It is not news that rising health care costs are a major concern of Canadian governments and employers. The number of retail prescriptions dispensed to Canadians will approach 400 million this year. The cost of these prescriptions will top C$17 billion.

Over the last 10 years prescription drug costs have increased by 250 percent. An explosion of new drugs, such as anti-inflammatory and anti-depressant medications, has also hit the market. The Biological Industry Organization (BIO) estimates that approximately 350 new biological drugs are in the late stages of development and will impact the market by 2006. Couple these factors with the consumer advertising efforts of the drug companies and the result is Canadians are spending more on drugs than ever before.

Governments have certainly taken the lead in curbing their drug plan costs. Unfortunately, many of their approaches have resulted in shifting the burden to employers. It’s time to explore how governments have approached cost containment and how employers’ plans are being impacted.

How governments shift the burden

The most overt example of government shifting health care costs occur when changes are announced in a budget, such as the Ontario government eliminating chiropractic and physiotherapy treatments from the list of reimbursed services. When the government stops paying for coverage, employers’ plans pick up the costs. While the most recent Ontario budget did not introduce specific limits or restrictions to the benefits for Ontario’s seniors, the budget did warn Ontarians of the need for changes to these programs to control costs without committing the government to a particular plan of action.

Some actions are more subtle, such as the growing list of drugs that are only covered under certain conditions. Many claimants find it easier to submit the entire drug claim to the employer’s plan rather than meeting the administrative requirements of the government plan. The result is employers often end up absorbing the full cost of drugs such as Losec^TM or Celebrex^TM. 

Sometimes the cost burden shift is due to unintended consequences. As provinces reduce hospital budgets, and length of stays in hospital, more treatments are performed on an outpatient basis. As the treatment shifts to an outpatient procedure so does the cost of treatment shift to the individual’s private plan coverage.

Reference based pricing

Reference based pricing groups a class of drugs of similar therapeutic efficacy and normally reimburses for the cost of only the least expensive drugs in the category. If more expensive drugs in the class are used, the reimbursement limit is the cost of the least expensive drug, with the patient paying the difference.

British Columbia and Saskatchewan have implemented referenced based pricing to take advantage of new, lower-priced substitute drugs now available for key therapeutic treatment areas such as gastro-intestinal drugs. The intent is to create a more informed and careful consumer who will request a less expensive alternative drug when faced with only partial reimbursement for a higher cost therapeutic equivalent.

Pre-authorization

Many government programs use pre-authorization strategies, such as limited use drug coverage for seniors. A number of drugs are eligible for reimbursement by provincial governments only with the proper documentation proving the patient has the condition the drug is designed to treat. If the patient does not have this documentation, but does have an employer drug plan, chances are the employer is paying the cost of these drugs rather than the province.

The federal, and most provincial governments do not cover new drugs for diseases such as Fabry or Gaucher disease. These prescription medications can cost upwards of C$300,000 annually and there are no therapeutic substitutes. 

These realities leave the employer plan vulnerable.

There are approaches employers can take to contain their costs while managing this shift. Part 2 of this article will address these strategies, some of the road blocks you can expect and how to overcome them.

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About the authors

Marg French is a principal in Mercer’s Toronto office. Marg specializes in the design, pricing and implementation of flexible benefit plans, and consults on a wide range of employee benefit issues and delivery mechanisms. She also has extensive experience in the marketing, financial analysis and projections for the funding and accounting of group insurance programs.

Bob Weinerman is a leader in Mercer’s Health and Benefits Business in Toronto and is a member of the Global Health and Benefits Business Leadership Group. Bob specializes in the design, funding and pricing of flexible benefit plans. He is a Fellow of the Canadian Institute of Actuaries and the Society of Actuaries.