Cost trends and containment strategies for private drug plans in Canada to help foster consumerism in healthcare.

There’s no doubt about it: we’re living in a new era. In Canada, total prescription drug spending increased by more than 600% over the last 22 years. Prescription drugs have changed, spending has changed and employer-sponsored drug benefits plans must change to remain sustainable. Many employers have adopted strategies to control expenses, yet drug plan costs continue to rise.

Could it be that the solution lies not just with the employer, but also in the employee’s actions? Perhaps the answer is to develop a new workforce of “smart shoppers” in this multi-billion dollar market.

A Short History of Drug Use

Here’s a startling statistic: the amount spent on prescription drugs in the U.S. triples every decade, as reported in the U.S. publication Employee Benefit Issues. In the 1950s, Americans spent approximately US$1 billion on prescription medications, largely antibiotics. The 1960s saw spending increase to almost US$4 billion with the introduction of drugs to treat asthma and mental health issues. The birth control pill also made its debut, heralding many social changes and facilitating women’s movement into the workforce.

In the 1970s, spending jumped to nearly US$12 billion as the treatment of mental and nervous conditions became more widespread, along with new drugs to treat diabetes and gastrointestinal problems.

Spending topped US$35 billion in the 1980s, and the 1990s saw spending increase to US$95 billion. So-called “lifestyle drugs” became available to treat weight gain and smoking. Biologic drugs began to appear, along with new and more costly treatments for diseases such as arthritis and cancer.

In the first half-decade of the 21st century, drug spending has grown to more than $200 billion in the U.S., with treatments for long-term conditions such as cholesterol, depression and heartburn disorders leading the increase. In Canada, our drug choices, spending and use mirror U.S. trends.

Utilization Continues to Climb

Not only are new drugs and vaccines increasingly available, Canadians are taking more of them. According to IMS Health Canada, the number of prescriptions filled in Canada increased by an average of 6.2% each year from 2001 to 2007—an increase driven primarily by our aging population consuming more medications and the expanding array of drug treatments. The average cost of all prescriptions in Canada also rose during this period, mostly due to patients being prescribed new—and often more expensive—drugs for their illnesses.

Generally, the increase in the average cost of a prescription in the private sector is much higher than in the public sector. For example, Emergis data for British Columbia show that the price of a prescription paid under a private plan increased by an average of 4.5% each year between 2001 and 2006. Contrast this average 4.5% private plan increase with the average 1.2% decrease in the annual cost of a prescription provided by B.C. Pharmacare public coverage over the same time period (per the Pharmacare Annual Report).

Clearly, Canadian employers have not capitalized on the cost-saving strategies used by the government to reduce drug plan costs—strategies such as paying for lower-priced drugs first and turning to more expensive treatments only after less expensive medications have been tried. Public plans typically delay or limit the entrance of new drugs to their formularies based on a cost/benefit equation. But employer plans almost always pay for new prescription drugs without a review or cost/benefit analysis.

New drugs, an aging population, higher drug prices, greater consumption, patient lifestyles and the desire for convenience will continue to drive up utilization in the future. Looking ahead to 2010, drug spending for private plans is forecast to grow at an average of 8% per year.

Biologic drugs, in particular, require special attention. These drugs are made from living organisms and can be very costly to produce. However, they can offer vast improvements for some patients and good value for employers, regressing the development of disease and keeping employees at work, or helping them get off disability and return to work sooner. It is estimated that there are 350 biologic drugs currently in development, with treatments often costing $20,000 or more per patient per year.

Many high-cost biologic drugs are last lines of therapy and could require a prior authorization process to ensure that any other effective drugs have been tried as a first course of therapy. Employers may want to consider adopting a managed formulary that reviews new drugs and adds them to the coverage list based on a cost/benefit analysis.

The Rise of Consumerism

Involved and informed employees behaving as consumers create opportunities for drug plan cost savings without reducing coverage. Consumerism programs are based on sharing costs with employees and equipping them with information and tools to help them understand drug treatments and costs. This approach is based on the premise that when employees pay a portion of the cost of the prescription and have the knowledge to make decisions, their behaviours change and they become more effective consumers.

The employer’s objective is to create incentives for employees by showing them how to save money on their portions of the shared costs. For example, employees are instructed to speak to their physicians about drug costs before the doctor writes a prescription, asking questions such as: Why did you prescribe this particular drug? Are there different drugs to treat my condition that cost less? Is this the newest drug on the market? and Is there an older drug that will work just as well? Ultimately, informed employees will lead physicians to prescribe more cost-effectively.

A Closer Look at Cost Drivers

Here are some strategies that plan sponsors can adopt to influence how pharmaceuticals are prescribed and dispensed.

Utilization – The first cost driver is increased utilization—more Canadians using more drugs, more often, leading to more claims. Canada’s aging population and our reliance on the aging baby-boomer workforce are significant causes of increased utilization. Per ESI Canada, the cost of drugs for an employee increases, on average, from $400 per claimant at ages 26 to 35, to more than $1,200 per claimant at ages 56 to 65. In addition, drug companies successfully find new uses for existing drugs—for example, a drug once used to treat depression may be marketed to treat anxiety, obsessive-compulsive disorder or anorexia, which leads to patients being prescribed a wider variety of medications for these conditions. And new drug delivery systems can also drive increased utilization, as many patients will adopt a new drug format such as a patch or a once-a-day pill for the greater convenience it affords.

