The $2-million fake lake in Muskoka. Bev Oda’s $16 orange juice. Even defined benefit pension plans for civil servants. The public sector doesn’t have a reputation as a beacon for effective cost management but it has made some progress when it comes to drug plans.
Of the $81 billion private plans spent on medications in the last five years, there was $14.5 billion in waste, says John Herbert, director of strategy, product development and clinical services at Express Scripts Canada in Mississauga, Ont. The waste is due in part to employees not choosing cost-effective medication and pharmacy practices.
Many public plans save significant amounts by mandating generic substitution, implementing managed formularies and negotiating product listing agreements with pharmaceutical manufacturers, says Michael Law, an associate professor at the University of British Columbia’s Centre for Health Services and Policy Research.
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Historically, most employers provided open formularies because drugs were relatively cheap and sustainability wasn’t yet a concern, says Helen Stevenson, founder and chief executive officer of the Reformulary Group and a former Ontario assistant deputy minister of health. Public plans, however, had to implement managed formularies simply because of the sheer number of people they covered. While some, such as Ontario’s drug program, primarily serve senior citizens and those on social assistance, others, such as British Columbia’s Fair PharmaCare plan, include all residents, although coverage levels vary by household income.
“[Public plan] budgets tend to be very big, so there was put in place that kind of review to ensure we really were focused on the clinical data but also the cost-effectiveness of drugs,” says Stevenson.
Formularies ‘too drastic’
As more drugs with big price tags hit the market, employers face increasing cost pressures but few are turning to formularies to address the issue immediately. “Employers might think it’s too drastic,” says Jean-Michel Lavoie, assistant vice-president of product development, group benefits, at Sun Life Financial.
“They want to get there, but let’s say they’ll do it over a two- to three-year period. . . . They’ll ask us to add a generic substitution the first year. And then . . . a prior authorization program focused on high cost in Year 2. And then Year 3, they’re playing with their deductible or their limits.”
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Another reason why employers may be skittish about implementing formularies is they use generous drug benefits to attract top talent, says Brett Skinner, chief executive officer of the Canadian Health Policy Institute and executive director of health and economic policy at Innovative Medicines Canada.
“All the research I’ve seen says that providing better access to newer and more innovative medicines provides better health outcomes for patient populations,” he says. “So that translates to better workforce productivity for private employers and it translates to lower overall health system costs at the total societal level as well.”
Skinner suggests copayments and deductibles are more effective cost mechanisms than formularies, since they allow employees and their physicians to choose the medication that works best for them.
The formulary-driven plans in the public sector are also missing the education component through which members can learn about what they can do to keep costs low, says Herbert.
“In some cases, it can be more restrictive and patients aren’t really making better choices. They’re just being capped or denied access.”
But formularies allow patients to make their own choices, Stevenson argues. If plan members prefer to use a medication found to be less effective than a rival drug, they’re free to do so and will simply have to shoulder a higher copayment.
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“So now, we’re introducing the concept of they can still get any drug they want but they’ll pay less for drugs that work better, essentially,” says Stevenson.
Exploring the alternatives
There’s another explanation for why plan sponsors are still on open formularies, says Marc-André Gagnon, an associate professor at Carleton University’s School of Public Policy and Administration in Ottawa. Insurers on administrative services-only agreements receive a percentage of an employer’s total drug spend, he says.
“You have no financial incentive for private insurers to move forward and try to change the culture about this,” he says.
But according to Lavoie, that reasoning no longer applies. “All the employers now have caps or pooling thresholds . . .,” he says. “They say, ‘I want to protect myself at $25,000 or $50,000 per person, and over and above that threshold, I’m transferring the risk to the insurer.’” With medications for hepatitis C priced at $80,000 for one course of treatment, for example, insurers have an incentive to control expenses.
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Once a plan sponsor has a formulary in place, it can negotiate with manufacturers for lower drug prices. Since 2010, the provinces — which have separate formularies — have bargained as a block through the pan-Canadian Pharmaceutical Alliance. List prices stay the same, but each quarter, manufacturers reimburse the provinces for the difference between those amounts and the negotiated ones that remain confidential, says Neil Palmer, president and principal consultant at PDCI Market Access Inc.
The Canadian Life and Health Insurance Association has pushed for the alliance to include private insurers as well. “We acknowledge that as a relatively small country, the only way we’re going to get a good price for a drug is if we stick together and leverage the combined buying of everyone in Canada, whether it’s a provincial government or private insurer, to pressure the manufacturers for lower prices,” says Stephen Frank, senior vicepresident of policy at the association.
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Competition law prevents private insurers from teaming up and creating a separate bargaining block, says Skinner, but some of them have begun negotiating prices individually or through third parties.
For its part, Sun Life occasionally negotiates with manufacturers, although Lavoie admits it’s harder to do so when employers are on open drug plans. Almost 90 per cent of the plan sponsors Sun Life works with, however, have prior authorization requirements, which acts as leverage as well.
The debate over pharmacare
While formularies and product listing agreements can be effective, Gagnon argues they don’t go far enough.
“It’s time for a more substantive reform, something like single-payer, universal pharmacare,” he says. “And in that case, yes, we could achieve very significant savings in terms of drug costs [and] still provide freedom of choice but not based on wasting other taxpayers’ money.”
He points to the Netherlands, which provides full reimbursement for drugs on the national formulary, as well as for those a physician deems medically necessary. People pay out of pocket only if they want a brand-name drug instead of a generic one for no medical reason. And that element of patient choice isn’t so different from some of the approaches touted by people like Stevenson.
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“The one [pharmacare model] that could be feasible is having a minimum national formulary,” says Stevenson. It would likely be less generous than private plans, and insurers would need the ability to sell top-up drug plans that are similar to the extended health benefits currently offered by some plan sponsors.
A major disadvantage of public plans, however, is their limited drug coverage and delays in approving new medications, says Skinner. He points to IMS Brogan research that found at least one private plan covered 88 per cent of the drugs approved by Health Canada between 2004 and 2012. For public plans, at least one of them covered just 46 per cent of the drugs approved during that time period. It also took 138 days for the average private plan to approve a drug. That compares to 479 days for the average public plan.
“What the private sector can learn is that they’re actually performing much better than the public sector in terms of providing benefits to their populations,” says Skinner.
But quick and broad approval can also be a downfall, according to Law.
“A lot of private plans are paying for branded medicine when generics are available, which is, frankly, just a waste of money in most instances,” he says. “They’re also paying for more expensive drugs when cheaper drugs would be just as effective and less costly for employers. And I think what people forget is that if you look at the economics literature, the people who eventually pay for drug plans are employees, over the long term. So all of us are paying for it in decreased wages over time.”
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Stevenson acknowledges the wait times for public plans to list a drug may be excessive but she emphasizes the provinces have to assess a drug from the perspective of both clinical and cost-effectiveness. Society, she suggests, can’t sustain the cost of approving each new million-dollar drug.
“I believe it’s really important to be assessing the relative value of these drugs and giving that information to people. And if people want to pay more for that drug, that’s fair. . . . If the drug is clinically superior, then sure, it should be reimbursed at the full amount. But that step is really important.”
Sara Tatelman is an associate editor at Benefits Canada.
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