Private drug plans are one of the most high-profile benefits plan costs, so it’s important to understand the factors influencing these costs. Many use the terms drug prices, drug costs and drug plan costs interchangeably when, in fact, they’re all different.

Drug costs are the total drug claims paid by a plan and generally include the pharmaceutical company’s list price, the wholesaler and pharmacy markup, and the dispensing fee. In contrast, drug plan costs are based on premiums determined by group underwriters. As well as base drug costs, drug plan costs include factors such as usage, commissions paid to plan advisors, administration fees, profit and trend factor. All of these represent the anticipated future costs the underwriter factors into the premium for the next 12 months.

Although a plan’s overall drug costs may grow due to increased utilization and ultimately increase the cost of the plan, individual drug prices in Canada are controlled by the Patented Medicine Prices Review Board (PMPRB). Its 2013 annual report notes brand name drug prices increased by just 0.5%, on average. However, the PMPRB regulates only the prices pharmaceutical companies charge wholesalers, pharmacies or hospitals. It has no oversight of consumer prices.

Read: Three drug trends you need to know

In 2012, Canada’s Research-Based Pharmaceutical Companies commissioned IMS Brogan to forecast overall private drug costs for 2013 to 2017. Its report said Canadian private drug plan drug costs (ingredient costs, plus wholesale and pharmacy markups) should grow at a compounded annual rate of between 1.6% and 2.8%. Then, in 2014, IMS Brogan compared the actual costs to the forecast. Private drug costs grew 2.2% in 2013, in line with the prediction.

What drives drug plan costs?

Drugs are typically categorized as traditional or specialty medications. Traditional drugs—usually in pill form— are easy to self-administer, require less monitoring and treat common conditions such as high cholesterol and high blood pressure. Specialty drugs are injectable and non-injectable medications used to treat complex conditions such as rheumatoid arthritis (RA), multiple sclerosis and cancer. They are usually costly, require special storage and handling, and need intensive monitoring and frequent dosing adjustment.

The Express Scripts Canada 2013 Drug Trend Report found average annual drug costs per claimant rose by 1.3% in 2013, with specialty drug costs increasing by 10% and traditional drug costs dropping by 1.2%. Lower costs for traditional drugs can be attributed to generic price reform by the government and the large number of blockbuster drugs recently genericized.

Read: Pharmacy management strategies reduce costs by up to 24%

“Specialty drug costs represent only 1.3% of claims but continue to grow as a percentage of total drug spending, steadily rising from 13.2% in 2007 to 24.2% in 2013,” says John Herbert, director, strategy, product development & clinical services, with Express Scripts Canada. “[This is] primarily driven by the high treatment cost and increase in utilization. Factors contributing to the increase in specialty drugs include the shift to more in-home and outpatient administration and the introduction of new specialty drugs such as Tecfidera for the treatment of multiple sclerosis, Xtandi for prostate cancer and Kalydeco for cystic fibrosis.”

Plan sponsors may be wondering why there’s been such growth in specialty drugs in recent years. The rise of new specialty medications has been spurred by improved scientific insights and techniques, allowing drug developers to reduce their high failure rate and take on some illnesses for the first time. For example, early trials of gene therapy (which involves replacing defective genes with healthy ones) were unsuccessful. Now, with improved techniques, there has been increasing success in trials.

Biologics, SEBs and Hep C

The year 2014 marked the first Canadian approval for a subsequent-entry biologic (SEB): Inflectra for the biologic medication Remicade (infliximab), used to treat RA and psoriasis. Priced at a 30% discount compared to the innovator drug, it may offer some cost savings for private drug plans. As the first of its kind, it also opened up the biologic market to further competition and may explain, in part, the announcement of several significant product listing agreements between Janssen and some major private payers to bring down the price of Remicade.

The challenge with SEBs is, highly sensitive manufacturing processes mean the SEB and the innovator drug aren’t interchangeable. It’s unlikely patients who are well established on the innovator can be easily switched to the SEB. For example, a patient taking Remicade to treat RA can’t automatically be switched to the SEB Inflectra. But there may be some savings with new patients who start on the lower-cost SEB before moving to the higher-cost innovator product if the SEB is ineffective.

Read: Dealing with biologics in a cost-conscious workplace

While treatment costs for conditions such as RA, psoriasis, Crohn’s disease and ulcerative colitis continue to concern drug plan sponsors, “new hepatitis C medications on the market that address unmet treatment needs was a key area of focus in 2014,” Herbert explains. These new drugs offer far superior treatment with fewer side effects, but they’ve also had a major impact on drug plan claims.

