PHARMACY Carve-in vs. Carve-out:

How Unbundling Pharmacy Benefits Can Reduce Costs and Improve Health Outcomes


healthcare costs continue to rise year after year. While employers experienced the smallest increase in decades during the COVID-19 pandemic as individuals deferred care or relied on telehealth now the United States is expecting a more than a 5% increase in health benefits costs over the next two years, according to a recent survey from Willis Towers Watson. To counteract the impact of this spike, businesses are seeking ways to make healthcare costs more affordable and sustainable both for the company and employees.

Employers are evaluating various options to counterbalance impending cost increases, such as premium contributions based on pay or job grades, adding surcharges for working spouses, adopting Centers of Excellence and adding more telehealth services. However, as you help your self-insured employer clients navigate these decisions, an important factor to consider is pharmacy benefits, and whether managing them outside of the health plan can yield greater savings and a better experience without disrupting their employees.

There are two ways in which self-insured employers can manage their pharmacy benefits — either “carved in” as part of the medical benefit or “carved out” and managed outside of a health plan.

Carved-in pharmacy plans are included or “bundled in” with medical benefits, and usually are run by a large health plan. In this scenario, employers, as plan sponsors, have minimal oversight of the pharmacy benefit. Because they are unable to contract directly with the carrier’s pharmacy benefit manager, employers typically are unaware of their specific contract terms — such as multiyear arrangements without competitive discounts, or the definitions that alter pricing and rebate terms — and can’t create a custom pharmacy benefits experience for them and their employees.

Carved-out arrangements, on the other hand, give plan sponsors full control over everything from selecting their preferred pharmacy benefits partner to their pharmacy network, stop-loss carrier and more. Self-insured employers in these arrangements have more visibility into their pharmacy contract, access to drug claims and other data, as well as auditing rights and a clearer understanding of discounts and guaranteed rebates. Additionally, since plan sponsors have better insights into how their plan is being run and performing from a clinical perspective, they have more options as it relates to proactive and tailored clinical management. This is why 94% of Fortune 100 companies carve-out pharmacy benefits and a reason the carriers are set on preventing smaller groups from doing it.

By carving out, self-insured employers can uncover the information needed to significantly reduce costs and improve member health.

Pharmacy benefits provide a critical and highly utilized service to plan members, making it essential that employers have full visibility into the actual performance of their pharmacy benefits plans. By carving out, self-insured employers can uncover the information needed to significantly reduce costs and improve member health. Additionally, when your clients carve out, you can guide them on selecting a pharmacy partner that will deliver sustainable prescription drug savings, elevated service and minimal disruption to members.

Carving-out the prescription drug program comes down to three main benefits:

  • Transparency: Full pricing and rebate transparency are a hallmark of best-in-class pharmacy benefit contracts. When your self-funded clients carve out, you can help them obtain a clean contract that includes straightforward language, visibility into plan financial performance, and a guarantee that all discounts and rebates will be passed through to the plan.
  • Insights: The best approach to managing pharmacy benefits combines the employer’s complete pharmacy claims historical data not the medical carrier’s book of business data with expertise that addresses potential clinical risk areas and cost-savings opportunities. For example, employers in a carved-out arrangement can review their (anonymized) pharmacy claims data alongside an independent PBO with pharmacy expertise and uncover insights around their member population. These include underlying chronic conditions or forthcoming specialty drug claims that could impact the plan’s budget. Considering specialty drugs can be 12 times more expensive than the average annual cost of brand-name prescription drug therapy, and specialty drug spending is forecast to continue increasing 15% year over year, gaining this level of insight is critical to making informed decisions and optimizing pharmacy benefits plans.
  • Control: Needs and priorities for pharmacy plans are as diverse as the employer and its members. Carved-in arrangements significantly limit choice because pre-packaged plans offer very little flexibility for employers to respond to changes in the pharmacy landscape, their business and their member population. By carving out these benefits, employers have the power to customize a plan based on company and employee needs, rather than selecting a package and formulary developed by the medical plan.Maintaining a carved-in benefits plan may seem like a simple option. However, carving out is a critical component of optimizing health care benefits. In fact, after carving out, employers are often able to reduce their pharmacy spend by more than 25% on average the first year, as well as protect themselves against future drivers of increased spend, like the rising cost and utilization of specialty medications. Brokers have an opportunity to help their clients identify and address pharmacy-related factors that are driving up their plan costs by carving out and managing them separately and proactively, so they can reduce costs while continuing to provide a comprehensive benefit.

CHRIS BROWN is director of Business Development at RxBenefits where he helps employee benefits consultants identify and solve their client’s toughest pharmacy challenges. Chris has worked in several different parts of the pharmacy marketplace throughout his 25-plus year career, allowing him to acquire a wealth of industry knowledge. In 2013, Chris was honored by the Oregon State Pharmacist Association with a Special Services Award for his successful legislative work on PBM transparency. He can be reached at