Healthy Skepticism Library item: 1058

Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.

Publication type: news

Peirol P.
Benefits in sick bay
2003 Apr 18

Full text:

Canadians with employer-sponsored health care plans have enjoyed a golden era in coverage — but that’s coming to an end as companies grapple with rising costs, propelled mainly by soaring drug claims.

“We’re forecasting double-digit increases [in health benefit costs] for the next few years, and that’s expected to continue. So, we need to manage that in the best possible way,” says Ashim Khemani, senior vice-president of group markets for Liberty Health.

Employers have responded by raising worker co-payments, cutting benefits or adjusting wage increases to offset higher costs. That has raised the ire of employees, who are fighting such moves with the backing of their unions.

In late February, 1,100 newly unionized workers at a Freightliner truck factory in St. Thomas, Ont., began a two-week strike over the proposed cost of co-payments for health care benefits. It was the Canadian Auto Worker’s first contract with Freightliner, a division of Daimler-Chrysler.

And in January, nearly 20,000 General Electric Co. workers in 23 states walked off the job to protest a company plan to bill them a few hundred dollars more a year for their health benefits coverage.

It’s become the most contentious issue at the bargaining table, for the first time superseding wages and job security, says Gary Cwitco, a national representative of the Communication Energy and Paperworkers.

“When I and my colleagues go to the bargaining table, we always find employers complaining their benefits costs are going up 10, 12, 14, 16 per cent per year,” he says.

He puts the blame squarely on the Canadian government, accusing it of “making peace with the large pharmaceutical companies” through extended patent protection laws that prevent cheaper generic drugs from coming on to market, and “passing the war on to employers and their employees.”

Funding cuts have also left their mark, and the provinces have responded by clawing back some programs, such as audiological services in Ontario and chiropractic payments in British Columbia and Manitoba.

“It’s an ongoing trend where [provincial] governments are trying to reduce their costs in health care while trying to get more money out of the federal government, but the cost of the services don’t change. . . . It’s just who pays it. It’s a shifting of costs on to the employer and employees.”

He and others are hopeful that the $27-billion over five years that the federal government recently earmarked for health care will help rectify the situation, particularly if a proposed national pharmacare program is introduced.

Meanwhile, plan sponsors will have to contend with increases of roughly 8 per cent a year for prescription drugs — and drugs account for 70 to 90 per cent of the cost of a typical private health care plan, says Jayne Bonnett, a senior consultant in group and health care at consulting firm Watson Wyatt in Toronto. “Drugs is the killer [category]. We don’t have a client where drugs isn’t the largest expenditure in the health plan.”

Why are drug costs escalating?

The major reasons experts cite are that employees, particularly aging baby boomers, are having more prescriptions filled, and that the new drugs, many of them of limited therapeutic value over existing medications, are far more expensive.

New drugs now account for more than 45 per cent of the total cost of drug claims, up from 4.8 per cent in 1997, according to a report from Green Shield Canada, a not-for-profit health and dental benefits adjudicator. The increase coincides with the introduction of drug ads south of the border that have piqued consumers’ interest. The pharmaceutical industry spends close to $3-billion (U.S.) a year on such campaigns.

In some cases, physicians have changed how they prescribe drugs, using them more to prevent than to treat specific diseases. And, as hospital stays are shortened, patients are more dependent on drug therapy paid by their insurers.

Other factors contributing to soaring drug costs include a greater social acceptance of some classes of drugs, such as anti-depressants, and patent laws that make it difficult for cheaper generics to come on the market.

To put the cost of new drugs in perspective, the average cost per claim of a patented drug introduced since 1997 is $92.56 (Canadian), compared with $78.79 for an an older patented drug and $22.94 for a generic drug, says Dr. Joel Lexchin, an associate professor in the school of health policy and management at York University in Toronto.

“A lot of times, these new patented drugs are no better than existing medications. That’s not always the case, but a large number of times it is.”

Patients, often influenced by drug advertising, will request a newly minted drug over an existing one, and about 80 per cent of the time the doctor will acquiesce, says Dr. Lexchin, who adds that he and his fellow physicians are heavily courted by pharmaceuticals.

