Why employers in Canada waste $5 billion a year on inefficient drug coverage

By Alan Cassels and Sean O'Brady

A version of this commentary appeared in the Montréal Gazette, the Vancouver Sun and the Victoria Times Colonist

Why employers in Canada waste 5B a year on inefficient drug coverageThere is certainly a lot of waste in health systems, but one area that seems to have escaped close scrutiny is the waste in private drug plans in Canada.  To put it simply, that waste is gut-churning. Estimated at over $5 billion a year, this represents over half of the annual prescription drug bill paid by private insurers in Canada and is money that could be better spent on increasing salaries and improving other benefits such as dental care.

The biggest part of an employee’s benefits package is their drug plan.  And unlike public drug plans in Canada, private plans are notoriously inefficient, often covering higher priced drugs that do not deliver better health outcomes for users or using sub-optimal renewal intervals.

But why are private plans so inefficient in Canada? We can learn a lot about why companies squander tons of money on prescription drugs by looking at how they negotiate drug plans with their employees and other players in the insurance universe. Our new study in Health Policy analyzes how drug plans are negotiated in the private sector.

By carrying out interviews with experts from private sector companies, unions, insurers and plan advisors, the study was able to drill down into the experience of the interviewees to understand the basics of “how things work” in negotiating drug benefits in unionized settings.

Basically, our findings show that everyone keeps each other in the dark about the drug plans they negotiate (if we can even call it ‘negotiating’ at this point). Employers who understand the technical details of their drug plans withhold data on drug spending from employees, thus awarding them an advantage in the negotiating process.  Union experts may understand how inefficient their current drug plan is but they often lack sufficient detail of drug spending in order to convince employees about the need to introduce cost-containment measures.

Employers want their drug plans to be as competitive as those offered by other employers.  So what happens when the norm is to cover all new drugs at any cost, even if the drugs do not provide additional therapeutic value? Well, the end result is that everyone buys “generous” plans instead of increasing employee compensation.

Everyone we spoke with agrees about the need to educate employees and employers alike. And in fact, everyone agrees (even insurers) that exorbitant drug costs are a big issue for Canadians.

Insurers could raise awareness to change this irrational norm of covering everything, since covered drugs often do not provide additional therapeutic value for money. One solution would be to proactively implement managed drug formularies. However, insurers’ financial incentives are not aligned with those of their clients because inefficient drug plans are unfortunately very profitable for insurers.

Insurers are paid as a percentage of the drug bill. So the bigger the bill, the more they make — a principle that absolutely counters the drive to root out and eliminate waste in the compensation package.

Take the arthritis drug celecoxib (Celebrex) for example. It is automatically paid for by most private drug plans in Canada, but not by BC Pharmacare covering those BC citizens without private insurance.  And why is that? It’s because this drug costs more and is considered less safe (it carries a black box warning for increased risk of heart attacks or strokes) than alternative drugs for arthritis.

A public drug plan like BC Pharmacare restricts automatic coverage for drugs like celecoxib for the key reason that they don’t represent value for money. But these are precisely the types of drugs that drive up the drug bill for private companies and increase insurers’ profits in the process. Sometimes drug companies explicitly target private drug plans for their products because such plans do not implement any restriction to get value for money.

During our study we also learned that unless unions and employers demand drug plans that deliver only drugs that are safe and cost-effective, they will remain incapable of cutting out wasteful spending on drugs. And because of the lack of trust and of information-sharing between unions and employers, it is unlikely to happen any time soon.

Our study shows that employers, unions, insurers and consultants all agree that the current system is unsustainable and will not change by itself. Everyone is calling for some type of state intervention.

Most of the interviewees agreed that a universal pharmacare program in Canada makes sense and we need to move in that direction.

It is time to seriously consider what can be done to reform drug coverage and eliminate wasteful spending on prescription drugs. The system will not change by itself. Tackling the wastefulness of private drug plans would not only increase the disposable income of all Canadians, it would also reduce labour costs and increase the competitiveness of Canadian enterprises. It is time to start thinking outside the inefficient box.

Sean O’Brady is a PhD student at École de relations industrielles, Université de Montréal, Montreal.  Alan Cassels is an expert advisor with EvidenceNetwork.ca and a researcher with the Faculty of Human and Social Development, University of Victoria.  Marc-André Gagnon is an expert advisor with EvidenceNetwork.ca and assistant professor with the school of public policy and administration, Carleton University.

January 2015

Listen to the interview with Alan Cassels:

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