It’s Not Just About Savings

Skyrocketing prescription drug costs are a persistent challenge for employer health plans.

Patients in the United States—and by extension, their employers—often pay nearly three times as much for medications as their counterparts in other developed nations. Specialty drugs in particular now account for more than half of prescription medication spending in the United States but treat only a small percentage of covered individuals with complex conditions.

In response to this growing cost-driver, vendors are marketing alternative funding programs (AFPs) and drug importation arrangements to help employers control their specialty drug spend. These programs often promise drastic cost savings with little to no downside.

But are they really the low- or zero-risk miracle solutions that vendors claim?

AFPs and Drug Importation Programs Explained

AFPs are administered by third parties that are engaged by employers to find funding and sourcing mechanisms for specialty drugs outside of the group health plan. While each program operates a bit differently, the core strategy is to exclude specialty drug coverage from the employer plan, which makes participants eligible for funding sources that cover drug costs for uninsured or underinsured individuals— e.g., charity funding, drug manufacturer patient assistance programs, or copay assistance programs. AFPs regularly tell employees that they must sign up with that program or be responsible for the full price of their specialty drugs out of pocket, often without those dollars counting toward deductibles or out-of-pocket maximums.

Drug importation programs frequently operate in tandem with AFPs. Under these arrangements, medications are sourced outside of the United States, often from Canada or other “Tier 1” countries, where prices are substantially lower due to government cost controls or drug pricing negotiations with pharmaceutical companies. Some programs ship the medication directly to the patient, while others require them to travel abroad or obtain the medication through foreign pharmacies working with the AFP. Select AFPs even send patients on all-expenses-paid trips to retrieve medication, as even this is cheaper than purchasing the product in the United States.

Vendors sell these programs as safe, legal, and routine, but the regulatory reality is murky and likely far more complicated than advertised.

What’s the Catch?

Legal and Compliance Risks

AFPs and drug importation programs raise significant compliance concerns under multiple federal statutes. Under ERISA, employers sponsoring self-funded health plans are fiduciaries obligated to act prudently and in the sole interest of plan participants and beneficiaries. Excluding medically necessary specialty drugs from coverage, or conditioning access to coverage on participation in an AFP, may invite scrutiny regarding actual satisfaction of these fiduciary duties. Additionally, if employer funds or plan assets are used to facilitate AFP arrangements, regulators may challenge whether employers are meeting the law’s mandate to act prudently and in the sole interest of plan participants and beneficiaries.

These arrangements also invite questions under the Internal Revenue Code, such as whether reimbursements or assistance provided outside the group health plan constitute taxable income that must be reported on the employee’s W-2. Failure to report income and withhold applicable income taxes could result in significant penalties for the employer and employee.

HIPAA’s non-discrimination regime presents additional concerns. Under the 1996 law, health plans may not discriminate based on an individual’s health status, medical condition, claims experience, medical history, or disability. AFPs target claimants with high-cost conditions, whose drugs are carved out of the group plan’s coverage and who are then shuttled to third-party channels such as those alternative funding and drug importation programs. Employers using these programs risk allegations that their plan design or administration discriminates based on health status or medical condition— even if the stated goal is cost savings.

Drug importation programs, as part of an AFP or not, present unique legal risks. The U.S. Food and Drug Administration (FDA) generally prohibits importation of prescription medication due to safety risks and the absence of agency oversight of the manufacturing process. The FDA’s personal importation policy is a narrow exception based on individualized circumstances and lack of drug availability in the country; it does not permit importation for commercial purposes or permit general substitution of federally-approved drugs with foreign-market products. The FDA recently declined to issue regulatory guidance on AFPs, leaving this a regulatory gray zone. However, agency spokespersons have publicly questioned the legality of these importation schemes, stating that alternative funding programs are not covered under the FDA’s personal importation policy. The Department of Homeland Security has also launched several criminal investigations into AFPs for importing medications regulated outside of U.S. channels and intended for foreign markets.

Finally, state insurance regulators and lawmakers are increasingly questioning the legality and ethics of these programs and their marketing. This year, for example, legislators in Colorado introduced a bill that would legalize “pharmacy stewardship programs” or AFPs for self-insured employers. While the bill did not pass, it sparked debate over the efficacy and fairness of these programs. Likewise, state regulators have authority to bring enforcement actions against AFPs for engaging in unlicensed insurance business.

Litigation Risks and Manufacturer Pushback

In addition to highlighting these programs’ problems with state and federal policymakers, drug manufacturers have challenged AFPs and associated importation practices in court as undermining supply-chain integrity and patient safety.

In Gilead Sciences v. Meritain Health, the manufacturer sued a web of entities—including a health benefits administrator, pharmacy benefit manager, AFP, a foreign pharmacy providing the drugs, and a broker contracting with the foreign pharmacy—alleging illegal distribution of imported Gilead HIV medications from Turkey and seeking to permanently cease importation of the drug. In another lawsuit, Novartis AG v. SHARx, two drug manufacturers sued an AFP and a foreign pharmacy over similar allegations—illegal importation and distribution of their drug from Canada. Although neither lawsuit named employers as defendants, litigation like this can disrupt benefits administration, particularly if an organization relies on the AFP to provide critical drugs to employees, and expose employers to reputational harm.

Reputational and Employee Relations Risks

Beyond the real legal and compliance risks these programs pose, employers also face reputational risks and potential harm to employees in vulnerable health situations. AFPs often require employees with serious illnesses to navigate complex processes, disclose sensitive financial and health information, and endure delays in accessing treatment. These delays can range from days to weeks while an employee waits to secure alternative funding or drug sourcing. Overall, employees may view these programs as discriminatory and coercive. When an employee does receive treatment through an AFP that imports drugs, there are obviously serious safety risks associated with taking medications that are outside of regulated channels.

Because AFPs often take advantage of charitable and other assistance programs designed to help uninsured and underinsured individuals—not those who are fully insured but whose insurance intentionally carves out high-cost drugs to save money—employers may face criticism for draining resources from those with greater need.

What Can Brokers Do?

Alternative funding programs often are directly marketed to employers without insurance broker involvement. Brokers and benefits consultants, though, can help their clients understand the risks and assess AFP vendors before moving forward with these programs.

• Compliance: Encourage clients to inquire about how vendors address ERISA fiduciary obligations, tax treatment issues under the Internal Revenue Code, HIPAA nondiscrimination requirements, and FDA importation regulations. Employers should understand, and ideally document, what specific steps AFPs and drug importation programs have taken to comply with applicable regulations.
• Drug Sourcing: For programs that import drugs from abroad, understand where the medications originate (e.g., Tier 1 countries), how they are transported, and whether the drugs pass through FDA-regulated distribution channels.
• Stopgaps: Encourage employers to establish contingency plans to ensure continuity of care if alternative funding sources fail or are delayed.
• Oversight: Implement oversight programs to monitor vendor practices, employee experiences, regulatory developments, enforcement trends, and employee outcomes to manage risks over time.

Real solutions to rising healthcare costs are hard to come by, so the appeal of these programs is understandable. But employers will better protect themselves and their employees if they engage in due diligence and risk analysis and do not simply take vendors’ word that these programs offer nothing but upside.