By: Sheryl Smolkin
Read this article at ebn.benefitnews.com
The Competition Bureau recommends that private plan sponsors embrace strategies such as preferred provider networks, mail-order pharmacies and patient incentives to get a better deal on generic drugs. However, sponsors and other industry experts say the first step is more transparency regarding the drug supply chain — including kickbacks and rebates to pharmacies and governments.
The Bureau’s 2008 study “Benefitting from Generic Drug Competition in Canada: The Way Forward” says obtaining generic drugs at competitive prices could save private payers up to $600 million per year, with the potential for hundreds of millions of dollars in additional savings as more major drugs lose patent protection.
The study reveals that despite strong competition in the supply of many generic drugs, the design of public and private drug plans allows competitive rebates averaging 40% to be provided by manufacturers, but gives little incentive for pharmacies to pass these savings on to private plan sponsors.
This cost transfer to private plans and individuals has been exacerbated by provincial government tactics to reduce the public drug spend, including caps on generic prices and competitive tendering based on cost for preferential listing of specific drugs.
“When the Competition Bureau says there is a lack of action on the part of plan sponsors, I sort of cringe because even my clients, which are the biggest companies in Canada, have not had the appetite to go after the whole idea of transparency,” says Wendy Poirier, a principal in Towers Perrin’s Calgary office.
Understanding the problem
“The gap between prices for public and private plans can vary from one drug to another and even between pharmacies. The range of submitted costs is unbelievable,” explains Mike Sullivan, the president of Cubic Health Inc. “For example, just the ingredient cost for a 90-day supply of Plavix in Ontario can range from $240 to $320. How could one pharmacy have a cost base 33% higher than their competitor at the other end of the spectrum?”
“My first big problem is separating whether year-over- year escalation in drug plan costs is even related to increases in the cost of generic drugs,” says Jeannie McQuaid, HR supervisor at Belshield Enterprises in Belleville, Ontario. “Who would ever know? As a plan administrator I don’t get to see a breakdown of how many drugs were generic or the individual pricing on those. I have to fight tooth and nail every renewal period just to get a separation between the drug component as compared to other medical services or hospitalization.”
Until recently, Hugh Paton was a senior benefits consultant at Bell Aliant. Currently, he is spearheading an Atlantic Canada employer coalition looking for ways to manage the escalating cost of drug benefits, including differences in the public/private drug spend.
“If in fact we have been paying 40% too much for every generic drug we buy, and employees are paying 40% more than they need to, that’s something we want to investigate and reduce,” says Paton.
He also notes that public plans have created a two-tier effect — a disruption in the marketplace. “The Competition Bureau says new generic drugs are coming out at 70% to 75% of the cost of brand name drugs, not 50% or 63%. We know that’s true, because we’ve seen it in our claims experience.”
Looking for viable solutions
So what can plan sponsors do to level the playing field between public and private drug plans for the cost of generic drug?
PPNs, mail-order pharmacies and plan designs that incent employees to be better consumers have been around for many years, but they’ve been a hard sell in this country.
Mercer Worldwide Partner Brian Lindenberg thinks the “pain factor” has not been great enough to convince employers to make significant plan design changes.
“Employers are reluctant to tell their employees to buy at a particular pharmacy chain so the company can get a better deal. Another reality is that employers tend to negotiate lower dispensing fees, not reduced pricing for the drugs. This is largely because pharmacies are reluctant to do so because they make a big chunk of their money through these rebates.”
For McQuaid, limited penetration of the few currently available PPNs is a live issue. “Some of these strategies are based on the premise that everyone has access to everything. They don’t work when you have people living in small towns and villages where there is no in-network pharmacy.”
Managed Health Care Services is a pharmacy benefit manager operating a PPN based on over 210 stores across Canada under the banners of Lawton Drugs, Sobey’s Pharmacy, Price Chopper Pharmacy and Thrifty’s Food Pharmacy, plus other affiliate providers. Sobey’s also offers mail-order services.
MHCS Director of Business Development Leanne MacFarlane says her company works with other pharmacies that accept their drug cards in regions where they do not have their own stores, but she readily acknowledges that “employer discounts are based on the number of scripts filled through the primary network.”
“Depending on how much activity is flowed through PPN, some of our long-standing clients have enjoyed savings of 15%-25% off what they would otherwise be paying,” she continues.
Nevertheless, where an employer has implemented a PPN, employees who go outside the network generally have to pay the claim and then submit an application for reimbursement.
“What few employers know is that the reimbursement client is considered a cash client by the pharmacy and they are charged the highest amount,” says Sullivan. “Therefore they run the risk of having a materially higher cost base on those out of network claims that can water down any saving realized through the PPN.”
Towers Perrin Principal Karen Millard agrees that employers have to fully understand what they are getting into. “I’m less than impressed with what the pharmacies are coming back with in terms of what they are prepared to do. Also, the Competition Bureau won’t be happy if the decision of employees about where to buy is unreasonably restricted.”
The changing landscape
Plan sponsor response to the Competition Bureau’s suggested options for obtaining competitive pricing of generics has been muted to date, but there are indications that the landscape is starting to shift.
“With a greater understanding of the issues, plan sponsors will begin to ask the tough questions like ‘how can I better manage these costs?’” says Lindenberg. “But it will take some innovative plan sponsors and PBMs or insurers who will go out and negotiate better deals.”
Poirier says recently, for the first time, a national employer with operations in small towns across Canada suggested that if they could arrange for a PPN with a major retailer in major centres, it would at least be a step in the right direction. “Even if they couldn’t get transparency, they could get a deal based on volume.”
