Rethinking risk management and the future of private drug insurance

Pooling is additional insurance that benefits plan sponsors can purchase to mitigate the impact of high-cost claims on their plans. Canada currently has multiple different pooling methods, which aren’t created equal, she noted. “We’ve had accelerated scientific discovery, drug development and innovation like we haven’t seen before; however, the cost of specialty drugs is of growing concern for plan sponsors that fund health benefits.”

Read: Growing use of specialty drugs putting pressure on plan sponsors: report

Insured health benefits plans are typically experienced rated, which means their claims’ experiences drive their premiums and the volatility of high-cost drugs can be significant. Without effective pooling, premium and pool charges can become unaffordable, with plan sponsors subsequently implementing more restrictive plans to mitigate their risk and manage costs.

Lepage outlined the various drug pooling mechanisms in Canada, including some of the key differences, such as participation requirements, governance and methodology. These include: stop-loss pooling, which is an optional insurance product that plan sponsors may elect based on their risk tolerance; the Canadian Drug Insurance Pooling Corp., which was created by the insurance industry to share the risk of high-cost recurring drug claims and is mandatory for all fully insured health benefits plans; and the Quebec Drug Insurance Pooling Corp., which was legislated and mandated to mitigate the risk of significant claims costs on individual plans when the Quebec government required a minimum level of employer-sponsored drug coverage.

In Canada, pooling was once for rare events, such as out-of-country emergency medical claims, but it has been adapted to manage risk associated with high-cost drugs, said Tim Clarke, president of tc Health Consulting Inc., also speaking during the session. “We’re using an old model for a relatively new problem. It’s time to take a new look at an old problem.”

Read: Back to basics on drug pooling

Several challenges make this type of risk different, he said, noting the industry is managing recurring claims rather than the one-off, high-risk events that pooling was used for in the past. He also highlighted the increasing frequency of these types of claims. “The fact that we have the kind of drug innovations that create the problem is fabulous, but — as an insurance industry — we need to be able to adapt and build the insurance models around it.”

The voluntary nature of drug coverage is also a challenge, said Clarke. Indeed, with more plan sponsors implementing caps on their drug plans, they’re essentially opting out of the need for pooling. “While they may be doing it for good reasons, it’s creating, in actuarial terms, adverse selection. If you don’t have everybody in the pool, the pool is harder to manage and insure.”

Clarke conducted research into how other global sectors outside of the health insurance industry are managing risk and solving similar difficult problems. “There are all sorts of risks — such as tornadoes, hurricanes [and] floods — that are also increasing in frequency and severity, [as are] insurance models that offer protection. We may be able to learn from these and apply the principles to our situation.”

Read: 2021 Drug Plan Trends Report: Diving deep into pros and cons of drug pooling

In addition, Clarke noted fundamental misalignments exist between the risk the private drug plan industry is trying to manage and insurance principles. Drug coverage is primarily voluntary, he added, highlighting the risk management challenge created by the fact that some plans don’t cover high-cost drugs. Ideally, the bigger the risk, the bigger the pool required to balance that risk. “One employer — or even one insurance company — may not be big enough to be able to pool risk effectively.”

He recommended some solutions for the health insurance industry, including: implementing a minimum drug coverage standard, which is legislated in Quebec; considering the broadest possible pool to spread the risk — again, Quebec has mandatory pooling for all plan sponsors except the very largest; leveraging innovative insurance models from other countries or other industries; and creating a safety net for drug coverage for Canadians who fall through the gaps.

“There are a lot of organizations that might be interested in developing a solution for these problems for the industry,” said Clarke. “Instead of them solving it for us, as an industry, let’s try to be the ones driving that solution as opposed to having the solution enforced upon us.”

Read more coverage of the 2022 Face to Face Drug Plan Management Forum.