Drug Plans

Prescription Drugs are the most expensive part of any benefits plan. Prescription Drugs typically account for 60-70% of all health care expenses, and account for the majority of cost increases. In order to combat the explosive growth in drug costs carriers have come up with several strategies, most of which, revolve around controlling which drugs are covered and which are not.

Brand Name Drugs

Just like the name implies these are drugs made by big name pharmaceutical companies. They fall under brand names like Viagra, Cialis and Levitra. We see ads on TV, brochures in doctors’ offices and generally know what they are called but not what they do. (ask your doctor if is right for you! )
Because of the marketing blitz and patent periods (the time when no other company can produce a similar chemical agent) the big drug companies can charge whatever they want. Brand name drugs tend to be very expensive, not necessarily because they work any better but because they are SOLD better.
Most cost saving measures have targeted Brand Name Drugs. By avoiding brand names plans can avoid the cost of all that marketing and hype, reducing costs substantially.

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Generic Alternatives

Often made in the very same factory as brand name drugs, generics are typically bough in huge bulk orders by either provincial or federal agencies. Because the generics lack the little logo stamp and occasionally use less expensive fillers they can cost up to a half as much as the same brand name drug. Generics are mandated by law, to provide the exact same medicinal ingredients, in the exact same dosages and of the exact same quality as the brand name. Generics, for all intents and purposes ARE the brand name drug, for only half the cost.

While the medicinal ingredients are mandated by law the fillers and binders aren’t; occasionally people will find they are sensitive to side effects from the generic when they are not sensitive to the brand name. This can usually be traced to a difference in fillers or psychosomatic response. For these people drug plans typically allow for a “no substitutions” clause. If the doctor writes “No substitutions” on the script the drug plan will cover the cost of the brand name drug.

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Lowest Cost Alternative (LCA)

A newer and more aggressive plan of attack on drug costs, LCA goes beyond substituting brand for generic form, and actually replaces the whole ingredient with another designed to do the same job. LCA looks not at the drug being prescribed but the ailment being treated. Take depression as an example, Prozac has been around for years, it is inexpensive and effective at the treatment of depression. Wellbutrin is another drug designed to treat depression, however, it is about 5 times the cost of Prozac. Wellbutrin has the added benefits of reduced side effects, fewer drug interactions and less complications, so doctors will often prescribe Wellbutrin over Prozac. A Lowest Cost Alternative plan will look at the problem of depression, and determine that while Wellbutrin is indeed a method of solving the problem it is substantially more expensive than good old Prozac. The LCA plan will decline the claim for Wellburtin, and prompt the pharmacist to dispense one of the less expensive alternatives which are covered by the plan.

LCA plans receive a substantial rate reduction, as well as a huge amount of flack from members. I have on several occasions had employees screaming at me over an LCA drug plan. The fact that they cannot receive the drug prescribed by their physician drives them crazy. Again for these people a plan can have a No Substitutions clause which allows the generic or Brand name drug to be claimed.

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Formulary

 Most plans work on a formulary basis, a formulary is just a list of drugs to be covered. Simple examples of active formularies are drug plans that do not cover lifestyle drugs such as: anti-smoking drugs, fertility drugs, or prescription weight loss medication. More aggressive formularies resemble the Lowest Cost Alternative plans but are even more restrictive, they also tend not to allow a “no-substitutions” clause. That is, if a drug isn’t covered, no amount of fuss from your doctor will get it covered.

Formulary plans are designed to use the cheapest drug possible to treat any one given malady. Typically there is ONE single drug for each medical condition. Members are allowed to purchase a non-formulary drug, however, they tend to either be reimbursed at a lower level, or only the cost of the listed drug is covered, any additional cost is born by the plan member.

A new, kinder, gentler formulary plan is referred to as a Conditional Formulary. Pioneered by Green Shield of Canada this is a very restrictive formulary which has several hoops plan members can jump through to get their drug of choice. You have to play the insurance companies game to get the drugs. The plan starts off very restrictive, most claims occur without incident; however, once a member has a problem with a formulary drug, they can apply for an alternative. Once approved, the more expensive alternative is covered and hopefully fixes the problem with the first drug, perhaps there are lesser side effects. If this second drug still is unsatisfactory a second application can be made for a higher tier of coverage. More expensive drugs are made available at this tier and again the process is repeated until a satisfactory drug of the lowest cost is found. The core idea is to cover the cheapest drug that works. If it doesn’t work you can try a more expensive one until either a working drug is found or you reach the top tier where the most expensive drugs are covered.

By starting at the bottom price wise, and moving up only when necessary, huge costs savings can be found. Administration, paperwork and frustration are the trade off for these savings.

Summary
Which plan is best for your group depends on your budget, your drug claims history and your benefits philosophy. Obviously not everyone wants to put their members into a position of jumping through hoops with a conditional formulary, then again having conditional coverage is better than none at all.

Other than Brand Name drugs, all of these strategies require a drug card. Drug cards are where the plan design and formulary are held. While a drug card increases the cost of a benefits plan due to an increase in claims, the cost savings from drug control are starting to offset the cost.

TL;DR you might be able to lower your drug costs by using generic, lowest cost alternative, or conditional formularies.

Demystifying Renewal Pricing

Group insurance renewals can seem strange and clouded in mystery. While each group, carrier and renewal is different here is a simple example of how renewal rates are set.

1) Past Experience
The insurance company looks at your claims experience and demographics, over the past 12 months, sometimes going back as far as 36 months.

Paid Premium = $20,000
Paid Claims =  $18,000


Paid Claims = 90% of Paid Premium


2) Pricing for the Future
Health care in Canada is getting more expensive every year. Expensive new drugs, an aging population and government cutbacks are causing healthcare costs to increase at approximately 13-15% annually . This increase is called a Trend Factor.

