Can I Really Save on Pharmaceutical Costs?
It is not uncommon when purchasing pharmacy benefits to regard price as the primary driver in making your decision. However, the rate of annual increases is just as important to consider.
As you select a pharmacy benefits manager, it is important to examine the total cost of those services over the lifetime of the contract. Let’s look at how the base price in year one combined with the year over year (YOY) increase, also known as “trend”, determine the variance in the cost – or in savings – of two contracts over time.
It’s important to first understand the compounding effect.
For illustrative purposes, think about what happens when you open a savings account with a $100 initial deposit with a bank that pays 10% interest each year.
In the first year, you get 10% interest on your $100 initial deposit, or $10. Your account balance at the end of year one is $110. In the second year, you’re paid 10% interest on the entire $110 account balance. That’s $11 in interest bringing your account balance to $121 at the end of the second year. After ten years of receiving 10% compound interest, your initial $100 deposit grows to $259.37. That’s an increase of more than 159%, and therein lies the power of compounding.
When it comes to saving money, you want as high of a compounding interest rate as possible. The same is not true when it comes to YOY price increases for the products and services that you purchase each year.
Applying Compounding to Procurement
Let’s assume you’re comparing two 10-year service contracts. Under Contract A you’ll pay $10,000 in year one with a 15% YOY increase. Under Contract B you’ll pay $12,900 in the first year with a 5% YOY increase. While Contract A is initially less expensive, Contract A costs more than Contract B by year four. Over the ten-year life of the contracts, Contract A will cost you a total of $203,037 while Contract B will cost you only $162,253.
As you can see, it is critically important to pay attention to the annual YOY cost increases in addition to evaluating your year one costs.
The best outcome of all is when you are able to secure a lower initial price and a lower YOY increase. Over time, that dual combination can save your organization a tremendous amount of money.
Applying Compounding to Pharmacy Benefits
Sourcing Alliance offers our members access to a revolutionary Pharmacy Benefits Management (PBM) Program that features greater stability in specialty drug prices, increased transparency and PBM accountability, and the buying power of the nation’s longest-standing PBM coalition with more than $1 billion in annual spend and 3 million covered lives.
Our PBM Program delivers self-insured employers an average savings of 25% on pharmaceutical costs. In addition, our PBM program’s annual YOY increase is only 5%, compared to the industry average of a 9% trend.
How do these initial savings combined with a lower annual trend produce savings for Sourcing Alliance members?
A member with 650+ employees is currently paying approximately $1 million per year for pharmacy benefits with a typical average YOY increase of 9%. Under the SourceRx Program, the member’s first year costs are reduced to $750,000 with an annual average YOY increase of 5%. The SourceRx savings grow over time due to the power of compounding. Under the member’s current solution, the cost in year ten is $2,171,893 while the cost of SourceRx would be $1,163,496. That is a savings of $1,008,397 – more than the entire amount paid in the first year of the contract. And over the life of the contract SourceRx saves over $5.75 million – almost six times what the member is spending today. Think about what that member could do with an additional $5.75 million in available funds over the next ten years.
As you look for the pharmacy benefits management contract that offers the lowest and best option for you and your organization, it is critical to look at what your costs are over time. Consider your costs in years three, four, and five. Ask yourself what you could do with an additional 5.75 times your current annual PBM spend in available funds over the next ten years.
See for yourself by comparing your current PBM cost to SourceRx. Simply download the calculator and insert your current PBM cost. Download Your Savings Calculator!
If you are not already familiar with SourceRx, and would like to learn more about the program, watch this 2-minute video.