In recent years, private drug plan sponsors have been faced with a serious issue: an increase in the number of covered individuals claiming very high-cost drugs for several years. The impact on private plans is significant and is even threatening their sustainability.
The cost of a single claim can now exceed $500,000 per year, reaching several million dollars within a few years. This is a risk private plan sponsors are exposed to, through no fault of their own, because of developments in research and drug therapies.
The proven effectiveness of high-cost drugs ensures that they will not be going anywhere. In fact, there is every indication that their consumption will increase substantially over the next few years.
Pooling allows for the mitigation of the adverse effects of high-cost drug claims on group benefits plans. However, in spite of the rules established by the Quebec Drug Insurance Pooling Corporation in 1997 and those established by the Canadian Life and Health Insurance Association (CLHIA) in 2013, the question arises as to whether or not the current pooling framework is an effective long-term solution. In its Report on Prescription Drug Policy published in June 2013, the CLHIA recommended developing a high-cost drug strategy, acknowledging that the new national pooling agreement is a step in the right direction, but that the industry can do more.
Read: Drug coverage system needs reform: CLHIA
The approach
The reimbursement of high-cost drugs by private plans is now similar to a life annuity. The similarity with long-term disability benefits is striking. Should the risk associated with high-cost drugs be underwritten in the same way as the risk associated with long-term disability benefits? This new approach warrants careful consideration as it may very well be an effective and lasting solution.
Currently, when a covered individual claims a high-cost drug for several years, the claim is payable by the insurer as long as the contract is in effect. When there is a change in insurers, the new insurer becomes responsible for the benefits payments. And if the plan sponsor decides to terminate the plan, the covered individual will no longer be reimbursed for the drug. The insurer’s risk does not extend beyond the contract period, which is not the case for long-term disability benefits. Does the fact that high-cost drugs and long-term disability benefits are underwritten differently reveal some inconsistencies in our industry?
Insurance products provide for the payment of a benefit when an unexpected event occurs, in exchange for payment of a premium. In the case of a covered individual requiring high-cost drugs for several years, the event is the prescription written by the doctor in relation to the diagnosis. Consequently, when an unexpected event occurs, the current insurer would be required to reimburse the drug, even after the contract has ended. This is how long-term disability coverage is designed and how high-cost drug insurance could be designed.
More specifically, high-cost drugs would be covered under a separate type of insurance that would have its own contractual provisions and pricing. This coverage would no longer be included in the healthcare plan, as is currently the case. A dynamic list of high-cost drugs would need to be established. When an event entitling the covered individual to a benefit occurs (the prescription), the current insurer would pay the claims for as long as necessary. If the contract is terminated, the insurer would continue to be responsible for paying and managing the claim.
Important benefits for plan sponsors
There’s already reason to believe that no credibility—credibility determines whether or not the group’s experience (past claims) will influence the premium rate—would be assigned to experience for small groups. The number and value of high-cost drugs would therefore no longer impact the premium. The premium would be established based on the insurer’s entire portfolio, thereby ensuring more stable premium rates for all types of healthcare coverage.
As is the case for long-term disability, when a group reaches a certain size, its experience could influence the premium rate, based on the determined credibility level. Because high-cost drug claims are infrequent and may exceed the cost of long-term disability benefits, a large number of covered individuals would no doubt be needed for the group’s experience to be considered fully credible, especially since reserves could reach massive amounts. There is reason to believe that the number of covered individuals years required for the experience to be fully credible would be higher than that for long-term disability insurance.
Premiums could be adjusted annually according to different factors: experience of the insurer’s entire portfolio, demographic changes in the group itself, the arrival of new drugs, etc. Actuaries will need to come up with a model for determining pricing and subsequent adjustments required.
Sponsors that have covered individuals claiming high-cost drugs on a recurring basis may currently have difficulty finding an insurer that offers good financial conditions because these claims are still connected to their group. If the impact of this type of claim is substantial, insurers may even refuse to underwrite the group. In theory, the pooling framework developed by the Quebec Drug Insurance Pooling Corporation and the CLHIA’s new agreement will reduce this type of occurrence; however, their effectiveness, in all circumstances, remains to be demonstrated.
By extending the insurer’s responsibility beyond the contract period, the insurer would continue to be responsible for benefits payments even if the contract has been terminated. Insurers asked to submit bids would no longer take over these benefits payments, and sponsors would no longer be adversely affected on account of these claims.
This new approach would certainly have other benefits for private plan sponsors, including more active high-cost drug claim management and continued healthy relations with employees.
The proposed change is significant as it targets the way in which high-cost drug plans are underwritten. A number of technical, administrative and legal challenges are associated with this change. However, this is a unique opportunity for insurers to develop a new product that meets a real need of private plan sponsors and their covered individuals.
A return to the fundamentals of insurance
More and more, group insurance is presented as a form of compensation encompassing several different types of healthcare that do not present any real financial risk (glasses, dental check-ups, massage therapy, etc.). The advantages are undeniable: economies of scale, tax benefits, prevention, productivity, engagement, etc. It’s important not to lose sight of the fact that the primary goal is to protect individuals in case of an event that has catastrophic financial consequences, such as the need to take high-cost drugs. However, the financial impact of these drugs on private plans is threatening the sustainability of these plans.
Experts must examine this issue now. The proposed approach merits reflection and discussion. Whether or not it’s ultimately adopted by our industry, discussions will most definitely generate constructive ideas.
Jonathan Bohm is a group benefits consultant with Normandin Beaudry in Montreal. This article briefly summarizes the company’s whitepaper, . The views expressed are those of the author and not necessarily those of Benefits Canada.