Last November, Hewitt surveyed 133 Canadian employers about their views on existing tools and techniques for controlling drug benefit plan costs, as well as on future use of some specific strategies. The results show that many employers are already pursuing certain traditional cost containment strategies or are willing to consider them if savings would be substantial.
The findings also indicate that there is both a self-professed lack of understanding regarding certain more innovative strategies (i.e., negotiating directly with pharmaceutical manufacturers or encouraging the use of mail order for maintenance drugs), as well as some hesitation to adopt other approaches. What is most likely to tip the scale in favour of new tactics is significant savings. The ROI has to make change worthwhile.
Flash forward a few months and Alberta, Ontario and now British Columbia have introduced sweeping changes to lower the expense of private drug coverage. Other jurisdictions are considering following suit. In Ontario, one of the key amendments is to lower ingredient costs for most generic drugs to 25% of their brand equivalents by April 2012, down from as much as 75% historically.
Despite the attention these changes have received during the months of anticipation pending legislative action, many employers have adopted a “wait and see” approach without a specific strategy to ensure the savings from these changes are maximized.
Time to act
While the full impact of the changes has not yet been determined—particularly with respect to the role pharmacies will play—it is clear that employers in many parts of Canada have the opportunity to see their prescription drug plan costs drop over the next couple of years. With the right strategies, the combination of generic pricing changes and the expiry of a number of high profile drug patents has the potential to result in almost zero drug inflation for 2011 and 2012. However, without specific plan elements in place, doing nothing—even temporarily—prevents employers from taking full advantage of the changes. There are efforts that employers should undertake immediately to make the most of drug plan savings.
Key to employers’ immediate actions is taking control of each aspect of their drug plan—mark-up, dispensing fees, product selection, etc. Every employer will make different decisions about how to exercise this control, but all should have the tools in place. Consider the following points as a “checklist” of tactics to think about for maximizing savings from the new approach to generic drug pricing:
Introduce a drug card
With change and uncertainty around pricing and pharmacy charges, a drug card becomes a more-important-than-ever tool for managing costs. Contrary to past impressions that drug cards increase costs, they are now key element to controlling them. For organizations that do not have a drug card already, immediate implementation should be the highest priority.
Promote generic drugs
For plans that already use design features such as mandatory generics and managed formularies, the savings from these changes will be greater. For employers that have considered the implementation of managed drug programs in the past, the potential savings from these features are now substantially increased. Even for those with managed formularies, the financial landscape between brand and generic prices has changed, which may require a re-thinking of the formulary structure.
Manage dispensing fees
The removal of professional allowances means a significant reduction in income for pharmacies that may be made up by increased dispensing fees. Employers should consider adding dispensing fee caps immediately to ensure that they control future dispensing fees. If the plan already has a dispensing fee cap, employers should review the cap to determine the right level going forward.
Manage mark-up
Pharmacy mark-ups on ingredient cost can be managed or capped under plans that have a pay-direct drug card. With the reduction in pharmacy income due to reduced generic prices and professional allowances, it is anticipated that pharmacies may increase mark-ups where plans allow it. Employers with a drug card should review the mark-up policy with their drug card provider to understand how an increase in submitted mark-up might affect their plan. For employers without a drug card, it is much more difficult to control the pharmacy mark-up.
Review post-retirement benefits and look at accounting expense savings
Organizations that offer post-retirement benefits that include prescription drugs should review their prescription drug brand/generic mix for retirees. While most employers are wary of changing the plan design for existing retirees, a clear understanding of the current design, along with administrative features (e.g., mandatory generic) and drug mix will impact how much savings will accrue to the retiree plan as well. If these savings are material, employers should look at their post-retirement accounting impact. Especially for those using international accounting rules (IFRS), the magnitude of the immediate savings from even a small change in projected experience or medical trend could be substantial.
For insured medical plans, negotiate carefully
For employers whose medical plans are administered on an ASO (administrative services only) basis, the actual savings in reduced drug costs will flow automatically into the plan. Those that pay a premium or fixed deposit rate to their insurance company for their drug coverage should review their plan design as well as their drug brand/generic mix and ensure that the plan specifics are reflected in both the rates charged after July 1, and the inflation the plan’s insurance carrier is projecting for the next renewal.
Reinvest in health
It is not often that government changes result in reduced costs for employers. Savings afforded by the new generic drug pricing may provide employers with additional funding to enhance their health and wellness initiatives. Investments in health today will help control costs into the future.
Communicate with employees
Employees may well have heard or read about the legislative changes in the media. Employers should take advantage of the opportunity to provide the “what does this mean for me” context by explaining to employees how the new legislation impacts their own plan and its features—particularly if changes will be implemented.
Prepare now for 2013
While the combination of generic pricing and patent expiries will keep drug costs down in 2011 and 2012, once these effects have played out, substantial cost increases are likely in 2013, driven by increased development and use of high-cost biologic drugs.
The bottom line is that costs will go down for those that take the proper steps. In contrast, plans without the appropriate controls could see their costs increase as pharmacies look to recoup the significant loss of income from the legislative changes. Far from being a time to sit idle, generic drug re-pricing provides a golden opportunity for employers to review key features of their drug plan in order to make the most of available savings.