In response to increased utilization, many employers will consider altering the plan design. One very important option is to adopt some form of cost-sharing, such as co-pay, deductibles or co-insurance. Each method works a little differently, but each involves the employee sharing in either a flat amount per prescription or a fixed percentage of the cost of his or her prescriptions per year. This is often the first step toward helping employees become smarter consumers. Along with cost-sharing, introducing an out-of-pocket maximum will protect plan members with severe illnesses who are reliant on higher-cost treatments by capping the amount that employees have to pay.

Managed or tiered formularies available from insurers are another strategy to contain costs. The insurer decides which new drugs are added to the managed formulary. It may choose not to cover a new drug that does not add value, or it may decide to cover a new drug, but not the same percentage of the cost. Clear communication will help ensure that employees understand that not every drug is covered by the employer’s plan, but an alternative drug treatment is usually available.


Off-loading of Hospital-administered Drugs

The typical group insurance policy excludes drugs administered in hospitals, and insurers are refusing to pay these claims. The insurance industry’s position is that billing patients for hospital-administered drugs is a violation of the Canada Health Act (CHA). Cancer Care Ontario (which funds cancer drugs in Ontario) has a legal opinion that it is not violating the CHA by billing patients for these drugs. Clearly, a consistent federal position and strategy is needed, but no clear answer is expected soon. While the issue of cancer drugs continues to be widely debated, some insurers are suggesting that all hospital drugs could eventually be billed to patients. It is prudent for employers to develop their own positions and to be conservative when considering the longterm impact of government policy changes on their benefits plans.

Another strategy is a Maximum Allowable Cost program, which requires prescriptions to be reimbursed based on the lowest-cost drug in the class. This enables employers to pay for the least expensive medication in a drug class when there is no proven clinical advantage to competing drugs in the same therapeutic class for the majority of people. With such a program, it’s important to offer educational tools to help employees understand that they will pay the difference if they and their physicians opt for a more expensiive medication within a specific drug class.

Finally, dispensing fees vary among pharmacies and are subject to increases. Plan sponsors can offset this cost by introducing a dispensing fee cap. The employer sets a plan ceiling on dispensing fees, and the employee pays the remainder in excess of this amount. This encourages employees to shop around and not just opt for the most convenient location to fill their prescriptions. A dispensing fee deductible per prescription can also be used to encourage employees to order a 90-day supply of chronic medication for a single fee.

Higher Ingredient Costs – The second cost driver is higher ingredient costs per prescription. Ingredient costs increase as a result of shifting to more expensive treatments. In some cases, prescriptions are changed to a newer drug—even when the drug previously used was effective. Managed formularies that only add new drugs based on a cost/benefit analysis can help combat this issue.

In addition, employers can make better use of generic drugs. For example, many employer-sponsored plans in Canada do not stipulate generic reimbursement. Making generic reimbursement mandatory— even if the physician writes “no substitution” on the prescription—can be a simple and effective way to manage drug plan spending. Tools to educate employees about generic treatment choices and how their behaviours influence their own costs are a must.

Cost-shifting – The third cost driver is cost-shifting—mainly from government initiatives such as high-cost oncology drugs provided to patients in hospitals. There is an emerging trend in some Canadian hospitals to refuse to pay for certain types of intravenous chemotherapy drugs used to treat cancer. Patients are being asked to pay for these treatments, which often cost tens of thousands of dollars. If the patient has private coverage from his or her employer, the claim is submitted to the group drug plan for reimbursement. These hospitaladministered drugs are not covered by employer plans. The employer is left in the difficult position of advising the terminally ill employee or family member that there is no coverage offered for these treatments.

Plan sponsors need to decide whether or not to exclude coverage for hospital-administered drugs such as chemotherapy, and determine if they have a contractual basis to support this decision. If they choose to provide coverage, can they afford it? Sponsors will want to develop a corporate philosophy and strategy for dealing with unlisted hospital drugs. And it’s important to be proactive about this issue—for example, determining what to say to an employee who calls to request coverage before the situation arises.

Plan sponsors will also want to make sure that they are protected from the cost impact of government off-loading. For example, if hospital drugs won’t be covered, the benefits contract must stipulate this exclusion. It’s also important that the fine print in the contract and the employee booklets are in line with the plan administration. If the insurer excludes drugs administered in a hospital, for example, this must be clearly stated in the contract and in all employee materials.

Taking Action

Employees value their drug plans, so it’s critical to keep them sustainable through effective drug plan management strategies. Plan sponsors should be proactive not reactive, aware of activity in the marketplace and if the plan is susceptible to off-loading from other plans. They also need to understand how the drug plan is administered and have programs in place to manage new drug costs. Consumerism is the long-term solution to managing escalating drug plan costs. Giving employees the necessary knowledge, tools and incentives to manage their portions of drug costs makes them a strong force in sustaining the group plan over the long term.

Barbara Martinez is a principal with Mercer’s health and benefits business in Toronto.

For a PDF version of this article, which includes the entire 2008 Drug Plan Report, click here.

© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the June 2008 edition of BENEFITS CANADA magazine.