| Dan Eisner, Advisor, ZLC Employee Benefits Solutions |
Over the years there have been many benefits plan provisions added to Extended Health plans to help control costs. Many of them have focused on prescription drugs, and, in particular, around controlling pharmacy fees. Based on changes in the employee benefits market, it may be time to rethink these provisions and likely get rid of them.
A big reason to reassess these strategies is based on the composition of an average drug claim and how these provisions impact purchasing behaviour. For example, an average drug claim about 10 years ago was approximately $40 and, of that amount, the pharmacy dispensing fee on average was approximately 20% of the total cost (about $7 to $8). Today the average drug claim is closer to $80 and the average pharmacy dispensing fee is $10 to $11, or approximately 12% of the total cost. As a result, plan design provisions focused on reducing or eliminating the cost of the dispensing fee have become far less effective.
Let’s discuss a couple of the more common plan design provisions related to controlling pharmacy fees and what has happened to them.
Dispensing Fee Maximums – This concept was simply to limit the amount the pharmacist could charge as their dispensing fee. Unfortunately, the pharmacy would never actually limit what they charge but would instead charge what they wanted to, and the plan member would pick up the difference. As little as 10 years ago, pharmacy dispensing fees ranged broadly from under $4 to over $15, so it made sense to try to steer employees to pharmacies with lower dispensing fees. However, in the current market, the vast majority of pharmacies are all packed in between approximately $10 and $11 for their dispensing fees (Costco being an outlier at $4 to $5) and these old dispensing fee maximums, set many years ago, are often set between $5 and $7. At the end of the day, there really is no incentive for employees to change their behaviours with this design as the results are almost always the same.
Dispensing Fee Deductibles – The focus here is to make the employee pay for the dispensing fee and thus motivate them to get their prescription drugs filled at the lower cost pharmacy. As noted above, the vast majority of pharmacies are priced pretty much the same, so employees have limited options to shop around and save some money. Consequently, this plan design provision has simply become an annoyance to employees with a somewhat arbitrary charge paid by them.
The bigger opportunities are now around managing the core ingredients costs in prescription drugs, so let’s take a look at a couple of them.
Mandatory Generic Substitution – This concept was quite radical 10 to 15 years ago and that provision in the plan design is now almost universally accepted as the “market norm”, except, for example, some historical union plans that are difficult to change. The mandatory generic provision alone has helped drive down drug plan costs by up to 80% for the most common generic drugs. However, there is not likely to be any further cost savings in this area except as fewer traditional drugs are expected to come off patent protection.
Biosimilar Replacement – Similar in concept to mandatory generic substitution, the idea is to drive the use of “biosimilar” versions of high-cost specialty drugs, which are developed after the original drug loses patent protection. These provisions have become much more common in Canada, largely driven by provincial government policy instead of proactive plan sponsor actions. Most insurers in Canada are following the lead of the provinces and requiring substitution for high-cost biologic drugs where a biosimilar drug is available. Without plan sponsors needing to make any plan design changes, these provisions will continue to drive savings of approximately 30% to 40% as more of these high-cost drugs lose patent protection.
Mark-Up Maximums – One last area for plan sponsors to consider exploring is where you limit how much the pharmacy can mark up the ingredient costs of the drug for retail sale. This provision is relatively uncommon in the market right now for a couple of reasons. First and foremost, there is little transparency in this area of the market as the mark-ups charged are never disclosed to employees or plan sponsors. Secondly, insurers have been reluctant to disrupt their relationship with the pharmacy market with this type of plan design provision, except for the largest of plan sponsors. As well, some insurers have released websites to help employees see the relative cost of the same drug at different pharmacies, which could help show the differences in drug costs overall, but this does not really drive the costs down unless employees are motivated to save money by coinsurance provisions. Perhaps it is worth exploring further if it fits your unique circumstances.
Prescription drugs will continue to be the biggest portion of an Extended Health benefits plan claims costs, often comprising 60-70%. Drugs are arguably going to be subject to the highest level of annual inflation going forward as more high-cost drugs enter the market. This part of the broader employee benefits program is also one of the most valued by employees. Put that all together and we have a large and increasing cost that is difficult to manage when plan controls adversely impact employees. That said, I think we can agree that the old-style pharmacy controls just do not work effectively anymore, and we need to focus on new and creative techniques.
We would be pleased to discuss your specific situation with you to identify the best strategy for your employee benefits plans. Should you have any questions on the above, please do not hesitate to contact any member of our team.
ZLC Employee Benefits Solutions is one of the fastest growing advisors for employee benefits and group retirement programs in Vancouver and we are fortunate to have the best people, resources, and clients. We provide value by leveraging one of the most skilled benefits teams – collectively over 450 years of experience within our team of 21 employee benefits specialists. We have been working with businesses ranging from 3 to over 75,000 plan members for almost 40 years.