Trend Factor = 14%

3) Administrative Costs
Administrative costs include: processing claims, printing booklets, maintaining phone and internet support, plan enrolment, preparing billings and invoices etc. If a plan has a Target Loss Ratio of 72%, the remaining 28% is used for administration.

Administration Costs of 28% = Target Loss Ratio of 72%


4) Putting it all Together
From past claims experience, known administration costs and predicted increases in healthcare costs we can predict next years’ claims and budget accordingly.

Example #1 High Claims
Paid Claims + Trend Factor – Target Loss Ratio = Rate Change
       90%     +       14%       –         72%             =      +32%

Example #2 Low Claims
Paid Claims + Trend Factor – Target Loss Ratio = Rate Change
     55%       +        14%      –          72%            =       -3%

Often clients feel like they are getting taken advantage of when their claims are at or below their Target Loss Ratio and they still receive an increase. They instinctively feel that if they hit their "Target" they shouldn't have any change to rates. If health care costs were stable this would be the case but, sadly the fact is that health care is getting more expensive each year, so insurance premiums need to increase to keep up. If you wanted to calculate this break-even point, where next year you would see no rate change it would be found by subtracting the current trend factors from your Target Loss Ratio. In the example above with a 14% trend and 72% Target Loss Ratio the "break-even" point for claims would be 58% of premium.

Clients need to understand that administration is going to account for between 15-30% of their premium, depending on group size. Trend factors will, on average increase the cost of  health and dental plans by 15% and 8% each year, respectively.

Why is my Extended Heath Care plan always getting more expensive?

Good question little Johnny, come sit on my knee and I will tell you a story.

Health Care is getting more expensive, therefore the insurance you buy to protect yourself from unexpected health care claims is also getting more expensive. In the insurance industry we call the rate at which health care costs increase a Trend Factor. Over the past 5 or so years, the Trend Factor has been about a 15% increase per year, every year. Costs are doubling approximately every 4 years. That's the "how much" part, for the "why" bit see one of my articles below.

What is a TREND FACTOR?

Trend factors are used when insurers are trying to forecast future costs. Most commonly you will see these at the annual policy renewal when the insurer is trying to determine the appropriate rates for the upcoming year.

Trend factors play a vital role in pricing any group. They take into account a few main factors.

Inflation: The inflation component of a trend factor refers to the increases in the cost per service. For example,

Ø  Escalating ingredient costs, rising research costs, and growing dispensing fees changed by pharmacies have an inflationary effect on drugs.

Utilization: An increase in utilization is an increase in the number of services used per plan member. For example,

Ø  Massage therapy claims are now the second most claimed part of healthcare next to prescription drugs. Five years ago, it was one of the least claimed benefits.

Aging: As the population ages average utilization is generally expected to increase as more treatments and prescriptions are required. For Example,

Ø  A 35 year old plan member claims for 11 prescriptions per year on average, compared to the average 55 year old who claims for more then 25 prescriptions per year.

Changes in Health Services Environment (including legislative changes): Cost shifting from Provincial plans places more pressure on private insurance plans and these costs need to be taken into consideration. Each year sees more offloading onto private sector plans. For example,

Ø  Eye exams are no longer covered by the provincial medical plan for anyone ages 19 to 64. Private plans are picking up the slack where before they didn’t need to provide coverage.

Ø  Hospitals are providing more outpatient treatments such as day surgeries which means costs that would have previously been borne by the hospital (i.e.: prescription medications) are now the employees responsibility and are being claimed on their group insurance.

Deduction Erosion: Year over year a fixed deductible does not keep up with that of average costs increases; as a result the proportion of costs paid by plan sponsors increases each year. The cost of providing the service keeps rising, but the deductible amount required from the employee doesn’t keep pace.

So there you have it Jimmy, Johnny, whatever your name is. Aging, government cutbacks and a general increase in the cost of medical care are all conspiring to increase health care costs. Now go play outside and try not to scrape your knee, our premiums are high enough as it is.

How Do I Know I am Getting "The Best Rate"?

This is what a Life-Guide printout looks like. Life- Guide is the software I use when producing Life Insurance quotes. Life-Guide tracks insurance rates from every brokerage insurance company in Canada. Life-Guide is how I know which companies have the best rates. Every Insurance Advisor should be able to give you a similar printout. I usually try and use one of the top 10 in the list based on price. I don’t always use the cheapest due to various reasons: service, policy wording, renewal premiums etc. but I try and stay in the top 5 as a general rule.

If you broker doesn’t provide you this kind of market survey, ask them for one. If the company they are recommending isn’t near the top price wise, ask them why not. Sometimes it is a good reason, like mine above. Sometimes its commission related and the agent will make far more money placing all their business with one carrier, if this is the case they probably aren’t looking out for your best interest. Or sometimes it is just as simple as they are not contracted with that particular company. As a broker, I am supposed to provide the best price possible, or at very least the best value. Captive agent companies like, Sun Life, Clarica, London Life and Desjardins are often only allowed to sell their parent company products. These companies rarely show up on these surveys and when they do they are often at the bottom of the pile.

You can even check rates yourself by going to

http://www.winquote.net/ 

WinQuote is a website version of Life-Guide. You can run simple quotes and get accurate results.

One tip about WinQuote is that they automatically quote based on “Super Preferred” health status, in my experience only Olympic athletes get super preferred, for a more realistic rate change health risk to Regular

I find that Life-Guide is slightly more accurate than WinQuote so don’t be surprised if there is a slight discrepancy between the two.