Edited by Thorpe Benefits from original article in Canadian HR Reporter, October, 2002

Extended health benefits offered by employers are intended to enhance the benefits available through provincial plans.

Provincial governments pay for the bulk of hospitalization and physician service costs. But increasingly, the lion's share of prescribed and over-the-counter drug costs are funded by the private sector - specifically, you and your employees.
 
The problem is that drug costs continue to escalate, representing an ever-increasing percentage of overall healthcare costs.

In some cases, it is forcing employers to introduce a closed or restricted formulary, meaning that employees won't have access to some of the more recent "innovative" and high-cost drugs through their employers' plans.

In others, the common out-of-pocket maximum or "co-insurance" on private benefit plans increases to $2,000 or more per year. Some employers may even start considering whether a prescription drug plan is an affordable part of the total benefits package at all. As remote as this scenario might sound today, without a change in the current cost trend, this option could be a real possibility for tomorrow.

Headlines and alarm bells
Almost every week, one of Canada's major newspapers contains an article decrying the state of the Canadian healthcare system. Blame is leveled in various directions, but the same bottom line remains - providing a universal healthcare system is expensive.

The Canadian Institute of Health Information's 2001 report shows healthcare spending in 2000 was $97 billion. Of this amount, the largest expense was for hospitals at $30.8 billion (32 percent of the total). For the first time ever, spending on drugs came in second at $15 billion (16 percent), ahead of the cost of physicians, who received $13.1 billion (14 percent) in 2000. According to a January 2002 report submitted to the Senate by the Canadian Institute of Actuaries, the future liability for funding Canada's healthcare system is comparable to, and likely greater than, the future sustainability cost of the combined CPP/QPP programs.
There is also the misconception that universal healthcare was envisioned as solely publicly supported. In reality, the private sector was always supposed to have some responsibility and today it pays for about 30 percent of all healthcare expenses. Most of this expense goes to prescription drugs.

Aging workers
A popular modern myth is that the aging population represents the imminent ruin of all publicly funded health and savings programs. Under these programs, the under-65 workforce funds programs for the over-65 retirees through the tax system.

In 1998, those 65 or older accounted for 12.3 percent of the population. By 2021, the over-65s are expected to account for 17.8 percent, and 22.6 percent by 2041.

The truth, according to actuaries, is that the aging population, in the absence of other contributing factors such as new technologies and higher-priced drugs, would have no meaningful impact on the rate of increase in healthcare spending.

Health-care for healthy seniors is no more costly than health-care for anyone else. Costs only start to go up in a meaningful way in the last six months of life when more drugs are prescribed and more care is in order. There is evidence that a significant percentage of total lifetime drug expenses (30 to 50 percent) will occur in the last six months of life.

In so far as more people over 65 will die and undergo those six months of intensive healthcare, seniors do represent a greater cost to health plans. But it is an exaggeration of the problem to assume all seniors represent an additional cost and therefore as a group they threaten to bankrupt health plans.

Pharmaceuticals just keep going and going...
Driven by their eternal quest for better, faster, longer, easier, nicer-tasting treatments, pharmaceutical companies continue research into new drug formulations and therapies. But this research comes at a cost.

The percentage growth in drug spending between 1985 and 1998 was more than twice that of overall health expenditures. The brand-name pharmaceutical companies maintain that rising drug costs reflect the large investments needed for innovative research to develop new products, but some experts are skeptical. A federal-provincial agency said in a report released in April 2002 that on average, Canadians spent $500 each on prescription drugs in 2001. This represents a 25 percent increase since 1998.

Generic versus brand name In light of these ever-increasing costs, there is growing interest in the generic versus brand name debate. One side of the argument looks at making generic drug equivalents available more efficiently.

Recently, two researchers from Queen's University in Kingston, Ont. reported that Canada's hard-pressed healthcare system could save tens of millions of dollars every year simply by reducing long delays in bringing federally approved, low-cost generic drugs to market. Their study concluded that just a week's difference in approving a number of generic drugs for purchase would have saved taxpayers and their benefit plans $1.3 million.

A month's improvement would have saved $5.78 million, while an improvement of six months would have resulted in savings of $36.5 million.

The study, financed by the generic drug industry, concentrated on just 34 generic drugs approved in Canada between 1995 and 2000. On average, it took 1,160 days for each one of these drugs to be approved for sale. One drug took nearly nine years.
 
Generic drugs generally sell for about 60 to 80 percent of the price of original brand-name products. They are only eligible for sale after the 20-year patent for a specific brand-name drug expires. Most industry analysts agree that an increased use of generic drugs would dramatically reduce ever-increasing prescription drug costs.

The other side of this debate focuses on the merits (or lack of) offered by many of the new brand-name releases. A report released by the Patent Medicine Prices Review Board in 2000. What about the report???

Another 42 were new drugs or dosage forms that appeared to provide little or no improvement over existing medicines. Only three of the 81 new patents could be classified as "breakthrough" or "substantial improvement" medications. Yet despite this reality, doctors are encouraged to write a growing number of prescriptions for these drugs.

Plan sponsors today
Today, most employer-sponsored plans are still designed with open formularies, meaning most, if not all, prescription drugs are covered by the plan. Canadian employers generally hesitate to restrict coverage for individual drugs.

However, as the pressure increases on financial resources, more and more employers are making the move to restrictive or moderately restrictive formularies as they feel powerless to control drug plan costs in other ways.

An emerging classification system that was once more common to surgical procedures is becoming the norm, that is, the distinction between medically necessary drugs (maintenance or acute treatments) and lifestyle or elective drugs.

Cost containment measures, such as restricted formularies, are not intended to create hardship for plan members. Instead, they are initiated to help plan sponsors ensure plans are financially viable. The best employers will use their discretion to implement those measures which best reflect their corporate objectives and culture.

The bottom line is that benefits plans cannot be a "blank cheque" for healthcare coverage. Employers and employees need to be partners in confronting waste and inefficiency in healthcare system, and need to make their voices heard in political circles, the only venue where change can really be affected.