“The pricing model for these drugs— on the order of $60,000-plus per member—is often rationalized as being less than the lifetime costs of previously available treatment regimes. However, plan sponsors weren’t typically bearing these full treatment costs,” says Lisa Callaghan, assistant vice-president, group benefits product, with Manulife Financial.

“New drugs to treat this condition were only introduced in 2014, and already in 2015, we see them in the top five drugs in our block of business,” explains Barb Martinez, practice leader, drug benefit solutions, with Great-West Life. “While hepatitis C treatments have a high upfront cost, the disease is then cured, hopefully, and no longer requires treatment.”

Pooling the risk

High-cost treatments mean pooling remains a critical tool for protecting plan sponsors from the impact of claims costs. “Pooling removes the total amount of an individual’s claims that is greater than the pooling level from the group’s experience [and is] used to predict the group’s future claims,” explains Martinez. “Pooling is absolutely necessary to protect groups from catastrophic and unpredictable losses, such as high-cost claims for hepatitis C drugs that likely do not reoccur.”

But greater use of pooling is having a major impact on pool charges across the industry. “Our members indicate that although drug plan premiums have not increased significantly over the past couple of years, drug pooling charges have escalated considerably during the same period,” says Wayne Farrow, president and CEO of The Benefits Alliance Group (a network of 40 member firms and more than 100 advisors).

“Most small to mid-size employers couldn’t manage without pooling; however, they continue to be concerned about the growing costs,” adds Cathy Fuchs, practice leader with White Willow Benefit Consultants. “We may see an increase in the number of plans with annual per-person maximums in order to avoid exposure to growing pool charges.”

Read: Insurance industry drug pooling begins Jan. 1

Increased availability of specialty medications also puts more pressure on the drug stop loss pool, where plan sponsors pay a pool charge to have their drug claims that exceed a certain threshold removed from the health premium renewal calculation and pooled with all other drug stop loss pool participants’ claims. With pooling thresholds hovering around $10,000, most of the costs and risks get pushed to the pool. Each year, thousands of plan sponsors benefit from pooling when it comes time to renew with their insurer. Other firms continue to support the pool as protection from future liability. All plan sponsors will pay for the increase in specialty drug use through growing pool charges.

In 2012, Canadian health insurers established the Canadian Drug Insurance Pooling Corporation for fully insured drug plans to share the costs of expensive and recurring drug treatments. Dan Berty, its executive director, says in its first year of operation, “insurers paid more than 4,000 claims—representing aggregate cost at the certificate level or total cost per family—for prescription drugs in excess of $25,000, doubling the number of claims from when the CDIPC was first established. Several claims exceeded $500,000, including one claim for more than $1.2 million.”

One proposed benefit of the CDIPC was improved portability of plans for employers, allowing them to switch providers without being penalized financially for existing large recurring drug claims. However, “no group with catastrophic claims is going to be received with open arms by any carrier,” says Farrow. “We still can’t move a case that has any significant stop loss claims.”

Read: How Canada can save workplace drug plans

Berty disagrees. “It remains a goal of the CDIPC to help facilitate movement within the market for fully insured plan sponsors with one or more recurring high-cost claims. Based on the most recent pool data, we know that more than 100 groups did, in fact, move between carriers, even though they had at least one claim over $25,000. This is an area the CDIPC board is following closely.”

Plan sponsor reactions

In 2014, many private drug plans were changed when carriers made mass amendments to all of their plans. These changes included adopting mandatory generic substitution—and, for high-cost specialty medications, increasing the use of prior or special authorization and case management—as well as introducing preferred pharmacy networks .

However, outside of this activity, most plan sponsors don’t intend to make plan design changes. In a fall 2014 TELUS Health Analytics survey of 100 plan sponsors, 91% reported a health premium increase of less than 10% over the last three years. Of those reporting increases, 70% chose not to change their drug plan. And most survey respondents said they don’t intend to make any plan design changes in the next three years.

Read: Bite-sized solutions to get drug plan costs under control

While recent focus has been on specialty drugs, there are ways to manage the costs of medications for chronic conditions (e.g., diabetes and hypertension).

