Group Health Insurance – Prescription Drugs

Prescription drugs comprise the largest portion of employee benefits plan costs, usually accounting for 60% to 85% of total plan costs. All drug benefits plans cover drugs and medicines that:

  • Are medically necessary
  • Are prescribed by a physician
  • Have a drug identification number (DIN)
  • Are dispensed by a registered pharmacist

Plan Design

There are three variations of drug benefits plans:

  • Prescription only (restrictive plan)
  • Any prescribed (broad plan)
  • Hybrid plan (variation of prescription only and any prescribed)

Prescription only This type of drug plan provides coverage for only those drug prescriptions that can only be bought using a physician's prescription. Employees are responsible for paying for over the counter (OTC) drugs even if they are prescribed by a physician (i.e. extra strength Tylenol).

Any prescribed This type of plan covers all drugs prescribed by a physician including OTC drugs

Hybrid plans A hybrid plan covers drugs prescribed by a physician which are not usually obtainable without a physician's prescription. Injectable drugs, serums, vaccines are also eligible for coverage under a hybrid plan. Other drugs such as life sustaining drugs and oral contraceptives are also considered for coverage under a hybrid plan.

Drugs that are typically not covered under a hybrid plan include:

  • Vitamins and steroids
  • Infertility drugs
  • Erectile dysfunction drugs
  • Smoking cessation products
  • Weight-loss medicines

There are two ways in which drug claims are paid:

  • Reimbursement plan
  • Pay-direct drug plan

Reimbursement plan Under a reimbursement plan, the employee pays for the prescription once it is filled by the pharmacist and then completes and submits a claim form (including the receipt) to the insurance company for reimbursement

Pay-direct drug plan (PDD): Under a pay-direct drug plan, the insurance company pays the participating pharmacist directly for the eligible cost of the drug. The insurance company or a third party that specializes in drugs claims paying establishes a network of pharmacists that are contractually bound to provide drugs to covered plan members. Employee or their covered dependents provide a drug prescription to a participating pharmacist, along with their pay-direct drug card; they will only pay the ineligible cost of the drug based on the plan design of their employer. The pharmacist charges the insurance company or the third party for the balance of the cost.

A pay-direct drug plan is more expensive to the employer than a reimbursement plan based on the following:

  • There is higher utilization of the plan because the initial out-of-pocket cost to the employee is minimal
  • There is no possibility of lost receipts or unsubmitted claims

Pay-direct drug plans are adjudicated in real time at the point of sale between the pharmacist and the insurance company or third party provider.

Drug Formularies

Of all of the benefits covered under an employer-sponsored benefits plan, none have experienced the inflation in costs that the drug benefit has. Drug cost inflation can run anywhere from 10% to 18% per year. Given the large impact of inflationary increases, the past of couple decades have witnessed the emergence of drug formularies to help combat inflationary increases in drug costs.

Drug formularies were established to help the employer reduce the cost (or cost increases) without affecting the well-being of their covered employees. There are many different drug remedies to treat any given illness. Employers are not able to constantly keep updated on the drugs available for every illness or ailment so they turn to insurance companies, consultants, pharmacists, and physicians to assist them in creating, implementing and managing formularies that suit their employee population. Below are some descriptions of formularies in the market today:

  • fixed or frozen formularies
  • flexible or managed formularies

Fixed Formulary - Benefit plans that implement a fixed formulary will cover only those drugs on the market or selected by the employer at the time that the formulary is adopted. Any new drug that enters the market after implementation of the fixed formulary is not covered. New drugs are added only at the employer's choosing (usually at the group benefits renewal and effective at the anniversary date).

Flexible/Managed Formulary - A flexible or managed formulary still has restrictions in coverage (like a fixed formulary) however, changes are constantly ongoing. The management of a flexible formulary usually includes setting up a committee representing the employer, employee, as well as other healthcare professionals (consultants, pharmacists, physicians). The committee will update the formulary regularly according to plan experience, utilization, new drugs on the market, employee requests, etc. Overall, a flexible or managed formulary constantly evolves to better serve the employer (to help maintain costs), and the employee (adding/deleting drugs from the formulary that are needed/not needed).

Formularies can include drugs that are either:

  • Generic equivalent
  • Therapeutic substitutions

Generic Equivalent - A generic equivalent drug is a drug with the same active ingredients at the same doses as the brand name original of the drug, however is available, usually at a much lower cost. Under a drug plan that includes a generic equivalent provision, the plan will cover the employee up to the cost of the generic equivalent cost of the drug if a brand name drug is purchased. Generic equivalent drugs enter the market after the patent on the brand name original drug is expired and are manufactured by companies other than the original brand name manufacturer.

Therapeutic Substitution - Insurance companies and third party providers of drug paying services have developed therapeutic alternatives with the help of physicians and pharmacists. Therapeutic substitutions assist in treating the same illness in a more cost effective manner. Drugs with different active ingredients but the same therapeutic classification as those prescribed are included in the formulary. The list of therapeutic alternatives are printed and distributed to employees so they can inform their physicians when receiving prescriptions.

Drug Costs

There are many components that derive the cost of prescription drugs including:

  • Ingredient cost
  • pharmaceutical manufacturer selling prices
  • distribution costs
  • mark-ups by wholesalers and retailers
  • dispensing fees

The cost to pharmaceutical manufacturer's of developing a drug include:

  • research and development
  • raw materials
  • manufacturing
  • distribution
  • promotion/advertising
  • market size
  • competition

There are also additional regulations based on the Patented Medicine Prices Review Board which regulates prices for patented drugs.  This governing body researches and publishes the prices for all new and existing drugs (prescription and OTC) annually.  Prices are benchmarked using pricing data from 7 industrialized nations including:

  • Canada
  • France
  • Germany
  • Italy
  • Sweden
  • Switzerland
  • The U.K.
  • And the U.S.

This governing body does not cover non-patented or generic drugs.

Dispensing Fees

The dispensing fee is the fee charged by the pharmacist for services rendered in dispensing the drug to the customer. The services that the pharmacist provides include directions on how to use the drug, including required doses, strength, and possible side effects. With modern advances in technology, pharmacists also provide additional services including:

  • A personal ID card that details prescription history at the pharmacy, existing allergies and existing medical conditions
  • Advice on ways to relieve certain symptoms without using drugs
  • Information on a broad spectrum of health issues
  • A free 24-hour help line to people who cannot come to the pharmacy

The dispensing fee is constant regardless of the prescription being filled as the services provided are the same regardless of the drug. Dispensing fees are typically regulated by federal/state/provincial governments and some of the regulations require the pharmacist to post their fees and post a list of services offered.

 

Category: Group Benefits