plan sponsors seeking cost savings may not be considering the longer-term financial and regulatory risk of these strategies — both for themselves and the needs-based funding system overall.
As more employers use alternative funding, there are already signs that manufacturers and the charities they work with may stop providing funds to patients otherwise covered by insurance. In fact, it’s already happening in the marketplace. We’re hearing reports of patients receiving alternative funding having their eligibility removed due to new qualification criteria.
Alternative funding sources have always been limited. Program funds can and do run out. Donors — including manufacturers — may stop making contributions, meaning exhausted funds may never be replaced.5
Funding program limits can take various forms:6
- Needs-based programs usually limit eligibility according to income, typically based on some multiple of Federal Poverty Guidelines. Coverage is often denied, especially for highly compensated employees.
- Therefore, alternative funding isn’t guaranteed. Individual members may find they don’t qualify for assistance or that funds have run out while their treatment is ongoing.
- Alternative funding vendors may not secure funding and then must work to carve drugs back into the original plan.
When funding stops or isn’t available, members need their employer to grant an exception to cover their medicine through the prescription benefit. The exception process creates additional administrative complexity — and costs — for plan sponsors. For example, exceptions may require time-consuming coordination among the alternative funding vendor, the plan sponsor and the PBM.7
Changing the pharmacy benefit to accommodate alternative funding programs can also alter the plan’s cost structure. This can affect pharmacy network rates, drug rebates, prior authorization approval rates and savings, costs associated with non-targeted medications, and short-term versus maintenance therapies.8
How alternative funding works
The cost savings from using charitable funds may seem attractive at first. But plan sponsors must realize their new vendor may not be able to secure funding or the funding may run out. They could end up paying more, not less.9
Below, we illustrate how a client’s costs might vary from the claimed alternative funding savings. The graph shows costs for an individual member granted $10,000 for a specialty drug through alternative funding. The middle line represents the normal PBM contract. Bars below that line show extra savings, and bars above the line show added costs.*
*Note: Figures are illustrative. Actual results will vary. Contact your Optum Rx representative for details.