Health Economics and Private Plans

Balancing Sustainability and Risks
The 2021 Canadian Leadership Council on Drug Plan Partnerships brought together benefits industry stakeholders to examine the evolution of health economics and formulary decision-making in Canadian private drug plans. Although managed formularies are a tool that can help manage drug plan costs, plan sponsors need to be aware of the challenges and potential financial and legal risks these programs may introduce.

“While there is lots of exciting innovation in drug development, it often comes at a high price,” said Daria O’Reilly, PhD, lead health economist, TELUS Health. “One of the tools used in managed formularies is cost-effectiveness analysis, which allows payers to assess incremental cost and benefits of new drugs relative to other therapies and ensures plan sponsors get value for the dollars invested in their employee benefit plan.” “Although I think plan sponsors are supportive of managing value for money, protecting plan sustainability and reducing financial risk, they may not understand the potential trade-off of increased legal risk,” said Tara Anstey, principal, Mercer (Canada) Ltd.

Formulary management and health economics

Although some new drugs may seem costly and unaffordable, there needs to be an analysis as to whether the drug is cost-effective, O’Reilly explained. “For example, will paying for this drug increase survival or improve productivity? Formulary decision-making based solely on the acquisition cost does not consider any measure of value or the benefit that the drug may provide to the plan sponsor.”

Pharmacoeconomics distinguishes between cost and cost-effectiveness. “Cost-effectiveness analysis is relatively new to Canadian private payers and considers the cost and benefits of therapies to determine if new drugs are worth the increased cost,” said O’Reilly.

Formulary managers assess new drugs by conducting an objective review of the clinical evidence with respect to efficacy and safety, in addition to assessing the estimated financial impact and cost-effectiveness.

“Are the incremental benefits fulfilling unmet medical needs where there was no prior treatment? Are there incremental health-care gains compared to other drugs that treat the same condition?” added Lindy Forte, principal consultant, Patient Access Solutions.

Cost-effectiveness analysis is not about finding the cheapest drugs, said O’Reilly, “rather it ensures the investment provides value for money.”

Different perspectives require different processes

Some private payers reference public drug coverage recommendations as part of their formulary management. The Canadian Agency for Drugs and Technologies in Health (CADTH) reviews drugs for the majority of the Canadian provincial drug plans; however, its perspective differs from private plans because it primarily covers seniors or those with low income, whereas private plans have a younger working population.

According to O’Reilly, “estimates of cost-effectiveness have traditionally been calculated with the public payer in mind, which primarily take into account costs borne by government. These estimates are not relevant to private payers because their objectives differ due to the population they cover and the benefits they value in a drug."

“For private plans, we should also consider how a family member’s illness impacts a plan member’s ability to work. For example, a parent missing work to take care of a sick child,” suggested Forte. “Private plan reviews need to be different from public because they insure a different population that are generally younger, require mobility for their jobs and have different needs,” said Sandra Ventin, associate vice president, Gallagher. “For example, it is important to understand that plan members taking a costly new drug may curb or avoid additional disability costs. Earlier return to work opportunities should be factored into the employer cost liability.”

Private payers who reference CADTH recommendations may not have current information. For example, CADTH may recommend a drug to be funded, but with a 95% reduction in price. Even if a confidential lower price is negotiated for provincial drugs plans, the CADTH recommendation is not updated. “This means that private payers may reference an outdated review that does not reflect a new cost-effectiveness analysis based on the lower price,” said Forte, “and I can say from experience, that it is not a 95% reduction – because if pharmaceutical companies had to reduce their price that much, there wouldn’t be many new treatments coming to Canada.”


A large employer had two bargaining units where employees worked side by side but were covered by different plans and providers. Both plans adopted a managed go-forward philosophy for their drug plan and had similar language.

When a drug was declined for listing by one of the providers but was eligible under the other, the plan sponsor felt that it had to make an exception because there was nothing that would justify the coverage of the drug under one plan and not the other.

New processes introduce new risks

“These new drug review processes may lead to more drug coverage declines and an increased risk for plan sponsors,” noted Anstey.

“As the number of declines for expensive drugs continues to grow, the economics make litigation more likely.”

Anstey also cautioned about potential public relations risks due to increased patient advocacy and patients who bring stories to the media. Christine Than, pharmacist - drug solution specialist, Aon, agreed: “Some of our clients are in the media on a regular basis and the last thing that they want is to be perceived as the one who declined a cancer drug.”

According to Anstey, most payers have implemented programs that reserve their right to pause the listing decision to conduct a pharmacoeconomic review and potentially negotiate a product-listing agreement with drug manufacturers. “I call this a managed go-forward plan. In the past almost all prescription-requiring drugs were covered; however, drugs that have come to market since the programs were implemented are subject to a more rigorous review.”

