JULY/AUGUST 2009

Managing Generic Drug Costs

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Over the past several years, we have seen significant inflation in drug costs in Canada. As benefit professionals, we attempt to mitigate these increases through the use of mandatory generic substitution that reimburses claims for generic drugs only, when a generic substitute exists. While the rate of inflation varies by province and by drug, studies show Canadians pay more for generic drugs across the country than most other parts of the world do. In addition, drug prices vary widely by pharmacy. A recent survey found that in 2007, the drug ingredient cost submitted to insurers for a three-month supply of Lipitor 10mg ranged from $161.74 to $221.20, a variation of almost 37%. This was not reflective of a pricing change from the manufacturer.

There are no limits on the drug markup Ontario pharmacies can charge private plans. We rely on the drug adjudication companies, like Telus Health and ESI, to monitor both the drug ingredient cost manufacturers are charging pharmacies and the drug ingredient cost pharmacies are charging plan members. They are also expected to protect drug plans from escalating costs and unfair pricing policies, which, in the past were determined by applying the formula used by provincial plans.

In response to Canada’s high price generics, Ontario and Saskatchewan have moved to a tendering process for generic drugs with more than one manufacturer that are covered under the provincial plan to attempt to realize greater savings. This means that these provinces will no longer apply a formula to determine the allowable drug ingredient cost — they will simply limit reimbursement for provincial drug plan claimants to the cost agreed to by the winning tender. This could open the door to additional cost shifting, as pharmacists look to private plans to supplement any income lost due to limits under the provincial plan.

Historically, we have focused on the variation in dispensing fees between pharmacies as an opportunity for cost containment, but the variation in pricing highlights the opportunity for containing costs through controlling drug ingredient cost. For instance, a $9.00 dispensing fee cap would save your plan $3.00, assuming the employee might normally use a pharmacy with a $12.00 dispensing fee. Conversely, using the price range for Lipitor noted above, if the reimbursement for the drug cost had been limited to the lowest price available, savings would have been almost $60.00 on a 90 day supply, or about $238.00 per year.

This highlights the importance of working with insurer partners and adjudication companies to ensure they are leveraging their positions as administrators of large blocks of business to secure fair drug costs, reflective of the best prices in the marketplace. While private payors may be less organized than governments and less focused on cost management, as they can pass these costs on to policyholders, employers cannot continue to shoulder the increasing cost of drugs indefinitely.

Krieger + Associates can work with plan sponsors and their insurer partners over the coming year to ensure controls are in place to protect their plans.

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