MacFarlane cautions that the indirect funding or allowances that pharmacies do get are subsidizing the professional services pharmacists provide, including maintaining stores that are open long hours in virtually every community. Nevertheless, she says that the pharmacy industry would be among the first to say the model could be modernized and is actively engaged in the process.
“Governments and the private sector have to bust out of our silos and change our business together, instead of one by one,” says Paton. “We need to stop paying pharmacists the 40% under the table, but put some of that money back on the table for the professional and consultative services pharmacists provide.”
Sullivan agrees that more transparency around discrepancies in public/private pricing of generics is important, and employer alliances like Paton’s group in Atlantic Canada can help employers negotiate better deals. But he thinks the future will also bring new players and more competition into the Canadian space.
“Canada has the highest generic drug prices in the developing world. Anyone who thinks floating numbers like $600 or $800 million, or a billion dollars, to the large U.S. PBMs and international health care companies isn’t going to get their attention is really not thinking clearly. U.S. PBMs make their money on the spread, and our price discrepancies could be an absolute gold mine for these groups.”
Public plan policy inflates private plan prices
Private plans sponsored by employers or employee associations account for more than 35% of expenditures on prescription drugs in Canada, while approximately 50% are covered by public plans. In contrast, 17% of prescription drug costs are paid for by individuals out of pocket, either as copayments or deductibles, or because the specific drugs are not covered, or they do not have insurance.
The Fraser Institute reports that brand-name drugs are about 53% less expensive on average than in the United States, but generic drugs in Canada are about 112% more expensive on average than the same generic drugs in the United States.
The Ontario government’s Transparent Drug System for Patients Act, adopted in June 2006, ended the traditional pricing framework for generic drugs across Canada based on maximum prices allowed under the Ontario Drug Benefit Plan.
For most generics, this amounted to 63% of the interchangeable brand reference formula price. The TDSPA reduced the maximum for most generic drugs to 50% of the interchangeable brand product price.
Private payers in Ontario, and public and private payers in other provinces, did not obtain the reduced ODBP prices. The exception was Quebec, which requires that generic manufacturers provide the province the lowest price available in other provinces.
The Competition Bureau’s study found that the ODBP and Quebec prices for generic drugs introduced before October 2006 dropped 21% after the TDSPA price caps were implemented, but prices for older generics stayed about 63% of the brand name for private plans in Ontario, and public and private plans in provinces other than Quebec.
However as patents expired and newer generics came onto the market, they were introduced at prices ranging between 70% and 75% of the interchangeable-brand product price, even where multiple suppliers were active in the market.
Provinces such as B.C. and Ontario have also started issuing tenders for the supply of particular medications (generic or brand name) to their public drug plans, with winning bids to be determined primarily on the basis of confidential rebates off the product list price.
A similar deal negotiated by pharmacy benefit manager Medavie Blue Cross, which brought the net price of Biaxin below the generic cost, was repealed by the manufacturer as a result of objections from the pharmacy sector.
Bridging Quebec’s public/private pricing gap
In Quebec, by law, every individual must have drug benefits, and anyone who is eligible for private coverage must be insured privately.
Unlike other provinces, drugs on the mandatory list cannot be “de-listed” by a private plan, as a result of a tender, for example. However, the government negotiates, for both public and private plans, the cost of ingredients and forbids manufacturers from having two pricing lists. The government also limits discounts paid to pharmacists by manufacturers to a maximum of 20% of their total sales.
The agreement stipulates that manufacturers cannot sell generic drugs at a price higher than the lowest one in Canada. As a result, Quebec benefits from Ontario provisions, which limit ingredient cost to 50% of the price of brand-name drugs.
For drugs listed on the mandatory formulary, manufacturers are entitled to a maximum annual price increase. Up to 2007, no price increases had been permitted for 14 years. Price increases, in excess of what the government has authorized, and the difference in ingredient cost between a generic and a brand-name drug, can be passed on to individuals insured by public and private plans.
However, two important constraints apply only to private plans:
• The claimant must be reimbursed at least 69% of the amount claimed by the pharmacists for the prescription.
• Excess amounts passed on to claimants must count toward the $927 annual maximum out-of-pocket amount; once this is used up, the plan must reimburse 100% of the prescription cost.
The Minist?re de la Sant? et des Services Sociaux negotiates with the Association qu?b?coise des pharmaciens propri?taires (representing owner pharmacists of over 1,600 pharmacies in Qu?bec) the amount charged to the R?gie de l’assurance maladie du Qu?bec for patients insured under the public plan, based on the following formula:
Cost of ingredient + 6% (max. $24) + $8.28 ($8.44 on April 1, 2009)
Private plans do not benefit from this agreement, thus pharmacists apply their “usual and customary” price. “Even if generic pricing goes down, there is no guarantee that private plans will benefit. On the private side, it’s an open market”, says Johanne Brosseau, a consultant in Aon’s Montreal office. “Just recently, carriers realized that if they want to get somewhere in terms of a negotiated agreement with the AQPP, they have to do their homework.”
Aon has developed an algorithm to calculate a “maximum eligible price” private plan claimants will be reimbursed in Quebec, to help plan sponsors avoid significant discrepancies between what public and private plans are charged for the same prescription. Over the last 18 months, four large employers have introduced this element into their plan design.
“To the extent permissible, overall direct savings generated with this approach are about 3%, resulting from both cost transfer and lower amounts claimed by pharmacists. However, we would save another 2% if we weren’t constrained by these rules” says Brosseau.
“Before this approach is adopted, we educate employees and teach them to shop around for the best service/price ratio” she continues.“Pharmacists and government are feeling the heat. In spite of initial difficulties, we are very pleased with how it is going.”