“There is a bit of a dichotomy because there are older drugs on the formulary that would not meet the cost-effectiveness criteria that are being applied to newer drugs,” explained Anstey. This can result in a situation where one patient has access to a drug that is not cost-effective because it was listed prior to the new processes, while another patient is denied access to a therapy that was reviewed later and deemed not cost-effective.

“This could create some dissonance for plan sponsors who might have to defend their coverage philosophy.” Although payers have contract language that reserves their right not to list a new drug and conduct a review, “there is little detail about the metrics used,” cautioned Anstey. “The challenges are, in part, due to the lack of transparency about payers’ formulary criteria or coverage decisions,” she said.

Plan sponsors’ potential liability to defend a vendor-declined claim may take many forms. A benefit plan is part of the compensation arrangement, according to Anstey, “which is included in the employment contract and is subject to a wide variety of compliance issues – such as income tax and human rights; however, there are other lesser-known risks of which plan sponsors should be aware.”


1. The introduction of new, expensive drugs will continue to threaten plan sustainability, and pharmacoeconomics play a crucial role in man-aging drug costs. Plan advisors and sponsors should understand the process to select cost- effective alternatives.

2. There is a potential risk when moving between carriers that may have different philosophies. When selecting a new insurer, ask them to articulate how they decide what to include in their formularies.

3. Transparency will improve confidence in payers’ drug plan management. Plan sponsors and plan members must feel that a decision for including or rejecting a drug is based on a sound process.

4. Ensure appropriate provider oversight of a payer’s drug plan management and formulary decision-making process and ensure that it aligns with relevant documentation.

5. Use a risk-conversation tool to assess a plan sponsor’s values and risk tolerance. If plan advisors also understand vendors, they can match up customers with an appropriate payer.

6. Consider what health insurance is really for. Will it provide protection for a plan member who needs a high-cost drug? Is it for catastrophic illness? Or day-to-day expenses?

7. When a drug is not covered, will payers still help plan members access the drugs they need? They still have a condition that warrants treatment and need help to navigate alternative funding.

Fiduciary liability

Canadian case law has recognized a fiduciary duty for plan sponsors to look after the interests of plan beneficiaries in the administration of the plan. While most of the caselaw to date has been in the context of pension plans, the common law principles extend to benefit plans. Fiduciary duty is considered the highest standard of care at law because there is vulnerability in the relationship. “Plan sponsors have an obligation for provider oversight of the vendors they select to deliver the benefits program,” said Anstey. “While the legal liability is most evident for self-insured arrangements, the liability for provider oversight may also extend to insured arrangements.”

The unsettled question is how much of the formulary management can be delegated to an insurer or ASO administrator. Plan documents typically include very little detail on the criteria that governs the drug formulary. While plan sponsors are permitted at law to delegate administration of the plan rules to a third party, this may not extend to the unfettered discretion of a provider to create plan rules that are not supported by the plan documents.

In group benefits, documents such as an insurance policy or plan text govern provider relationships; however, plan sponsors potential ambiguity and liability.”


“Exceptions are the number one area where I see vulnerability,” said Anstey, “and I would suggest that there are very few plans that are not making exceptions.”

A Canadian Nova Scotia human rights tribunal found at first instance (reversed on appeal for other reasons) that it was discriminatory that a plan did not consider an exception request for medical cannabis, primarily because the trust had a past practice of considering extra-contractual exceptions. “Exceptions can potentially destabilize the plan and create a precedent for future challenges.” According to Anstey, plans can mitigate risk by having a clear exception policy and criteria, rather than simply reacting to situations as they arise.


1. What is their process for evaluating a new drug?

2. What information is considered?

3. Do they use public drug plan recommendations to inform formulary decision-making?

4. How does the cost of the drug affect the coverage decision?

5. How do they determine if a drug is cost-effective? What perspective is used, and what benefits are taken into consideration?

6. How long do their drug reviews take?

7. What plan language supports their formularyreview process and a decision not to list a drug?

8. Will they accept the risk of a legal challenge of their formulary decisions?

9. Do they publish the outcomes of their drug reviews and rationales for their decisions?

New risks to consider

“Beyond the risk of an employee commencing litigation, other parties, with perhaps deeper pockets, may also be prepared to sue a plan sponsor,” cautioned Anstey. In one such case, a plan member who required a high-cost drug was inappropriately denied coverage by their group insurer, but subsequently had the claim paid by their spouse’s plan. Because of the high cost of the drug, the spousal plan successfully sued the initial insurer for reimbursement. “These were two unrelated plans with no contractual relationship, which may be an example of how litigation will evolve in the future,” said Anstey.

It is uncertain how some of these legal challenges will play out because, according to Anstey, “there’s little documentation regarding formulary review processes that could justify what is covered or not. It’s a new frontier in terms of contract language.”

What is the advisor’s responsibility to make sure that their plan sponsor understands the risk? “It’s a huge responsibility and I would argue most advisors don’t understand the risks or are ill-equipped to discuss them with clients,” said Rob Taylor, executive vice president, HUB International. Similarly, Gordon R. Hart, chief executive officer, Selectpath Benefits & Financial, said he is “feeling more uncertain about the legal liability and ramifications of some formulary approaches, given the lack of transparency about decisions and how they are made.”

