Demystifying private drug plans
There are many pre-conceived notions about private drug coverage in Canada that are really myths. There are also significant differences between public and private drug plan coverage that result in different coverage decisions. It is important to understand these myths and differences to better understand the overall Canadian healthcare system.
Myth #1 – Public and private drug plan objectives are the same
One of the main differences between public and private drug plan coverage in Canada are their basic objectives. Whereas public drug plans provide drug coverage for senior citizens and persons on social assistance, employers in Canada offer drug plans to employees as part of their total compensation package. Most employers feel obligated to offer a drug plan in order to be competitive, and attract and retain talent. Private health plans are a tax effective form of compensation, because when an employer pays for benefits for an employee, the employees don’t have to pay taxes on the benefits* and the cost of the benefits are a business deduction for the employer.
Most employers’ primary objectives are to offer a drug plan that will satisfy their employees and minimize the amount of premium they pay. An employer’s drug plan budget competes with such things as salaries, pensions, disability coverage and employee assistance programs. Public drugs plans, on the other hand, compete against other parts of the health care budget, such as hospitals, primary care, etc.
Myth #2 – Insurance companies decide private drug plan coverage
Many think that insurance companies decide private drug plan coverage; however in reality they are suppliers that compete to win the bid to administer the drug plan chosen by the employer with the assistance of a group benefits plan advisor. Their advisor helps benchmark their benefit plan relative to other employers competing for the same talent, and counsel on plan design options and expected premium costs. The employer can offer as much or as little drug coverage as they want. ** The advisors’ primary role is to help the employer design a group benefit plan that meets employee’s needs within the employer’s budget. They help select an insurer and negotiate on behalf of the employer to get them the best possible insurance coverage at the lowest possible price with one of the many group benefits providers in Canada.
Insurance companies compete to be the insurer of choice, by offering competitive rates and demonstrating that they are the best supplier to manage the employer’s benefit plan costs.
Insurers want to offer a wide variety of drug plan designs and management tools so that they can meet employer needs. Most insurers offer a range of plans, from very generous drug plans that include over the counter drugs to much more restrictive drug plans like frozen formularies.
The most common private drug plans are those that cover drugs that legally require a prescription; however there are more and more employee drug plan managers seeking ways to control costs by implementing more restrictive drug plans.
When an employer selects a managed formulary or drug plan, they hand over the management of the drug plan to their insurer. Employers do not want to manage a drug plan any more than they want to manage their pension plan. They select a drug plan manager to evaluate new drugs and design the tools to manage their use and rely on the expertise of the insurance carrier or pharmacy benefit manager to manage the drug plan for them.
Myth #3 – Employer drug plans mimic provincial drug plans
Although many think that employers choose formularies that mimic provincial drug plans; in reality this plan design is not as popular as expected. While a provincial drug plan must take into consideration population health and the provincial health care budget, many of these costs are not relevant or applicable to an employer. For example a new drug that reduces provincial health care utilization, (like replacing a hospital infused drug with an oral drug) is less valuable to an employer than a new drug that reduces absenteeism and prevents a costly disability claim. In recent years it makes less sense for private plans to mimic provincial plans because of the lower pricing resulting from provincial drug plan product listing agreements (PLA) and Pan Canadian Pricing Alliance (PCPA) which remain confidential. The product coverage decisions that the provinces are making are not based on the list price that the private plans will ultimately pay, nor on values that are relevant to an employer.
In contrast to public drug plan decision making, the process for review and evaluation of drugs by private payers is a “black box” to most. Public drug plans post information about their queue, timing, decisions and rationale. Understandably the insurers want to guard their innovative drug plan management practices from their competitors. This makes it difficult for stakeholders such as patients, physicians, pharmaceutical companies to review and assess an insurers’ clinical and cost effective decision making process of new drugs. There is very little information shared publicly by the insurance carriers on the process, methodology, timing or outcomes of their individual drug reviews. An employer who is a customer of the insurance company’s formulary can request information about the decision making process, and employees who are covered by the plan can make a confidential online or telephone inquiry using their specific plan information (contract and certificate number) about the listing status of a specific drug.
Myth # 4 – Private drug costs are rising
When employers express concerns about rising drug costs, they are usually referencing the cost of their drug plans. While a large portion of drug plan costs come from drugs, there are many other factors than drive up drug plan costs. The price of drugs in Canada remain relatively stable due to the Patented Medicines Price Review Board (PMPRB), however the overall cost of the drug plan may change due to change in therapeutic mix (patients using new drugs in place of older ones) and increased utilization due to the age and health status of the specific employee population. Drug plan costs also include additional costs such as risk and pooling charges, administration fees, plan advisor commissions and insurer trend factors.
Myth # 5 – Drug plans provide “insurance” protection for employers
Insurance companies’ key business is to predict and manage risk: the risk of a covered employee becoming ill and needing to make a drug claim. Underwriting involves determining risks before assuming liability for insurance coverage. They assess the risk of a group plan and determine the premium they will charge the employer. Their goal is to determine a price that is competitive enough to gain a new client and yet still be profitable. The types of factors that influence the premium include underwriting (financial) arrangement, previous claims experience, and age, gender, occupation and location of plan members.
Some employers choose to manage their own drug plan risk and select an Administrative Services Only (ASO) arrangement, where the insurer is contracted to administer the drug plan that the employer has chosen. In simple terms, the insurer pays a claim and then bills the employer for the cost of the claims plus an agreed upon service charge, usually a percentage of the claims paid. With an ASO drug plan, the employer takes all the risk for the variability and volatility of the drug costs and may choose to purchase additional insurance protection in the form of high cost pooling insurance for claims that exceed a certain threshold.
Private drug plans are annually renewable and the insurer will determine the next year’s drug plan premium based on the employer’s previous years claim experience. If an employer’s drug costs go up, so does their premium. If they participate in an insurance pool to spread the risk amongst employers, they also share in the cost of the pool. If the overall claims experience for the pool goes up, so do the charges paid by each participating employer, regardless of their own plan claim experience. With insured drug plans, although the insurers may pay the claims on behalf of the employer, they pass these costs back to the employer retrospectively via annual renewal premium calculations.
While employers are key payers for drug costs in Canada, it is important to recognize that they are a significantly different stakeholder group with unique objectives and processes to manage their drug plans.
*In the province of Quebec, employees have to pay provincial income tax for the amount that their employer pays for health benefits on their behalf
**In Quebec employer drug plans must provide coverage at a level equal to or better than RAMQ Drug Plan.
Suzanne Lepage is a Private Health Plan Strategist based in Kitchener, Ontario. Follow Suzanne on Twitter @suzannelepage