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Seeing double on drug costs

The factors behind double-digit increases on prescription drug plans
Canada’s inflation continues to be low. Yet many plan sponsors are seeing double-digit increases in their prescription drug costs.

Numbers and costs of prescriptions
At the simplest level, drug plan costs are a reflection of the number of prescriptions paid and the cost per prescription. For the period 1996 to 1998, Liberty Health reports relatively stable average claim costs of $40.59 (1996), $39.60 (1997) and $40.61 (1998).

Average claim costs for ESI Canada over the same period are also reasonably level. According to Dr. Steve Semelman, ESI’s director of health management services, the benefit manager recorded average prescription costs for its clients of $35.11 in 1996, $36.68 in 1997, and $36.07 in 1998.

Utilization on the rise
Average claim cost doesn’t give a complete picture. Insurers are also looking carefully at significant increases in utilization or the number of services claimed per plan member.

At Great-West Life, utilization has jumped 8.3% in 1998 over 1997. According to senior vice-president Dave Johnston, the costs per prescription have also gone up 4.6% over the same period. When these trends are factored into Great-West’s costs on prescription drugs the combined increase from 1997 to 1998 as a result of utilization and claim costs is 13.3%. This experience is not all out-of-line with increases reported by a number of insurers.

Getting older
As a population, we are getting older. Along with our increased wisdom, that age brings more prescription drug claims per claimant as well as a greater cost per prescription.

The recently published Merck Frosst study on drug costs demonstrates the point. In 1996, claimants 25-34 years of age accounted for 13.2% of prescriptions and 11.6% of expenditures. That group had an average of 5.9 prescriptions filled for a cost of $144.98. In the same year, claimants who were 45-54 years old generated 22.9% of prescriptions and 25.1% of expenditures. It is worth noting that the older group had almost the same number of claimants. The higher share of expenditures can be attributed to more prescriptions per claimant, 10.3, resulting in a greater overall cost per claimant of $316.00.

New drugs mean new costs
Canadian drug sales jumped to $7.45-billion in 1998, up 12.7% over the year before according to the pharmaceutical market research company IMS Health (1997 sales totaled $6.6-billion, an increase of 9.9% over the previous year). Five therapeutic classes accounted for over half of last year’s growth: psychotherapeutics ($141 million increase); cholesterol reducers ($106 million increase); cardiovascular ($88 million increase); antispasmodics ($70 million increase) and anti-invectives ($57 million increase).

Although these record sales in 1998 are not being driven entirely by new drugs - IMS recorded a 5.4% increase in the number of prescriptions dispensed in Canada-certainly the introduction of new and more expensive prescription medicines is a major contributor.

Ian Therriault, a vice-president with IMS, points to "an above average increase in the consumption of pharmaceuticals in 1998" and the introduction of new drugs. "A number of innovative new therapies are causing patients to trade-up to new, more expensive and often more effective medications, and are allowing for the treatment of conditions where no treatment previously existed."

Industry observers point to utilization as key factor
A number of insurers are projecting cost increases for their clients’ dental plans in the 5.5% to 7% range. With the largest block of dental business in the country, Great-West Life says that it is using trend factors on its dental plans of 5.5.% (plans with no deductibles) and 6% (plans with deductibles).

Dave Johnston, senior vice-president, suggests that although dental fee guides published by the provincial dental associations have pushed fees higher the last few years "more significant is the increase in overall utilization of dental services."

Utilization at historical highs
Peter Arison, director of advisory services for the Ontario Dental Association, explains that costs are a function of utilization that is at "historical highs". With the dental fees in the 1999 edition of the ODA Suggested Fee Guide for General Practitioners going up 3.2%, Arison argues that "increases in utilization is by far the single most important factor to explain the observed increases in third-party dental plan increases."

(Average increases for provincial dental association 1999 fee guides across the country ranged from a low of 2% in Prince Edward Island to a high of 4% for diagnostic and preventive services in New Brunswick. The Alberta Dental Association continues its practice of not publishing a fee guide).

Costs are (baby) booming
Tom Gillett, FCIA, FSA, president of Direct Dimensions Actuarial Services and an actuary specializing in dental, drug and travel benefits, explains that our aging workforce is in large measure what is behind dental plan costs increases.

"Dental costs rise between the ages of 30 and 50 primarily due to an increase in the usage of periodontal procedures and crowns. Those costs tend to flatten out after age 50".

Gillet’s assessment is consistent with data provided by Great-West Life on the average dental cost covered per employee that show costs peaking at ages 45 to 49.

The ages of 30 to 45 are the prime years for employees’ children to be turning three or four and adding an average of $200 per year in claims, says Gillett. "After 50, parents tend to see their children leaving the family, saving $200 per year."

With the "baby boom towards age 50" pushing up current dental plan costs, Gillett suggests there may light at the end of the tunnel. "The early part of the baby boom is just starting to reach 50 and therefore there is some hope that overall utilization rates will not be as large over the next decade."

MAKING CLAIMS FOR VIAGRA

Claims policies on anti-impotence drug
In the first week that Viagra (sildenafil) went on sale in Canada, starting March 25 of 1999, 20,600 prescriptions were filled, according to figures just released by IMS Health Canada. That’s far more than the 13,600 prescriptions for all other erectile-dysfunction drugs in the entire month. A great many of these prescriptions for Rfizer’s block-buster anti-impotence drug were paid for by private drug plans. Here’s a snapshot of how some of the insurers had prepared themselves and their plan sponsors for the onslaught of Viagra claims.

Manulife Financial recommended that Viagra be treated as an eligible expense on its standard plans and that it be limited to a "usual and customary limit" of eight tablets per month.

