© Copyright 2002 Rogers Media. The following article first appeared in the April 2002 edition of BENEFITS CANADA magazine.

It comes as no surprise to Canadian employers that double-digit increases in drug costs will continue in 2002 and beyond. Despite this reality, organizations have been slow to implement drug plan management strategies, responding instead with temporary measures. With revenues down in almost every sector, the time is ripe for a remedy, rather than a band-aid solution, to address rising drug costs.

There are many approaches to drug plan management. Benefits managers will almost certainly need additional input from those outside of the human resources department--other executives and third parties such as insurers and pharmacy benefits managers (PBMs)--to tailor a solution that meets the organization's particular needs. Here are nine solutions to consider:

1. Drug formularies. A formulary determines what drugs are covered under the plan. Options include mandatory generic substitution and frozen formularies, where all existing drugs continue to be covered but no new ones are added. The disadvantage of the latter approach is that costs are reduced but employees do not have access to many of the latest medicines. Therapeutic substitution is another alternative in which the plan covers only the most cost-effective drug in a particular class.

In addition to determining what drugs the plan reimburses today, employers should think about the future and ask: Will line extensions and generics be added automatically to the formulary? Will the plan cover all prescription drugs, including new ones that meet formulary requirements? Will new drugs have to meet certain criteria? Will the plan automatically assume coverage where provincial health plans fall short?

There are different ways to treat drugs that don't appear on the formulary. A plan sponsor may choose to reimburse plan members at a lower coinsurance rate or have the plan reimburse the cost of the drug's equivalent on the formulary, with the employee paying the difference.

Overall, one of the advantages of developing a formulary is that independent professionals make decisions about which drugs are covered, keeping the employer at arm's length from medical decisions.

2. Multi-tier co-pays. Many Canadian organizations are now considering a multi-tiered drug plan in combination with a drug formulary. The first level might cover life-sustaining drugs; the second, most prescription drugs but not lifestyle drugs; and the third, most prescription drugs as well as lifestyle drugs. This type of structure is best suited to a flexible benefits program. In fact, plan sponsors can further customize each level with different deductibles, co-pays, etc.

3. Pre-approvals. There are several ways to give employees access to drugs on a formulary, under certain conditions. For example, in a pre-approval program a prescription is not filled unless authorization is received from the company's insurer or PBM. The physician completes a form indicating the employee's need for the medication. This is similar to the process used by provincial healthcare plans with regard to seniors.

A grandfathering clause can be added to ensure employees who are already using a particular drug do not require prior authorization. This reduces potential savings but helps address the perception that employees are losing a benefit.

4. Maintenance prescriptions. With a maintenance prescription program (used for drugs taken on an ongoing basis such as birth control pills), pharmacists fill a prescription for a longer period of time. The program is more convenient for employees and it may save money on dispensing fees.

5. Trial prescriptions. Under a trial-prescription program, pharmacists dispense small amounts of any medicine the first time it is prescribed. If the treatment is successful, the remainder of the prescription is dispensed, requiring a second dispensing fee. If the treatment is unsuccessful, an alternative medicine is dispensed. In this instance, the plan saves money by not paying for unused medicine. Despite the second dispensing fee, some overall cost savings may be achieved.

6. Step therapy. Another solution is a treatment protocol or step therapy, where the plan only covers drugs when they are used in accordance with a standard treatment protocol. For example, if a second-line treatment should be used before a first-line drug, a first line of therapy will only be covered by the plan if an employee has tried a second-line drug first and it is not effective. One of the drawbacks of this approach is educating physicians on the protocol involved and explaining to employees which drugs are reimbursed and when.

7. Caps on dispensing fees. Limits on dispensing fees also control costs. Pharmacists are regulated with respect to what they may charge for the ingredient portion of a prescription, but there are no limits on dispensing fees. By capping dispensing fees at a certain level, employees are encouraged to shop around for the lowest dispensing fees as they pay any amount over the limit. This was one of the most popular cost-containment techniques in the mid to late 1990s as dispensing fees in some areas rose significantly.

However, in recent years the rate of increase on dispensing fees has declined (perhaps in response to plan limits). This measure, while still effective, is now used less often. The employer also runs the risk of having plan members use pharmacists who are relatively inexpensive but do not offer counselling on medication compliance and side-effects which can end up inadvertently impacting the health outcome of the employee.

8. Health spending accounts. Perhaps the most cost-effective option is replacing the entire health benefits plan with a healthcare spending account (HSA). Under this option, an employer puts a set amount of money in an account each year and employees decide how to spend it. The money is tax-free and it can be used for vision care, prescription drugs, dental care, etc.

This is the ultimate cost-control measure for the plan sponsor as it allows the organization to define its contribution towards medical expenses. However, this approach can put employees who have high medical expenses at a disadvantage, and these individuals are the ones who need the plan the most. Given the drawbacks, stand-alone HSAs may not be the preferred alternative for many employers at this time.

9. Communication. The final key to an effective drug plan management program is communication. This involves more than merely informing employees of any changes to the plan. Employees must understand what the plan covers because they are the intermediaries between the sponsor and the doctor. Effective communication may require employers to provide plan members with letters to physicians and pharmacists or wallet cards that enable employees to clearly explain to their healthcare providers what the plan covers.

Employees must also understand the organization's strategy and why it is implementing changes. They should be aware of what their new plan does and does not cover. If members understand the changes and the rationale behind them, they are more likely to be supportive. This will go a long way toward keeping cost increases to a minimum.

The choice of which solution, or combination of solutions, is right for an organization will depend on the overall benefits strategy. Once employers know what they want to achieve, they can ascertain whether it is affordable using traditional and more innovative forms of cost control. If not, it will be necessary to consider compromises. BC

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."