Zero inflation for employee drug plans: it’s possible!

Alberta has tabled proposed changes to generic drug pricing and discussions are underway in Ontario. Depending on the approach eventually taken, other parts of the country may follow suit.

Brand name drugs that have lost patent protection are often produced and sold by a number of manufacturers that create interchangeable generic versions. Every Canadian government drug plan, as well as many employer benefit plans, encourages the use of generic drugs through a variety of regulatory mechanisms in order to reduce drug costs. As such, generic drugs typically account for almost half of the prescriptions dispensed for a drug plan.

Nevertheless, the prices of generic drugs in Canada are higher than in other countries. Although the Patented Medicine Price Review Board (PMPRB) sets a maximum price for brand name drugs in Canada, no such mechanism applies to generic drugs. Along with a lack of transparent competition, this reportedly results in artificially high generic drug costs. For example, well-known generic drugs that can sell for $30 to $70 for a one-month supply in Canada are available at some U.S. pharmacies for only $4.

In recent years, provincial governments have begun to push for cost reductions in the area of generic drugs. Ontario’s Bill 102, which came into effect on March 1, 2007, reduced the Ontario Drug Benefit (ODB) plan for seniors price for generic drugs from 70% of the brand name (63% in some cases) to no more than 50% of the brand name drug.

Most other Canadian provinces have followed suit and, like Ontario, have also implemented legislation limiting the maximum price of generic drugs in most cases to approximately 50% of the brand name price.

Double standard
These changes successfully reduced drug plan costs for the Ontario government. Unfortunately, these legislated savings for the ODB plan did not apply to private drug plans. As a result, employers have continued to pay approximately 70% of the brand name price for most generic drugs, effectively creating a two-tier pricing structure.

In July, the Ontario government announced that it would again look at ways to reduce the ODB cost for generic drugs. And more recently, in October, the second phase of the Alberta Pharmaceutical Strategy was introduced, also aimed at reducing generic drug prices. In Alberta, the reduction in generic drug prices will benefit both the public and private payor plans, effectively removing the double standard in that province. While a number of approaches are being considered in Ontario, what isn’t yet clear is whether the changes will perpetuate a double standard for drug pricing between public and private plans or whether the government is willing to enforce common pricing for all payors.

Carpe diem
Even though control over pricing clearly rests with the provincial governments, that doesn’t mean that employers need to stand by, waiting to see whether their drug plans will benefit from impending changes.

If the Ontario government changes apply only to the provincial plans, thereby exaggerating the two-tier pricing, employers should consider negotiating ingredient costs directly with the manufacturers on their own. Certain employers have recently taken such action. Effective July 1, 2009, General Motors and Chrysler, in partnership with Green Shield, negotiated rebate deals with the manufacturers of nine brand name drugs, effectively lowering the cost of these drugs below the cost of the generic equivalent. In return, brand name drugs now have exclusive listing on the union and non-union plan formularies for both General Motors and Chrysler.

In addition to negotiating pricing agreements with manufacturers or pharmacies, employers should consider implementing pharmacy network solutions or making rebate arrangements through Pharmacy Benefit Managers or their insurance carriers.

If other provinces introduce measures that are advantageous to both public and private plans alike, employers should consider changing plan design provisions, features or coverage to reduce cost and maximize value. The most obvious requirement would be that the employer’s plan coverage be modified to require generic or the least cost drug substitution.

Available savings
The good news is, no matter what course of action is taken, it would appear that employers will benefit in the short term. Savings of 5% to 20% of drug plan costs could be achievable over the upcoming two to three years.

A large portion of these savings will come because several “blockbuster” brand name drugs will be losing their patent protection in the next few years (e.g., Lipitor, Nexium, Crestor) and generic versions of these drugs will be coming to market. Further reductions in generic drug prices could have a significant impact on private drug plans.

With potential savings on the horizon from new generics, new legislation and employer negotiations, employer drug plans could see little to no price inflation over the next two to three years, but only if employers prepare themselves to adapt to the new market realities.

Tim Hadlow is a senior benefits consultant in Hewitt Associates’ Toronto office.

To comment on this story, contact us.