Great-West Life estimated the cost implications for its plan sponsors and then gave them the option of including Viagra in their drug plans. Viagra is not included on standard Great-West drug plans, but plan sponsors can add it with an annual maximum of $1,000.

Aetna Canad does not have Viagra on its standard plans, but plan sponsors were surveyed and can include coverage on their plans with a standard annual maximum of $1,000.

After extensive consultation with plan sponsors, Sun Life decided not to include Viagra on standard plans, but gave clients the option of including it with an annual maximum of $1,200.

Waterloo-based Mutual Life confirms that Viagra is not part of its standard drug plans, but that clients can add it along with a $1,200 annual maximum.

Maritime Life has not added Viagra to standard plans, but plan sponsors can cover it with annual maximums of either $500 or $1,000.

Green Shield Canada decided not to add Viagra to standard drug plans because of concerns about "the cost associated with its utilization". However, plan sponsors can cover the drug for an increased cost of 5%, and claims are subject to medical evidence and limited to eight tablets monthly up to an annual maximum of $1,200.

Liberty Health also chose not to add Viagra to its standard drug plans, although the insurer recommends an annual maximum of $1,000 and a 50% co-payment for those plan sponsors who wish to cover it.

Quebec-based insurer SSQ Vie chose not to add Viagra to standard plans, but gave plan sponsors the option to add it, making it eligible when medically necessary and subject to an annual maximum of $1,000.

Canada Life confirmed that Viagra is not on standard drug plans, but plan sponsors may add it with an annual maximum of $1,000.

CONSUMER PATTERN & COST SHIFTING

Canadians’ health becoming a private matter

Consumer Preferences
When we consider government cost shifting, we tend to think only of those drugs and treatments delisted from government insurance plans that often end up on private plans. But our expectations as healthcare consumers as well as changing practice patterns are also driving costs away from government and on to private insurance. For example, as hospital stays shorten and more Canadians are encouraged to treat their health conditions at home, drug costs which were previously covered in-hospital by a government plan may shift to a private benefit plan.

With the trend to shorter hospital stays, Great-West Life has seen a corresponding drop in hospital charges of 3.4% between 1997 and 1998. But that decrease was more than offset by rising drug and paramedical costs. The increase in paramedical services in 1998 was 16% over the previous year. Dave Johnston attributes this at least partially to a "societal change" and to a trend towards alternative treatments.

"The comfort level with younger people about going to alternative medical practitioners, such as chiropractors, is much higher than the older generation," says Johnston. "So what is happening is that the utilization, the number of visits to some practitioners, is much higher at the earlier ages, and is likely to flow through as we age."

Health information
Some commentators have suggested that our own growing health awareness and the fact that we are being inundated with health information from many different sources may also be contributing to the demand for drugs. Barry Noble, Manulife Financial’s national director of managed care, acknowledges that direct-to-consumer advertising south of the border by U.S. pharmaceuticals may have a "spill-over effect" into Canada and be "influencing Canadian drug consumption patterns."

While new drug therapies and increased consumer awareness can make important and positive contributions to society when they improve health outcomes, as well as reduce hospital stays and absenteeism, there is also no doubt that these factors are shifting some health costs to the private plan sponsor.

We asked the experts for their views on fiduciary responsibility for group pensions and what it means to plan sponsors

On the issue of fiduciary responsibility for plan sponsors of group retirement income plans, the question that comes to mind for Jeff Gray is"who’s watching the henhouse?"

"Fiduciary responsibility, in broad terms, is the company’s legal responsibility to watch over and act in the best interests of its retirement plan members whether in a formal pension plan/deferred profit sharing plan or a less regulated group RRSP. Acting in the best interests of plan members means being accountable for the investment management, administration, registration and communication aspects of the plan even though the actual delivery of these services could be from a third party."

"In the past, some plan sponsors felt that offering a retirement income program was a ‘perk’ and therefore legal repercussions from this employee offering would be out of the question, that employees would be ‘looking a gift horse in the mouth’ so to speak. This is no longer the case because of situations in which sponsors have been held accountable by members in conjunction with regulatory bodies such as the Pension Commission of Ontario (now the Financial Services Commission of Ontario)."

"Most plan sponsors now recognize that fiduciary responsibility has become as much a part of business as providing accounting reports and that this function can be shared using third-party consultants but not shirked. Providing this service will result in a better program (returns and quality of service), satisfied plan members and greatly reduced risk to the plan sponsors."

Jeffrey E. Gray, union manager, group pensions, Standard Life Assurance Company

Brian Gregoire points to the U.S. experience to caution that plan sponsors need to think about their fiduciary responsibilities for their pension plans. Doing it now, he says, is critical to avoiding future liabilities.

"It has been my personal experience that in some cases sponsors of Defined Contribution Pension Plans (DCPP) have not spent enough time thinking about their fiduciary responsibility. To those plan sponsors who have taken the time to think about it, and have reacted appropriately, congratulations."

"Those who have not spent the time and altered their programs to deal with their fiduciary obligations should address this issue sooner rather than later. A wise person once said ‘those who fail to plan, plan to fail’. This holds true when one considers the U.S. DCPP experience. Over the past few years, there have been many articles written about plan sponsors in the U. S. where this issue has arisen. In some situations, sponsors were accused of not providing members with an appropriate diversified investment selection."

"Other challenges have come when the DCPP plan sponsor may have provided appropriate investment diversification but is accused of providing insufficient educational tools and support for the members to make the appropriate investment decisions. Plan sponsors of DCPPs need to spend time regularly reviewing their fiduciary responsibilities to avoid future liabilities."

Brian Gregoire, senior account executive, group retirement services, Great-West/London Life

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