Private payer reviews present unique challenges

The evolution of health economics and formulary decision- making introduces challenges that are unique to Canadian private drug plan management. Models of both US private payers and Canadian public payers are not always relevant because their economics or health-care systems are different.

Forte, who develops new drug submissions for Canadian public and private plans, identified some of the challenges. Developing pharmacoeconomic models for payers is costly, according to Forte, and can take at least six months to create or customize for Canada. “The amount of work increases significantly when the model needs to be further customized
for private payers.”

Priscilla Nykoliation, senior manager, payer relations, private market, AstraZeneca Canada, asked “are pharmacoeconomic models always relevant? I think it depends on the type of treatment.” For example, some plan members are diagnosed, treated with the medication, and potentially dying while they are on disability leave. “The submission will not show increased productivity levels whatsoever. These treatments will improve quality of life; however, is a pharmacoeconomic model needed in this type of scenario?”

Private drug plan managers can sometimes take up to 12 months to review new drugs. “Think of what this means to a plan member who has advanced cancer and has already been through three prior lines of therapy,” said Forte. “This new treatment may offer an additional five months of life; however, the member will not access it in their lifetime.” Or consider a multiple sclerosis patient, explained Forte: “During the time they are waiting for the payer to complete the review of a new treatment, they could end up in a wheel-chair, which is irreversible progression that could have been prevented.”

While there was general agreement that new drug submissions should be customized for private payers, the important outcomes are rarely available.

Sometimes a pharmacoeconomic analysis is a mandatory component of a new drug submission, said Joe Farago, executive director, private markets and investment, Innovative Medicines Canada. “Canada represents less than 2% of the global mar-ket, and, as such, clinical trials, submissions and pharmacoeconomic models are often not tailored specifically to the Canadian private payers.”

Although private payers value reduced disability, time off work or consumption of other health-care benefits, clinical trials are designed for global regulatory purposes. “It would be challenging to design trials to meet the needs of all payer types across the globe,” explained Forte. Drug manufacturers need collaboration from the insurers “because they often don’t have some of the necessary data to produce models that include presenteeism, absenteeism and productivity gains,” said Farago.

Lack of transparency restricts opportunities for improvement

The lack of transparency with private payer reviews not only poses a legal risk for plan sponsors, but can also hinder the submission process because, according to Forte, “Once submissions have been sent to the payer, they often go into a black hole, with no status updates or explanation of the final coverage decision.”

Ideally private plans would publish their reviews and rationale for their decisions like the public payers. If the reviews were made public, pharmaceutical companies could learn from prior reviews and improve their submissions.

Unfortunately, according to Farago, many current private payer submission requirements were created in isolation, without consultation with the major partner that produces the dossiers. “Moving forward, there would be benefits from greater collaboration and partnership in deciding how health economics can and should be used for the Canadian private payer market.”

Tara Anstey Mercer (Canada) Ltd.

Kevin Ashe Mosey & Mosey Benefit Plan Consultants

Paul Beecher AbbVie Corporation

Cheryl Bielicz Bristol Myers Squibb

Paul Crossdale BenefitsConnect Inc.

Michael Dietrich Innovative Medicines Canada

Tari Duguay Cowan Insurance Group

Glenn Fabello Pelorus Benefits

Joe Farago Innovative
Medicines Canada

Lindy Forte Patient Access Solutions Inc.

Mark Goldasic JDIMI Consulting | Navacord

Gordon R. Hart Selectpath Benefits  & Financial

Ilias Iliopoulos AstraZeneca Canada

Aliya Jaffer TELUS Health

Joanne Jung Willis Towers

France Lambert Amgen Canada

Patrick Malloy BFL CANADA Consulting Services Inc.

Philippe Martin Bristol Myers Squibb

Jacques-André Morin Normandin Beaudry

Priscilla Nykoliation AstraZeneca Canada

Rakiya Oseni Mercer (Canada) Ltd.

Kathleen O’Keefe OMG Benefits Consulting Inc.

Daria O’Reilly TELUS Health

Jason Ovsenny People Corporation

Dave Patriarche Mainstay Insurance Brokerage Inc.

Chris Pryce Human Capital
Benefits Inc.

Chris Sanderson Maximus Rose

Kathy Sotirakos Amgen Canada

Robert Taylor HUB International

Christine Than Aon

Aneesa Toor The Leslie Group Limited

Theresa Tran Eckler Ltd.

Sandra Ventin Gallagher

Andrew Wynn AbbVie Corporation

Elaine Yedlin Johnston Shaw Inc.

Bill Zolis Penmore

Sponsors: Abbvie, Amgen, Astra Zeneca, Bristol Myers Squibb, Innovative Medicines Canada, Telus Health