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Payers Troubled by Rise of Alternative Funding Programs

By Steve Callahan and Carly Nicholas

For the past few years, the industry has grappled with the rise of a controversial new pharmacy benefits strategy: alternative funding. Alternative funding programs (AFPs), also known as specialty carve-out programs, are intended to reduce the cost of specialty drugs for both patients and payers.

According to proponents, AFPs can help employers improve access while keeping costs in line. But according to detractors, these programs are by nature unsustainable—and potentially illegal. Despite these concerns, AFPs have been on the rise. According to PSG’s 2023 Trends in Specialty Drug Benefits report, 14% of employers were using AFPs in 2022, up from 6% in 2021.

To better understand what payers think about AFPs, the MMIT Indices team conducted a Rapid Event Primer in December 2023. Before we explore the results of our research, let’s first take a look at how AFPs function.

Understanding AFP design

Alternative funding vendors primarily contract with self-insured employer health plans to lower drug spend. First, they ask the plan to remove certain high-cost drugs from their formularies, or to designate these drugs as ‘nonessential,’ which allows the plan to bypass annual limits on patients’ out-of-pocket costs.

The vendor then helps these newly underinsured members apply for patient assistance programs (PAPs)—typically run by manufacturers to provide access for patients in need—to cover the cost of the drug. In return, the plan pays the alternative funding vendor a ‘cost avoidance fee’ for its services.

Many manufacturers are responding to this trend by scaling back their PAPs, and some have begun litigation against alternative funding vendors. In the meantime, patient policy organizations continue to advocate for legislation to ban AFPs, along with patient co-pay adjustment programs like accumulators and maximizers.

Negative financial impact on payers

So, how do payers view the rise of AFPs? The majority of our payer respondents (80%) said they anticipate significant challenges with the adoption of alternative funding strategies, especially in terms of long-term planning and regulatory compliance. Two-thirds of this group expects those challenges to be ‘major’ or ‘severe.’

In free-form commentary, payers focused on how AFPs might distort their cost-sharing incentives and limit their control over expensive drugs. As one medical director said, “Alternative funding, while it may help the patient financially, may impact our ability to control access and manage the cost of expensive agents. For example, if a drug is not preferred since it is expensive and not effective, but the patient gets the funding for the drug, then the plan loses a tool to manage drug costs.”

Payers were also concerned about the considerable risk of non-compliance, with one independent medical director simply commenting: “Illegal.” As a pharmacy director from a large national payer noted, “There will likely be regulation coming that addresses the abuse of these programs and benefit designs that steer towards them. Not a sustainable model.”

Another pharmacy director summarized the issue this way: “Non-compliance with healthcare laws and regulations may lead to financial repercussions, legal challenges, and damage to the reputation of the pharmacy benefits provider.”

Major clinical challenges

Half of responding payers also foresee ‘moderate’ to ‘major’ clinical challenges associated with the adoption of AFPs. “We have carefully selected preferred products based on a wholistic view of cost and quality. These alternative funding strategies have a high potential to disrupt our strategy,” said one medical director from a large national payer.

Payers also pointed out that changes in copay structures or delays in medication access may negatively impact patient adherence to prescribed medications, which can lead to poor clinical outcomes. Payers also mentioned the lack of claims data for patients using AFP-funded medications. Without this data, payers can’t be certain that there isn’t a negative impact on patient care coordination and population management.

One pharmacy director from a regional payer commented, “Implementing alternative funding strategies might involve therapeutic interchange programs, where patients are switched from one medication to another within the same therapeutic class. Clinical considerations, such as patient response and potential side effects, must be carefully managed.”

Patient eligibility concerns and access delays

Contrary to the claims of AFP vendors, the majority of payers do not think that relying on alternative funding will prove beneficial to patients. Seventy percent of payers think patients are ‘moderately’ to ‘very’ likely to face eligibility issues, while 80% of payers believe patients are likely to experience medication access delays and difficulty coordinating care with care teams.

Securing funding through AFPs will “certainly take longer than a traditional prior authorization process,” according to one pharmacy director. “There is the possibility of delays in eligibility just because of the administrative issues to be resolved to receive the funding,” said one medical director.

Another pharmacy director noted that alternative funding vendors will be dealing with “high volume of requests, insufficient staff training, regulatory compliance challenges, and documentation challenges,” which would likely delay access.

Insufficient safeguards for alternative funding

Payers were also concerned that the funding for an AFP might also run out, leaving patients high and dry. “Ideally, there should be a ‘pool’ of money to fund the alternative funding and also, a budget to plan for distributing the funds which is sustainable,” said one medical director. However, 60% of responding payers said there were no safeguards in place to ensure that alternative funding vendors can secure funding consistently.

Some payers noted that the lack of sustainability of alternative funding puts the entire healthcare system in jeopardy. Health plans might need to change benefit designs mid-year, placing previously excluded drugs back on their formularies.

According to one pharmacy director, if funds run out, the “affordability of the health care system would be put at risk and self-funded clients will opt to not cover high-cost drugs.” Another medical director agreed, noting that a lack of funding would mean “pressure to continue on a non-preferred medication, and conflict will arise between the member/physician and the payer.”

In summary, payers noted their concern that the alteration of the pharmacy benefit to accommodate AFPs would impact existing drug rebate programs and overall savings. The majority of respondents believed AFPs would have a moderate (50%) to high (20%) impact on their overall savings structure, with one regional plan’s medical director noting, “Our efforts to achieve overall savings will be in direct conflict with this program.”

Clearly, the majority of payers—at least those represented in our Rapid Event Primer—are not keen on AFPs. Given these widespread concerns, it’s unlikely that we will see full AFP adoption from payers, but these programs will doubtless continue to exist in one form or another unless the government intervenes. In time, more stringent regulatory oversight and better employer and patient education will help discourage the use of AFPs.


To see how unblinded payer perspectives can help your organization, learn more about MMIT’s Biologics & Injectables Index.

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Steve Callahan

Steve Callahan

Steve Callahan initially got his start conducting research in biology but transitioned his focus to Market Access as a consultant at firms such as Compass Strategic Consulting, Certara Evidence and Access, and IQVIA, and most recently as a senior manager leading market research for MMIT. Steve has conducted extensive research and has led a variety of projects within immunology and with biosimilars. Steve earned his B.S. in biology at Fairfield University, his M.S. in biology at Southern Connecticut State University, and his M.B.A. at the University of Connecticut.

Carly Nicholas

Carly Nicholas is a senior market research analyst who works on the MMIT Indices team. Over the years, Carly has conducted market research for a wide span of treatment areas and access management topics. She currently conducts research for the Rapid Event Primer, a monthly report that provides high-level insights on specific market access events or trends. Carly earned her B.S. in Psychology with a minor in Marketing and Autism Behavioral Studies at Saint Joseph's University in Philadelphia.

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