Cost Increases Within Canadian Drug Plans: What’s the Real Story?

Let’s look at the latter misperception first. Incredibly, Wal-Mart had annual revenues of nearly $379 billion in the year ended January 31, 2008. If Wal-Mart grows their business at 5% per year, they would need to earn an additional $19 billion in revenue by January 31, 2009 to meet that target. Just to put that figure into perspective, the Bank of Montreal’s revenues were less than $17 billion for the year ended October 31, 2008. A 5% increase in revenue for Wal-Mart may seem low, but that means they will have had had to find more new revenue than an entire major Canadian bank produces in one year just to reach that number.

That 5% increase on an already enormous number is misleading. The same is true with drug plans. If a plan has had average drug claim costs approaching $70 for the past three years, of course we wouldn’t expect to see significant cost increases in this climate (more on that below). However, that doesn’t mean there aren’t significant opportunities for Canadian plan sponsors to realize material immediate savings and better position themselves moving forward.

Looking back to the first misperception highlighted above, it’s difficult to conclude with a straight face that plans are being better managed as a whole. The public sector has left the private sector in the dust with respect to managing costs. There are enormous pricing discrepancies between provinces for the same quantity of the same drug, and there are equally significant pricing differences within the same province. Plan contracts haven’t been examined in years. All things considered, plan sponsors are still leaving on average between 4%-8% of their plan spending sitting on the table because their existing plan experience is not optimized.

The current drug cost inflation trend has very little to do with the manner in which a majority of companies have been managing their plans, and everything to do with the following factors.

Blockbuster Drugs

The release of blockbuster generic drugs in the market in 2007 and 2008 including venlafaxine (Effexor XR), ramipril (Altace), pantoprazole (Pantoloc), and rabeprazole (Pariet) provided for immediate cost savings to plans of 30% or more. The lack of new blockbuster drugs to follow in the footsteps of past blockbusters like Lipitor, Losec, Prozac and Celebrex is evidence of an enormous erosion of the pipeline of new drugs for very common conditions.

Thanks to the high profile withdrawal of Vioxx from the market in late 2004, there has been increased scrutiny of new drugs by approval bodies such as the FDA and Health Canada. This has slowed the number of new drugs receiving market approval in recent years.

Drug Plan Management

Before plans become content with a lowering of their trend line, it’s useful to consider what is happening in the area of drug plan management in the biggest marketplace in the world south of the border. The market leader in the United States for managing plan costs is Medco Health Solutions, a pharmacy benefits manager (PBM) that covers over 60 million lives in the U.S. and fills in excess of 580 million prescriptions annually.

In 2007, the company’s book of business had an inflation trend of only 2%. All of this in spite of the fact that the U.S. market has the highest brand name drug prices in the world and that expensive specialty drugs are a much bigger part of plan sponsor spending than what we have see in Canada to date. How Medco achieved these trends is the important part of the story. This trend is sustainable because of their focus on the following areas, all which have application to our Canadian environment.

Plan Management

There are appropriate, actively managed plan designs that engage the plan members to recognize the cost of medications and provide incentives for utilizing cost-effective therapies where they exist and are valid alternatives. Case-in-point: Medco achieved 64% generic drug penetration in 2008, whereas most Canadian plan sponsors are fortunate to be at 48% even with all of the major generic products on the market. Their designs also recognize that not all drugs are created equally, and as such, should not be reimbursed equally.

Specialty Drugs

Innovative (and incredibly expensive) specialty drugs that are used to treat catastrophic conditions and serious cases of more common disease states are the fastest growing segment of the drug expenditure in the U.S. and Canada. As companies continue to develop innovative specialty therapies, active management of this piece will become more important.

Medco has pioneered the development of Therapeutic Resource Centers that employ teams of pharmacists to assist patients within their book of business in managing complex chronic diseases states like diabetes.

Like most U.S. PBMs, Medco is actively involved in the procurement and distribution of medications. They use partnerships with manufacturers to obtain very competitive pricing, and have established relationships with retail pharmacies within their provider network that allow for plan sponsors to share in lower costs for their plan members while still enabling access to pharmacists in the community setting and via their Therapeutic Resource Centers.

While Medco does have its own distribution centers, the vast majority of its prescriptions are handled by its retail network which proves the value that can be obtained for plans when partnerships are developed in the distribution channel.

It’s great that the stars have aligned to provide some temporary relief to plan sponsors as far as cost pressures are concerned, but any plan leaving 4%-8% of its spending on the table within its existing plan design is not doing itself any favors. In today’s economic environment of salary freezes, lay-offs, increased pension funding obligations, and the increasing cost of providing a comprehensive benefits package, I’m sure that money being left on the table can be put to good use elsewhere.