Insurers to split cost of expensive drug claims

Agreement should reduce risk of employers seeing premium spikes, reducing coverage
By Amanda Silliker
|Canadian HR Reporter|Last Updated: 05/07/2012

In an effort to increase drug plan sustainability, Canadian insurers are coming together to split the cost of the most expensive drug claims, according to the Canadian Life and Health Insurance Association (CLHIA).

In April, the association launched a drug-pooling framework to protect fully insured private drug plans from the full financial impact of high-cost drugs. Twenty-four insurance companies across Canada, which collectively represent 100 per cent of the supplementary drug market, have committed to joining the framework, said CLHIA.

“It really is a win-win for everybody that is impacted by this,” said Janet Jackson, vice-president of group marketing at Kingston, Ont.-based Empire Life, one of the insurers participating in the initiative.

“It really helps small and mid-sized businesses and Canadians that have high, daunting drug bills… This is a good step forward to deal with some of the issues around rising high-cost, recurrent drug claims.”

The framework will be implemented Jan. 1, 2013, and only applies to fully insured drug plans. Once this framework is rolled out, CLHIA will look at potentially expanding it to other types of employer plans such as administrative services only (ASO), refund accounting or stop-loss plans, said Stephen Frank, vice-president of policy development and health at CLHIA in Toronto.

In 2010, more than 1,900 individual claims from fully insured plans had an annual cost in excess of $25,000. The number of these claims has been increasing at more than 20 per cent per year since 2008, said CLHIA. And, for the second consecutive year, there was one drug claim for more than $1 million.

“What’s coming is quite intimidating from an economics perspective,” said Frank. “The current way you insure these types of plans will not be able to deal with what we expect is going to hit the market. So, we’re not in any crisis now, we’re not in dire straits at the moment, but we wanted to get ahead of the curve.”

High-cost drug claims are driven mainly by costly treatments for illnesses such as cancer, genetic enzyme disorders and auto-immune disorders that are becoming more common.

Biologics — made from living organisms rather than chemical compoundsare increasingly being used to treat these disorders, which is really driving the cost up, said Mark Hogan, senior vice-president at employee benefits consulting firm Coughlin & Associates in Ottawa.

“Right now, there are several hundred biologics that are in the production pipeline and when they hit the marketplace, it is projected that the average dose will be $1,000 — that is just one injection,” he said. “My concern is companies won’t be able to afford those incremental increases, so they’ll have to start changing their benefit plans.”

The aging population is also driving up costs because people take more drugs as they get older, he said. And the industry is seeing more high-drug costs associated with younger people as well, said Jackson.

“Relatively young people now are having diseases related to cancer, auto-immune conditions and really rare diseases that don’t really have an age limit,” she said. “It’s really a good news story that there are these great new drugs to treat illnesses effectively but the consequence of it is they’re very, very high cost.”

The drug-pooling initiative will protect employers with insured drug plans from seeing a spike in premiums if they have a high-cost claim.

“So, what the industry has agreed (to) and what the rules will say is that you cannot set the premium for an employer with any reference to those high-cost claims — you have to pretend they didn’t happen and take everything that’s left and you can price based on that,” said Frank.

While this pooling agreement will prevent a spike in an individual employer’s premiums, it will negatively impact the rest of the people in the pool, said Hogan.

“What they’re suggesting now is they’re going to reinsure that risk of large claims so that everybody is going to end up paying a part of that so, effectively, everybody in that pool will ultimately have higher costs,” he said.

One-third of small and medium-sized employers said they would consider making changes to their drug plans if premiums were to jump by 25 per cent, according to a poll by CLHIA.

“What employees are at risk of today, and they may not be aware of, is if they or one of their colleagues or a family member has one of these high-cost claims, they are at risk of losing their coverage and Canadians don’t understand that,” said Frank.

The pooling framework will help reduce the risk of employers modifying their drug plans to exclude a very high-cost prescription drug from coverage or putting a cap on their drug plans.

“(Modifying plans is) one way of addressing the issue but it really doesn’t help because what happens is their employees can’t afford to take the drug and they go on disability, they’re less productive, so the overall outcome for all isn’t good when something like that happens,” said Jackson.

The drug-pooling agreement will also increase competitiveness. As it stands now, when an employer with a high-cost recurrent claim puts its business to market, the prices that come back are so much higher than what it currently has that it can’t move, said Frank.

In the new agreement, insurers cannot consider the recurrent high-cost claims when they are bidding on new business.

“You tend to get employers who are locked in with their current insurer even if they’re not happy with their service or pricing,” he said.

“Going forward, employers will have the flexibility and ability to shop their business and get pricing back that’s more reflective of what they currently have.”

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