Had a friend ask me about Rx options at a small company and thought it was worth the time to define "Carve-Out" for the HR crowd who may not be aware of the option...

If you aren't a benefits manager, you may not be familiar with the term "Prescription Carve-Out" or "Rx Carve-Out".  What do those terms refer to?  Rx Carve-Out refers to the option for a self-insured medical plan to use a PBM (prescription benefits management company) to manage the pharmaceutical portion of their medical plans, rather than allowing the traditional PPO or HMO (think Blue Cross organizations) to manage the Rx program in conjunction with the medical plan.

Why would a company use a PBM rather than an organization like Blue Cross Blue Shield to manage their Rx  program?  Simple answer - cost control and protection against annual trends.   The smaller your company, the less clout you have with the big insurance providers.   Many HR pros assume they have total design control when a company elects to become self insured - not true.  The big insurance providers can still opt to offer 1 or 2 flavors of design in some key areas, and Rx is one of those.

Prescription carve-out offers max benefits to smaller companies by bringing value in several areas.  First up, PBMs will offer mail-order - believe it or not, some BCBS organizations will not offer mail order to smaller self-insured clients.  Mail order is a primarary driver of generics within your company.  For a company with 600K in total Rx costs annually, a good rule of thumb is that every 5% gain in generic rates (as defined by total % of scripts ordered via mail order) will deliver 40K in savings- real money.  It's crazy to think that some smaller companies can't get access to mail order via a Blue Cross organization, but this is one item that forces the Carve-Out option.

The other big play from a cost reduction standpoint in moving to a Carve-Out is accessing the buying power of a network like Caremark or AdvancePCS.   Since these folks do nothing but Rx, they are very disciplined as a provider in extracting volume discounts and passing them along to customers.

The final benefit of the Rx Carve-Out is design control.  If you are a small company on a BCBS plan as a self insured entity, you may not control the ultimate design of your plan, and as a result may be covering things that aren't ordinarily covered nationally.  Control doesn't mean you will take benefits away, but it's always good to know you have options.