Pharmaceuticals to push healthcare cost increases to five-year high

Buck Consultants’ 2010 Canadian Healthcare Trend Survey finds that pharmaceuticals—which represent 60% to 70% of health expenditures—remain the fastest-increasing expense paid by group insurance plans, with an expected increase of 15.8% in 2010. This is up slightly from last year’s increase of 15.6%.

“This is surprising considering the patents on several high-cost brand drugs are expiring this year, opening the door for lower-cost generic drugs,” says Michele Bossi, practice leader of Buck’s Canadian health and productivity consulting practice. “We are also seeing a trend among provincial governments toward introducing legislation that will reduce generic drug pricing over the next few years.”

However, the expanding biologic drugs market is counteracting the downward pressure of new legislation, as it represents uncharted territory in which future drug costs are difficult to predict.

According to the survey, medical services and supplies (excluding prescription drugs) saw the largest cost increase at 13.5%, up from 12.8% last year. This is mainly due to an increase in utilization of paramedical services such as massage therapy, physiotherapy and chiropractic treatments.

Bossi explains that despite ballooning health benefits costs that easily exceed the cost of inflation for most other business expenses, employers are loath to jettison the programs due to the role that employee benefits programs play in attracting and retaining employees.

“There continues to be a gradual shift in focus to the broader concept of workplace wellness, not only to address benefits costs but also as a tool to improve employee engagement and productivity,” says Bossi. “Employers are beginning to realize that an investment in a healthy workplace culture will yield significant returns, not just in reduced benefits costs but in improved productivity and employee engagement.”

Ontario drug reforms no panacea
For employers with drug plans in Ontario, the province’s recent moves to control the cost of generic drugs may not produce the desired results, according to a Mercer communiqué. Prices for many generic drugs will decrease incrementally over the next three years but will not necessarily translate into decreased drug benefits plan costs.

With the current price of generic drugs in Ontario ranging between 30% and 80% of the brand name drug price—and drugs released after 2006 making up most of the high end of this range—most drug plans in Ontario have a current weighted average generic drug price closer to 55% or 65% of the brand name price.

As a result, plans that have a weighted average generic price around 55% will not see a noticeable decrease in their overall generic drug prices until 2011, when generic drug prices are decreased to 35% of brand prices. The net impact for Ontario plan sponsors, explains Mercer, will depend on the current mix of generic drugs under the plan and the reaction of the pharmacy industry in the marketplace.

In fact, there are several factors that could increase net drug plan costs.

• Dispensing fees for all prescriptions, whether for generic or brand name drugs, may rise. It has been reported that some Ontario pharmacies have raised their dispensing fees to $15.
• Pharmacies might increase the markup included in the ingredient cost from the current levels—typically 10% of the drug cost. While any changes to markups would have to be negotiated, pharmacies might refuse to accept the provider drug card unless the markup is significantly increased.
• In order to make up for lost revenue in Ontario, pharmacy chains might significantly increase generic drug prices, markup or dispensing fees in its pharmacies outside of Ontario.
• Market forces may affect drug prices and plan costs in unexpected ways.

“Overall, the final amendments are good news for private drug plans,” says the communiqué. “However, the impact on private drug plan costs is not completely known since not only do generics account for only part of the overall cost of a drug plan, but pharmacies might attempt to recoup some of their lost revenue by increasing other prescription costs or increasing prescription costs in other provinces.”

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