Despite a delay in announcing the final regulations to its Drug System Reform changes, the Ontario government barely moved an inch earlier this month. While the negative impact on a pharmacy’s public sector book of business will be material with the Government “win”, the fallout from the last two months that will result in significant new challenges for private sector plan sponsors.
The bottom line is this: the door to the public sector was slammed shut in the face of Ontario pharmacies. There is absolutely no room left on that side – prices for most key generic drugs will fall to 25% of brand effective July 1, payments from generic companies in the form of allowances have been made illegal (with commercial terms such as volume discounts being capped rigidly at 10%), dispensing fees for most stores with move only modestly from $7 to $8, mark-ups on ingredient costs are still capped at 8%, and the budget for professional services has not been expanded beyond what was announced. The government will police its own book closely – they have won what they set out to achieve. They have the big stick and they used it.
Where does that leave private sector drug plans? If the public door was slammed in the face of pharmacy, that will turn the focus to the private sector. While that may be the catalyst for some interesting and innovative pharmacy provider—plan sponsor partnership opportunities (which would be a very positive development), those partnerships will take time. In the near-term, there is a much greater likelihood that private plans will feel the brunt of the consequences of significant revenue loss on the ODB book of business that needs to be made up elsewhere.
You have to hand it to the government—politically, they look like heroes. Not only have they lowered generic drug costs for their own benefit, they have extended the olive branch to the private sector for the first time (although private sector pricing on most generics will be double the cost of the public cost until mid-2011). The McGuinty Liberals have been praised and thanked by private sector stakeholders for their benevolence in lowering generic drug costs. Not bad at all for a government that has difficulty sorting out sex education and e-Health.
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Recall what happened in Ontario in 2006 after Bill 102 – up from the ground popped a two-tiered pricing system. A predictable result from flawed legislation – but the government walked away from it and claimed no responsibility. Does anyone think they now care if employer ABC and its members somehow end up confronting unintended consequences that are a direct result of deep cuts to the public plan?
Consider the landscape for private plan sponsors thanks to government waiving its magic wand:
• The public sector has a hard fee cap which doesn’t exist on the private side. If pharmacies decide to bump up their fees to $14 or more (this figure being the approximate cost of dispensing a medication that various pharmacy groups have calculated) , even if a plan has a fee cap (although a number still do not), the difference will in all likelihood will be billed to the plan member. It happens today.
• The public sector has a hard mark-up cap which doesn’t exist in all cases on the private side. There are a number of reasons for this, but most plan sponsors will likely be amazed to find out what their liability could be in this area in the coming year, even those who think they are protected because they have a pay-direct drug card. Unless a plan knows exactly what average mark-up it pays, it cannot quantify the liability to the plan moving forward.
• There is no rule on the private side that prevents increasing mark-ups on brand drugs at the same time that pharmacy pricing files are adjusted on the generic side.
• Quebec and Saskatchewan are the masters of 30 day supplies for as many medications as possible regardless as to whether they are maintenance medications or not. I wonder how the average day supply will be impacted over the next 12 – 36 months in Ontario, Alberta and other provinces?
Unbundling of pharmacy services
The other piece that has received relatively little attention is the possibility of widespread unbundling of pharmacy services on the private side. There are a number of standard items that are included in a dispensing fee (assessing safety, identifying drug related problems, prescription counselling, packaging, billing, etc). However, in the past, pharmacies have also provided free delivery, counselling for OTC products, wellness clinics, and free refill authorizations which involve communicating with the physician, etc. Granted nobody has ever told pharmacies they had to do this for free, so good for them if they finally start charging for services they could have started charging for years ago, but the old business model of generic rebates covered these costs and the model never changed.
What this means for plan sponsors is that their plans and/or their members are going to begin to be faced with some new charges they have not encountered before.