The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management

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Benefits and Pensions Monitor April 2007

Reference Based Pricing And Employee Engagement

By: Wendy Poirier & Karen Millard

Canadians spend more than $20 billion a year on prescription drugs, with the private sector bearing more than half of this cost, either out-of-pocket or through private insurance plans. The magnitude of Canadian spending is staggering, but itʼs the cost trend – three times the general inflation rate – that shocks most plan sponsors. Private prescription drug spending has tripled in the last 10 years and could very well do so again over the next decade.

As costs increase, prescription drug plans are becoming a material aspect of not only benefit plan costs, but also of total compensation spending. Looking beyond cost control, the prescription drug plan is also viewed as a direct reflection of an employerʼs approach to wellness and managementʼs interest in employee well-being – the number one factor driving employee engagement, according to Towers Perrinʼs 2006 Global Workforce Study.

Given the financial, operational, and motivational stakes involved, plan sponsors are starting to review the practical link between benefit programs and their business goals. In this article, we consider this link in the context of drug substitution opportunities and challenges.

Generic Substitution

One of the key factors affecting drug cost trend is the shift to more expensive new drugs in place of older, less expensive therapies. Canadian brand name drugs generally enjoy 20-year patent protection. Once patents expire, manufacturers can produce lower cost generic versions.

Generics have the same active ingredients as brand name drugs. They must meet federal standards for chemical identity, purity, potency, bioequivalence (rate of absorption and elimination from the body), and labeling. They may differ from the brand name only in packaging, non-active ingredients, colour, and shape. While the original manufacturer may have invested years and hundreds of millions of dollars in testing and research, the generic has a much lower ʻto marketʼ cost and, therefore, can be priced lower than the original.

Potential Savings

To take advantage of these lower prices, it is common practice for employer-sponsored drug plans to have mandatory generic substitution clauses. Few employer-sponsored plans, however, realize 100 per cent of the potential savings available from generic substitution. By volume, generic drugs account for roughly 40 per cent of all prescription drugs dispensed nationally, but from a total cost perspective, generics account for only about 15 per cent of the Canadian prescription drug spend. The other 85 per cent is still represented by patent and off-patent brand name drugs.

referenced based pricing

Brand name loyalty remains high in patients and physicians. Differences in the non-active ingredients can also be important. Physicians may have legitimate concerns that a patient will have adverse physical reactions to the non-active ingredients in a generic. Patients may simply be anxious about changing to a drug that looks different from a familiar brand name or believe the best drug must be the most expensive brand name in all circumstances. Despite the ability to monitor general rates of generic substitution in private and public plans, there is generally no mechanism to accurately capture why a brand name drug is dispensed when a generic is available. Most benefit plans requiring generic substitution waive the requirement where a physician has marked ʻno substitutionʼ on the prescription. Only rarely do plans limit reimbursement to the cost of the generic in all circumstances.

Generic substitution provides no assistance where there is no available generic for a prescribed brand name drug. It is not unusual to see more than 80 per cent of drug plan costs attributable to brand name prescriptions for which there is no available generic. To compound the problem, only some of the brand name drugs entering the market each year are ʻbreakthrough ʼ therapies. Many of the new brand names, though heavily promoted, are ʻme tooʼ therapies that provide little to no therapeutic gain over existing drugs. The challenge for plan sponsors is to set reimbursement parameters that are prudent, but that also take into account the enormous value of new or expensive medications for certain individuals.

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