Ontario drug reform: will plan sponsors pay more?

At the same time, the expected potential savings that have been suggested assume a world where there is no adverse impact from increased dispensing fees, mark-ups, brand name costs, and possibly even therapeutic substitution away from generics in some classes. It would stand to reason that these are profound issues that will impact individual plans with different plan designs, and different demographic and disease state profiles in very different ways. This is an incredibly complex area and the fallout to any changes that are formalized in the coming weeks could pose significant threats to private sector plan sponsors and their members.

The proposed regulations that followed the announcements in Ontario are open for public consultation until May 8th, so there is a chance that some of what was originally announced may change. The final regulations are expected May 15th, at which point any changes that are outlined will take immediate effect.

In the meantime, plan sponsors need to understand the possible threats to their plan and how these threats can be mitigated. Plans sponsors need to know how to act as of May 15th.

Recap of the proposed changes

• On the public side, generic prices will fall from the current level of 50% of their equivalent brand price to 25%, and the current system of professional allowances paid by generic manufacturers to pharmacies will be removed at the same time.
• In addition, pharmacies across the province will be categorized into one of four “rural” or “urban” designations and the new dispensing fee that the Ontario Drug Benefit (ODB) Plan pays will increase by anywhere from $1 – $4.
• Mark-ups on drug ingredient costs on the public side for expensive therapies will be capped at $125, with an increase in the current 8% ODB mark-up to 10% for rural stores, but a decrease to 5% for large, self-distributing pharmacy chains (i.e. those that do not use drug wholesalers but rather buy medications from manufacturers directly.)
• On the private side, generic prices will start at 50% of brand price (the current level that the ODB plan is at) and be reduced to 25% over a three-year period. Professional allowances on the private side will be allowed to a maximum of 50% in Year 1 and will eventually be phased out over the same three-year period.
• There are no mark-up or dispensing fee restrictions on prescriptions for private sector drug plans.

Impact on private sector plans
Until the final regulations are published, the impact of what is proposed will not be known. However, there are some threats that could be felt by plan sponsors in Ontario, as well as those in other areas of the country, that need to be considered:

• Dispensing fees will increase materially to compensate for the adverse financial impact of these proposed changes on pharmacies. In fact, during the week of April 19th, dispensing fees in Ontario immediately increased to $14.99 in some stores. They could easily move materially higher in the weeks and months ahead. For plans without fee caps, an escalation in costs due to higher fees is anticipated. Furthermore, even in plans with dispensing fee caps, it is possible that the difference between a new higher fee and a fee cap could be differentially billed to plan members.
• Some claims processors have come out over the past week to suggest that they would not allow differential billing to happen&#8212but they will have a very tough time controlling what happens to cost variances post-adjudication of the claim. Similarly, as Medavie Blue Cross and Green Shield have found out over the past six months, pharmacies may refuse pay-direct drug cards if they feel claims processors are adversely impacting their business.
• Due to the lack of limits on ingredient cost mark-ups on the private side, we could quickly see significant increases in this area&#8212especially in reimbursement plans and certain PDD plans that have no pricing controls in place. By the same token, pharmacies could begin to differentially bill excess mark-ups to plan members that are not paid for by their plans in much the same way they can pass along excessive dispensing fees.
• Not every pharmacy provider currently takes advantage of the generous, one-size-fits-all upper pricing limits that most of the major claims processors allow on brand name drugs across the country. That could all change after May 15th, and plans could start to see the impact of higher brand prices across the board with pharmacies maximizing the revenue off of every prescription to counter lost revenue in the Ontario market. Since brand name drugs still account for 70-75% of spending in most private plans, this is a material concern.
• Similarly, for plan sponsors outside of Ontario, it should be alarming that Ontario has moved to act so aggressively in such a short time frame. Will a material decrease in prices in Ontario result in higher prices in other regions of the country? This is a possible strategy for national chains to recoup lost revenue.
• There is a threat that in some drug classes pharmacies might move patients from generic medications over to different (but equally safe and effective) brand name products in the same class due to higher margins to the pharmacy and no price difference for the patient. With Lipitor expected to come off patent later this year, it will be interesting to see if Crestor grows its market share significantly. The ODB plan needs to be especially concerned that that could happen sooner rather than later, but that trend could also occur in the private sector.
• The public sector has been talking about throwing $100 million back at pharmacies for professional services to help offset decreases in revenues from lower prices. If the private sector as a whole is not investing the same kind of revenue into services (as opposed to higher product costs), will pharmacies feel that they have to increase costs as articulated above to make up for lost revenue? It’s difficult to conclude otherwise.

The onus will be on individual plan sponsors to actively educate plan members as to how prescriptions are priced, what components make up a prescription’s cost, what changes are taking place that could impact what members are paying, and how members can address the issue. At the same time, given the unique nature and current experience of every plan, it will become extremely important for plan sponsors to monitor their claims experience to ensure they are able to achieve the savings that these changes may provide. That may require fine-tuning existing plan parameters, or making more significant plan design changes to insulate against unintended consequences.

For plans outside of Ontario (or with a bulk of their claimants in other provinces), it will be important to ensure that there are no adverse impacts from the fallout of the drug civil war in Ontario within their plans.