“Approximately 75% of Great-West Life’s drug spending is for traditional chronic medications, yet higher-cost specialty medications are getting most of the attention, ” says Martinez. “Managing the impact to the plan for chronic conditions where medication is relatively low cost but [there is] high utilization is very different. There is more opportunity for cost-sharing between plan sponsors and plan members, and there are also wellness programs that target a healthy lifestyle for chronic conditions such as diabetes or cholesterol.”

Fuchs adds, “In the future, interest among employers on more actively managing drug plans will increase; there will be a greater focus on targeted interventions that drive behaviour. This could include focus on improving adherence, consumerism and more efficient delivery of services [such as PPNs, medication management and disease management programs]. The reluctance to consider managed formularies is being replaced with the need to liberate savings on the day-to-day costs in order to fund biologics. As the number of biologics coming to market grows, more employers should be looking to find savings in other areas of their benefits plans in order to provide coverage for biologics.”

Read: The rough road of biologics

Balancing costs with benefits plan objectives is an ongoing challenge; however, “it is important for plan sponsors to re-evaluate the underlying objective of their drug benefits plan, determine if their current plan design will sustain them into the future and choose the drug plan programs that meet their needs,” Callaghan adds.

Suzanne Lepage is a private health plan strategist. suzanne@suzannelepage.ca

HOW TO CHOOSE A PPN

As many plan sponsors see their drug expenditures climb, some are starting to give preferred pharmacy networks a closer look. While PPNs have existed in Canada for many years, they have traditionally featured a preferred dispensing fee with minor or no adjustments on other key price drivers, such as the various components that make up a drug’s ingredient cost: manufacturer list price (MLP) + wholesaler markup + pharmacy markup. But PPNs have evolved in recent years to the point where the risk of not embracing them outweighs the desire to provide plan members with unfettered choice on where they fill their prescriptions. This is contingent on selecting a PPN that balances cost savings for both the employer and plan members without sacrificing patient care.

Trends associated with different types of drugs show why the ideal PPN must address as many, if not all, components of the price of a prescription.

Generic drugs – According to Equitable Life claims experience data, the average paid amount for a generic drug in 2014 was significantly less than in 2008. While the majority of claims in a typical drug plan are associated with generic drugs, they typically represent only 30% to 35% of a plan sponsor’s total drug plan expenditure, given the generic drug’s relatively low cost per claim. A lower dispensing fee, then, can be a significant savings.

Single-source brand drugs – Conversely, the average amount paid for a single-source drug (a patented drug with no interchangeable equivalent) in 2014 was significantly greater than in 2008. While these drugs don’t represent the bulk of drug claims, they typically represent 65% to 70% of total drug plan expenditure, given the average paid amount is four times higher than a generic drug. A lower dispensing fee, combined with a reduction of some or all components of ingredient cost, is essential to generate meaningful savings.

Specialty drugs – The average amount paid per claim for specialty drugs (high-cost medications used to treat less common but serious diseases, mostly single-source drugs) was relatively stable between 2008 and 2014, at about $2,000. At that price, any savings associated with a lower dispensing fee is negligible. What matters most is reducing some or all components of the drug’s ingredient cost. However, specialty drugs will continue to see the most rapid growth as a proportion of a plan sponsor’s total drug expenditure for the foreseeable future.

Fortunately, many PPNs have begun to adapt their value proposition in order to accommodate today’s very different mix of drug types and their underlying cost components. However, there are important questions plan sponsors and benefits advisors should ask. The ideal PPN is one for which the answer is yes to as many of the following questions as possible.

  • Will we have access to the MLP (or better) for all drugs?
  • Will we have access to a substantial reduction or elimination of the wholesale markup for all drugs?
  • Will we have a substantial reduction in the pharmacy markup for all drugs?
  • Will the preferred dispensing fee be substantially lower than the fee at pharmacies our plan members currently use?
  • Will we receive highly customized analytics specific to our organization and our plan members that support the scale of savings, convenience and transition management?
  • Will we receive simple and practical communication and navigation tools, especially with respect to specialty drug claimants?
  • Does the PPN have a sound operational and patient care service model?
  • If the PPN is insurance carrier-driven, will it seamlessly integrate both the carrier and the pharmacy service model?

Plan sponsors can’t afford not to take advantage of PPNs. When structured and delivered thoughtfully, PPNs can support drug plan sustainability while protecting a benefit valuable to employees and their families.

Martin Chung is assistant vice-president, strategic health management, with Equitable Life of Canada. mchung@equitable.ca

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Copyright © 2017 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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