© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the January 2006 edition of BENEFITS CANADA magazine.
A bitter pill
Plan sponsors in Canada can learn a thing or two from their U.S. counterparts about managing drug benefit programs.
By Shawn O’Brien

Whether you are an employer in Canada or the United States, one thing remains the same: managing fiscal constraints, human resources requirements, and the wellbeing of employees is a constant juggling act. And there are many balls in the air right now; the rapidly increasing costs of new drugs are profoundly impacting employers’ plans. Given the rising proportion of drug program costs, the ongoing sustainability of employer-sponsored benefits are potentially at risk. That’s unless innovative and proactive measures are introduced.

Plan sponsors have traditionally been applying budget expense management principles to their corporate drug benefit programs. That’s because as sponsors struggle with the annual costs associated with their drug programs, they seek mechanisms that require minimal administrative effort and are easily understood by plan members, as well as yielding the highest direct cost savings. This often results in increases in co-insurance levels that penalize participants without focusing on the core causes of increased drug expenditure.

Unfortunately, there is more focus on the bottom line than on the value of the drug program. And it has resulted in benefit levels being negotiated from one plan year to the next with little consideration of the influence on health outcomes.

Historically, there has been little control or innovation in drug benefits and employers have paid for most or all of drug plan costs. Formularies have traditionally gone unmanaged, covering virtually all drugs that require a prescription. The customary low annual and per script deductibles have been eroded and are proving ineffective in offsetting drug trends or changing consumer behaviour.

The current reality is that rising costs are being managed through plan design initiatives such as managed formularies. New drugs are reviewed for efficacy and cost by independent evaluation committees prior to their inclusion under the drug program. There is also a greater proportion of drugs covered by the plan member through direct cost sharing and health spending accounts.

Although employers’ annual increases in total drug expenditures have been improving in recent years, they have far from stabilized. Annual drug trends are comprised of inflationary costs, changes in utilization, and changes in therapeutic mix. These combined forces are increasing overall drug expenditure. Increased utilization is driven by new drugs for previously untreated or under-treated conditions, an aging population, new standards of care/prescribing guidelines, and direct-to-consumer advertising.

For most plan sponsors, a larger proportion of their claiming population is moving into the 55 to 65 age category. These claimants utilize, on average, double the number of prescriptions per year as a person in the 35 to 44 age category. Typically, age-related diseases such as high blood pressure and elevated cholesterol begin to make their appearance at around age 45.

On the inflationary side, the low-volume, high-cost prescription drugs for catastrophic conditions are propelling average claim costs skyward. Research has led to treatment for conditions that were previously untreatable or only treated in hospitals. Catastrophic illnesses such as Multiple Sclerosis, Cancer, and HIV/AIDS now have breakthrough treatments available.

However, many of these breakthrough treatments are costing employer sponsored drug programs in excess of $15,000 a year. In addition, Canada and the U.S. are experiencing a biotech revolution as both countries have significant biological drug activity in their pipelines. And the average claim cost of a patented single-source, branded drug is around $85 per claim. Given that these singlesource drugs are accounting for over half of all claims processed for many plan sponsors, they are contributing to over two-thirds of all drug expenditure.

Many drug plan management strategies are transferable between the U.S. and Canada. However, the more innovative approaches in place in the U.S. are slow to be adopted by Canadian employers. For example:

Multi-tiered formularies: Most drug plans in the U.S. consist of a multi-tiered—usually three-tiered—formulary with different flat dollar or percentage co-pays based on the type of drug dispensed. While low cost generic drugs, generally the least expensive, form the first tier and are subject to the lowest co-pay, the third tier is reserved for those drugs that either have a generic or a second tier drug available. These drugs attract the highest co-pay.

Mail-order pharmacies: Using a mail-order pharmacy, the plan member can receive a three-month supply of medication while only being charged two times the tiered co-pay that is applicable to retail pharmacy claims.

Prior authorization: Prior authorization applies to drugs that are being used for an indication other than what they are approved to be marketed for, drugs that have the potential for abuse, and drugs that should only be used under certain circumstances. The patient must meet specific pre-defined clinical guidelines before certain drugs will be approved for reimbursement. This method of drug management ensures responsible prescribing on the part of the physician and raises the awareness of alternative therapies for the patient.

High amount pooling: This method allows plan sponsors to guard against the financial burden of catastrophic conditions. There are literally dozens of conditions characterized by $15,000 to $25,000 in drug expenditure per person each year. Increased utilization of other health benefits as a result of these conditions can be combined under a pooling arrangement as well.

MAC and reference-based pricing: Maximum allowable cost(MAC)and referenced-based pricing are now on the horizon. MAC allows an overall price ceiling to be reimbursed for brand-name drugs with generic equivalents. Referenced- based pricing allows reimbursement up to the cost of a particular drug(the reference drug)in a specific drug class. Both techniques allow the plan sponsor to reimburse a reasonable amount of the treatment cost to their plan members.

Flex benefits: Flexible benefit plans and healthcare spending accounts are becoming more popular. This option allows plan members to direct coverage to meet their individual needs. Spending accounts offer flexibility as well as tax effectiveness for both the employer and employee. Among the major health management trends is the public shift towards a focus on wellness. This can take many forms—from Employee and Family Assistance providers, and employee health workshops and seminars—to health risk assessments, or disease management/specialty pharmacy programs that manage high cost and chronic conditions.

Specialty pharmacies: The trend toward dedicated “specialty pharmacies” in the U.S. is sure to appeal to the Canadian benefits industry. These pharmacies are designed to manage the application of high cost drugs and conditions such as multiple sclerosis, cancer, rheumatoid arthritis, hepatitis, and HIV/AIDS in an effort to facilitate optimal treatment. A caseworker is typically assigned to assist the patient in their drug therapy regimen to ensure compliance. Medical management is enhanced by of the sheer volume of patients specialty pharmacies treat with these complex conditions.

HRAs/predictive modeling: Providing traditional health risk assessments helps employees understand future health risks based on current factors and history. Predictive modeling utilizes sophisticated software and methodologies to determine future claims propensity of individuals or groups on an automated and larger scale then conventional health risk assessments.

Pharmacotherapeutic care: Pharmacotherapeutic care is based on the principles of pharmacogenomics and pharmacogenetics. Taking predictive modeling one giant step further, and without the need of historical claims data, pharmacogenomics can determine, without a shadow of a doubt, whether an individual is genetically pre-disposed to a certain disease or has an inherent deficiency that would impact how they respond to various drug treatment therapies.

Our U.S. employer counterparts bear a far larger burden of healthcare costs than in Canada as a result of higher cost drugs and the costs of subsidizing services. But they have progressed in managing drug expenditure in a much more aggressive manner than in Canada. Canadian plan sponsors should examine these strategies, given the uncertainty of the future healthcare system.

Plan sponsors need to define their overarching corporate goals, develop a strategic plan for their drug program, determine coverage position, implement ongoing monitoring and review processes, and respond to those processes with innovative benefit design modification strategies. This hands-on approach will help ensure the sustainability and effectiveness of their drug program for years to come.

Shawn O’Brien is a consultant, health strategies practice, with Aon Consulting in Toronto. Shawn.obrien@aon.ca