By Dan Eisner, Employee Benefits Advisor
Simply put, a drug formulary is a list of drugs covered under your drug plan and it is therefore used to restrict coverage for certain drugs. However, the actual methodologies employed by insurers in developing a formulary can vary a lot. Based on my experience over the last 20 years, very few plan sponsors have considered implementing drug formularies that more aggressively restrict or reduce drug coverage for employees. At most, we have seen plan sponsors adopt mandatory generic substitution provisions, most often though as a requirement by the insurer rather than a request by the plan sponsor. Beyond that, there has been very little interest in the more aggressive and restrictive drug formularies which are available from insurers.
The lack of interest in drug formularies has occurred in spite of drug plan inflation running at 8% to 15% annually over the last 15 years, with much of this inflation comes from new and more costly drug therapies. This may at first seem surprising, but when you consider the significant effort required around employee communications to implement and support drug formularies, and the risk of negative employee perceptions towards the plan sponsor, it is not that surprising. Employees want and need to know why some drugs are being covered and why others are not, who is making those decisions (i.e., who to blame) and what this means to them. Realistically, drug formularies never result in positive news for employees as they always restrict coverage and that often results in complaints back to the plan sponsor.
That said, the concept of drug formularies to help contain drug plan costs has become a more relevant topic recently, at least before COVID-19 hit. What is interesting though is that plan sponsors may not realize that their current plans now likely incorporate a drug formulary, whether they know it or not. Over the past few years, all insurers in Canada have effectively been further restricting drug coverage in order to help ensure the sustainability of drug plans. They have been doing this by way of programs not necessarily referred to as drug formularies.
Most commonly, all insurers have implemented mandatory generic programs where employees are directed to take significantly cheaper generic drugs (also referred to as the low cost alternative) when they are available. Another common feature of drug plans is now prior authorization programs where insurers will require extra steps before coverage is eligible for reimbursement. Most often, the insurer will need reassurance that other more cost-effective therapies have been tried first and that the drug being considered is actually effective for the condition in question. In some cases, insurers will refuse to cover some drugs at all until more clinical evidence is available to support the efficacy of these drugs. These programs have proven effective so far without significantly inconveniencing employees.
The big problem is that these programs are not identical, as all insurers implement them differently. The concepts are maybe the same but the details and administrative practices may differ. As well, some programs, particularly those supported by external third parties, may be proprietary to an insurer. This is important for plan sponsors to understand if they are looking to market the benefits plan and potentially change carriers. As well, if there is a certain feature that you like with an insurer, you may be tied to that carrier if it is unavailable elsewhere.
At the end of the day, insurers still provide access to even more restrictive drug formularies if you are interested, but the vast majority of plan sponsors have not been interested in them. However, all plan sponsors do now have some form of formulary, which includes some form of restricted coverage for prescription drugs. That is not necessarily a bad thing as many of these measures have proven to be effective in helping ensure the sustainability of plans going forward.
We would be pleased to discuss your specific situation with you to identify the best strategy with respect to your employee benefits and retirement programs. Should you have any questions on the above, please don’t hesitate to contact me or a member of our team.
ZLC Financial is one of the fastest growing advisors for employee benefits programs in Vancouver and we are fortunate to have the best people, resources and clients. We provide value to you by leveraging one of the most skilled benefits teams – almost 350 years of experience within our team of 18 employee benefits specialists. We have been working with businesses ranging from 3 to over 70,000 plan members for the past 35 years.
This information is designed to educate and inform you of strategies and products currently available. As each individual’s circumstances differ, it is important to review the suitability of these concepts for your particular needs with a qualified advisor.