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Drug Formularies: Today and Tomorrow

Managing benefit costs today is near impossible without the use of a practical formulary to help manage the escalating cost of drugs. Sal Cimino, of Green Shield Canada, looks at some of the alternatives sponsors can consider.

Pharmaceuticals have become increasingly important in Canada’s healthcare system. Prescription drugs not only treat illnesses and replace more invasive treatments that can require hospital stays and expensive health resources, but also play a major role in prevention. Since the early 1980s, drug expenditures have been the fastest growing component of total healthcare spending, increasing an average of about 10 per cent annually1. This steep climb in drug costs is driven by increases in:

According to The Canadian Institute for Health Information (CIHI), Canada’s healthcare spending was expected to reach $130.3 billion in 2004, a 5.9 per cent increase over 2003. Total healthcare spending will be $170 billion by 20192. The cost of prescription drugs was 9.5 per cent of total health expenditures in 1985 and had grown to 16.2 per cent in 20033. These costs threaten the ability of provincial and private benefit plans to continue providing benefits at current levels.

Some Controls
Public policy in Canada has provided some controls through provincial formularies. Publicly funded drug programs are not available to the entire population. Some provincial plans only offer drug funding to their senior citizens and to those who require social assistance. Other provincial plans are offered based on personal or family income. This leaves a large portion of the population reliant on private and employer funded programs.

In 2001, only 46.3 per cent of expenditure on drugs was financed by the public sector while private insurers financed 34 per cent and individuals funded the remaining 19.8 per cent4. The burden on private insurers is expected to grow as employers are forced to cover more of the costs for healthcare. Effective plan design and employer driven formularies contain part of the answer for managing healthcare dollars. Traditionally, a drug formulary within a private benefit plan was a list of drug products that a drug plan would pay for. If it’s on the list, it’s a benefit. It generally included any drug that required a prescription. In 2002, there were approximately 22,000 prescription drugs on the Canadian market5. The need to control the use and costs of these drugs, as well as the advent of electronic adjudication, created a plethora of permutations and variations of formularies. The choices became almost excessive.

Organizations designing drug benefit programs could design a formulary that would exclude specific drugs and/or categories of drugs to minimize drug plan costs. But as drug costs rose, it became quite evident that as a cost containment tool, formularies, on their own, were not overly effective in controlling the growth. Drug benefit design reflected employer needs and new products began to appear such as Managed Care Formularies. These formularies were one-sided attempts to control costs.

Looking Ahead
As costs rise, can the private sector continue to fund benefit plans at the same rate and are today’s plan designs the answer? Conference Board of Canada research indicates that employee benefits in 2003 represented more than six per cent of total payroll costs. It is estimated that this will increase to eight per cent by 20076. One in four employers indicated that containing benefit costs is one of their top issues this year.

Although the traditional formulary approach still forms the basis of many plans, the exclusionary approach has been softened. Many plans today include a long list of products but the approach is to be selective and ensure that prescribing is sensitive to both the patient’s needs and the various alternatives, including less expensive generics or older drugs that are equally effective but less expensive. You now see a variety of terms to describe formularies such as managed, conditional, and controlled; along with buzz words such as limited use, special authorization, or individual clinical review.

Even provincial formularies have morphed into a less exclusionary type of drug coverage. Most provincial formularies have many more drug products listed, but have limited their use. Individuals can be eligible for a drug benefit if they meet criteria specific to the drug. The criteria are usually crafted around the drug’s indications for use. Every drug approved for market by Health Canada receives approval on the basis that the manufacturer will market the product for the uses listed when applying to Health Canada. Any use outside the indicated use is deemed off-label.

