Insurance Regulatory Considerations for Prescription Drug Cost-Management Programs

At a Glance

• Pharmacy benefit managers and other industry participants have responded with various program offerings intended to help self-funded employer plans and other payors manage high drug costs. Alternative innovative solutions are available that, in some ways, are structured similarly to an insurance product but not offered as such.
• The consequences for engaging in the unlicensed business of insurance may include cease-and-desist orders, administrative fines and penalties that may accrue on a per diem or per occurrence basis, criminal sanctions of officers and directors, and restitution. Further, in certain states, consequences for engaging in the unlicensed business of insurance may extend to an entity that engages the unlicensed insurer under an “aiding and abetting” theory.
• Employers and other payors searching for innovative solutions to help manage the high cost of prescription drugs, as well as entities considering offering these solutions, should be aware of potential insurance regulatory considerations that depend on how such solutions are structured.

The cost of prescription drugs continues to be a major concern for Americans, with a majority of polled Americans seeing prescription drugs as too expensive and 30% struggling to afford medications. At the same time, payors are seeking ways to manage the rising costs of prescription drugs, and the extraordinarily expensive cell and gene therapies in particular, which may cost hundreds of thousands or millions of dollars per patient.

Pharmacy benefit managers and other industry participants have responded with various program offerings intended to help self-funded employer plans and other payors manage these costs.

Insurance Offerings to Contain Employers’ Costs

Some of these cost-management offerings are variations on traditional insurance products, such as stop-loss insurance policies designed for the specific purpose of insuring an employer against certain plan costs associated with specified high-cost cell and gene therapies or other high-cost drug treatments. Employers also may choose to offer specified disease and critical illness policies to their beneficiaries that provide coverage for conditions that commonly are treated with high-cost prescription drug therapies.

In all such cases, as insurance products, the coverages must be offered by a licensed insurance company and are otherwise subject to applicable insurance regulatory requirements and oversight.

Alternative Solutions

Alternative innovative solutions also are available that, in some ways, are structured similarly to an insurance product but not offered as such. For instance, certain vendors offer programs under which the employer pays a per member per month (or other “fixed”) fee to the vendor for access to, and clinical management services associated with, certain cell and gene therapies with no, or limited, additional costs to the employer plan or the member.

These programs may be offered as a true “subscription service,” where the employer pays a set fee for the services regardless of the actual utilization of the program by its beneficiaries; or they may be offered with some form of financial risk-pooling, where the employer may owe more into, or receive funds back from, the risk pool at the end of the year based on actual utilization of the program.

Although these alternative solutions may offer potential advantages over traditional insurance products — e.g., they may have a lower up-front cost and/or provide more varied or flexible financial options for fee payments and expense reimbursements — entities offering or considering offering such solutions, as well as employers and other payors considering utilizing them, may want to consider whether any insurance regulatory issues are presented by the programs.

Insurance Regulatory Issues for Alternative Non-insurance Products

As referenced above, state insurance laws require a license — e.g., as an insurance company or health maintenance organization — to engage in the business of insurance. Most state statutes that define the business of insurance are imprecise and broad.¹ Further, despite the extensive state regulatory framework governing the business of insurance, “insurance risk” generally is not defined with specificity and, in some situations, can be difficult to distinguish from “business risk” — i.e., the inherent risk of engaging in any particular business enterprise — for which no license is required.

The National Associate of Insurance Commissioners (NAIC) has provided guidance regarding what constitutes the business of insurance, describing insurance risk as an arrangement wherein a party transfers risk to another party, and the party assuming the risk agrees, in exchange for payment, to perform some function associated with the risk — e.g., payment of claims.

An insurance-risk transfer also involves the following key characteristics:

1. The assumption of an unknown, future level of risk of a number of persons
2. The pooling of the risk and spreading it across a group
3. An opportunity for the party assuming the risk to make a reasonable financial return through pricing of the risks and calculating loss experience

On the other hand, the NAIC has described business risk as an arrangement that does not involve risk-spreading and does not carry with it the same nature of risk.² A classic example of business risk is the risk inherently assumed by an entity with respect to the costs of providing its own products and services to customers — as opposed to assuming risk for the costs of products or services provided by a third party.

Certain other factors that oftentimes are used to assess whether an entity is engaged in the business of insurance include: (a) which entity ultimately is responsible for any underlying claim payments to providers and benefit obligations to members; (b) any limitations on the assumption of the risk assumed; and (c) the degree of control over the risk assumed.

Risks of Engaging in an Unlicensed Business of Insurance

The consequences of engaging in the unlicensed business of insurance may include cease-and-desist orders, administrative fines and penalties that may accrue on a per diem or per occurrence basis, criminal sanctions of officers and directors, and restitution. Further, in certain states, consequences for engaging in the unlicensed business of insurance may extend to an entity that engages the unlicensed insurer under an “aiding and abetting” theory.

In conclusion, employers and other payors searching for innovative solutions to help manage the high cost of prescription drugs, as well as entities offering or considering offering these solutions, should be aware of potential insurance regulatory considerations depending on how such solutions are structured.