Alternative funding increase in pharmacy health care

2023 Q3 Rx Newsletter:

August 22, 2023

As prescription drug costs increase, employer plans look to alternative funding.

Alternative funding is the process in which patient assistance programs are utilized to decrease specialty drug cost spend for employer plans.

Alternative Funding Trends in Employers Plans

The percentage of employer plans utilizing alternative funding programs (AFP’s) has increased to 14% in 2022 compared to 6% in 2021.[1] There are several vendors in the market that promote employer savings by implementing alternative funding.

AFPs provide employers with quick savings on high-cost drugs since they are processed at point of sale compared to the standard process which can take months. The only cost to employers is a small fee from the AFP vendors. If the drug is not AFP eligible, then the plan would need to cover that drug under their health plan.

Compliance Concerns around AFPs2

Employer plans need to consider potential compliance issues when implementing AFPs. In order for AFPs to work, specialty medications are excluded from the plan, which is therefore not within the written plan. These reimbursements are then required to be reported on each employee’s W-2 that is filed each year by the employer. Employers face the potential to be financially penalized by the IRS if the W-2 forms are incorrectly filed.

An employer plan may be penalized under ERISA if there is evidence of a fiduciary breach. Employee financial contributions are to be set within a trust and only utilized for benefits that are covered through the plan. A fiduciary breach can occur if claims are reimbursed that are not technically covered by the plan. This can occur if a specialty drug is not being covered by the AFP and is given an override to be covered by the employer’s health plan. Under ERISA, the Department of Labor can impose a financial penalty on the employer.

Outside of potential financial violations, an employer plan may be seen as discriminatory by the Department of Labor if they are covering drugs on the pharmacy plan based on the employee’s financial status. An employer plan cannot cover a drug based on the eligibility of an employee being able to utilize AFPs.

Other Potential Unrelated ERISA Issues2

  • Misrepresentation may occur as alternative funding depends on receipts having no insurance.
  • If an employee’s financial information is included in the alternative funding application, it must be accurate when provided by the AFP to other agencies and manufacturers.
  • Stop loss insurance is typically used by the employer in relation to amounts covered by the group health plan. Claim reimbursements made outside of the terms of the group health plan and not covered by alternative funding may not apply to the group health plan stop loss insurance.

It is important for any employer considering the use of alternative funding to work with their compliance team to determine the fit. While cost savings are important, it is equally important to substantiate the value these programs bring to employees.

Contact our pharmacy practice to learn more about the concerns and issues of alternative funding programs.

  1. “Employers Expand Use of Alternative Funding Programs,” Drug Channels, accessed July 24, 2023
  2. “ERISA and IRS Compliance Related Issues for Alternative Funding Programs,” Vivio Health, accessed July 24, 2023