Many provinces have also gone further than just listing limited access drugs. For example, the Ontario Drug Benefit Program (ODB) uses the Individual Clinical Review approach to drug coverage. This goes well beyond a traditional formulary in that many drugs may be considered for coverage for individuals in the plan. The physician needs to make the case in writing to the ODB. Each submission is individually reviewed. This type of formulary approach is more flexible and addresses not only the needs of the employer, but also the needs of the employee. Privately funded drug benefit programs can provide a customized approach to formulary design. Gone are the concerns regarding accessibility to newer and better drugs. The new approach allows for access but limits the access to the right drug, for the right patient, at the right time.

For this type of approach to be successful, the drug list, or formulary, must be dynamic. Changes must be made so that access to drugs is ubiquitous, but can be limited if drug abuse or misuse is an issue. Inclusion, or exclusion, of a drug product onto a formulary should include reviewing other elements such as need, safety, and efficacy, along with the cost. This holistic approach provides a more effective way to determine the level of coverage.

Education Is Key
The success of drug formularies is dependent on expectations and education of employees and their families. Communicating the benefits of a formulary and how it works is critical. When employees understand the factors that determine whether or not they are covered in a specific situation, they are more likely to discuss their options with their physician and pharmacist and make the right choices. Empowering the employee will encourage them to find answers to questions such as:

Another positive side effect is the change in prescriber habits. Physicians are not part of the financial transaction of the filling of a prescription, therefore no method is available to influence the prescribing. Over time, however, as the formularies and attached plan designs become known, physicians will adapt to the necessities of the patient and the realities of spiraling drug costs. Employers are making efforts to help employees become better consumers. Many benefit plan administrators provide information and online tools to help employees make better decisions about coverage. Employers and benefit plan administrators are also introducing programs to help employees adopt healthier behaviours and to take prevention more seriously.

Conditional Drug Formulary
An example of a formulary that addresses many of these issues is a conditional drug formulary. It offers both accessibility and cost containment. Aconditional drug formulary tests each new drug to see if it meets the criteria to be a full benefit, a conditional benefit, or a denied benefit. A team of medical and pharmacy consultants evaluates new drugs based on the following criteria:

For drugs added as full benefits or benefits with conditions, patients must meet medical condition criteria or have used other therapies. Drugs that are not added to the formulary are considered a non-benefit and are not eligible under any condition. A non-benefit is one that does not meet any of the criteria that would allow it to be included. These could include additions to a drug class that cost more without adding enough significant clinical value to warrant the additional cost. An employee can request individual coverage for a denied drug under special circumstances.

When a prescription is written for a conditional benefit, the pharmacist, upon attempting to adjudicate the claim electronically, is notified that the drug must be authorized. The patient is alerted by the pharmacy to contact a customer service centre which instructs the patient that the physician must complete a special authorization form. This allows for coverage to be limited to approved conditions, dosages, and durations. For some drugs, this process has been automated. If information exists in the patient’s file (prior use of another drug for the same condition), the prescription can be filled immediately, eliminating the need for a physician to complete a form.

The greatest benefit in using a conditional drug formulary is flexibility for the employee and the cost containment that it affords the employer. Employers are assured that only drugs that have clinical value or cost advantages are accessible to employees and their families. Drugs with the potential for misuse, abuse, and overuse remain available under special conditions or are eliminated from the plan.

A Final Note
As the pace and cost of new drug development increases, more and more organizations will request flexibility in their drug formularies. The answer is solutions that enable the employer to control costs while meeting the needs of their employees. In other words, they need solutions that provide the right drug, for the right patient, at the right time.


Sal Cimino is manager, pharmacy and professional services, at Green Shield Canada.

1. Ake Blomqvist and Jing Xu , Pharmacare in Canada, Issues and Options, Applied Research and Analysis Directorate, Health Canada, 2001
2. Canadian Institute of Health Information, Health Indicators 2004
3. Canadian Institute of Health Information, Drug Expenditure in Canada 1983 to 2003
4. Canadian Institute of Health Information, Drug Expenditure in Canada 1983 to 2003
5. The National Advisory Council on Aging, Bulletin Vol. 15 No. 1, 2002
6. Conference Board of Canada

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