Of the 450 new patented drugs that were introduced in Canada between 1996 and 2000, only 25 were classified as major therapeutic advances by the patent review board, he says. Most of the new drugs on the market are so-called line extensions and “don’t have much of a benefit over the existing drugs.”

That said, “people should be able to get what’s necessary, if it’s been shown to be better,” Dr. Lexchin says.

What can be done? It’s a thorny issue for companies, aware that if they cut benefits too close to the bone, they risk facing an employee backlash, or being viewed poorly by potential new recruits. Nonetheless, here are some of the options that human resources professionals across the country are considering, and adopting:

Splitting benefits costs with employees through co-payments, shared premiums and deductibles;

Introducing flexible benefit programs and health care spending accounts;

Enforcing generic substitutions;

Restricting coverage of items that have been subject to abuse, such as orthotics and smoking cessation aids, and of paramedical services, such as massage treatments;

Introducing disease management and prevention programs such as flu shot clinics and weight-loss programs;

Adopting managed formularies, or approved lists of drugs, which limit the coverage of certain new medications;

Auditing their own drug plan programs and usage patterns to identify trends and conditions within the employee population.

“If you’re an employer trying to maximize the dollar value of what you’re spending on employees, you’ll want to maximize what you’re spending on health care,” says Jeffrey Schmidt, a senior vice-president at Aon Consulting Inc., which works with both drug plan providers and administrators.

Generic substitution programs and managed formularies — both common in provincial pharmacare plans — are two solutions winning converts among companies and unions alike because they trim costs while curbing unnecessary use of newer, more expensive drugs.

Under managed formularies, new drugs are stringently assessed by a committee of doctors, pharmacists, benefits consultants and often union representatives for their therapeutic value over existing products. They can be added to the formulary without conditions, or may be subject to special authorization.

In this way, an effective breakthrough drug, such as Remicade, for example, which costs roughly $20,000 a year per patient and is used to treat crippling rheumatoid arthritis and Crohn’s disease, can be approved for a plan member who has already tried a gamut of other medications, but not for another who hasn’t tried the alternatives yet.

Green Shield studied plan sponsors with and without managed formularies in southwestern Ontario and found that those with the restrictive plans paid on average roughly 8 per cent less per drug claim in 2001 ($44.85 compared with $48.63).

While managed formularies cost more to administer, they’re effective because savings can still be achieved without sacrificing patient care.

The big three auto makers, through the CAW, have had managed formularies in place for several years and found that they have kept drug costs “relatively low,” says Ms. Bonnett of Watson Wyatt. “It’s a good example of the importance of engaging the labour movement. Otherwise, it’s an uphill battle.”

Co-payments, deductibles and caps on payments are another popular option with employers, who say that if employees want to maintain their full health benefits, they should be prepared to help shoulder the cost.

Ideally, such measures also cut down on total claims by helping plan members think twice before requesting a costly treatment or buying a new pair of eye glasses just because they’re eligible.

It may also make them more likely to request a generic drug over a patented one, or shop around for a pharmacy that offers cheaper dispensing fees.

Unions point out, however, that while there’s evidence that co-payments do deter the use of drugs and services that an employee might otherwise take advantage of, it’s unclear whether they save money in the long run, for an employee’s condition might worsen if she or he avoids a treatment because of cost.

Some employers try to offset co-payments and spending caps by giving employees health care spending accounts — money they can use toward the health benefits of their choosing. The amount can vary from several hundred dollars a year to several thousand, and can be applied toward any health-related service that an employee would normally claim on their income tax return.

For example, a health spending account can enable one employee to cover her additional drug costs while another chooses to blow his budget on laser eye surgery and another arranges home care for a dependent.

Canada Revenue considers such a benefit to be tax deductible for the employer, so it’s more appealing from an employer’s perspective than offering a comparable pay raise, says Mr. Khemani of Liberty Health.

However, health spending accounts are static and do not keep pace with inflation, Ms. Bonnett adds. “If you implement a spending account of say $2,000, it might be adequate for now, but it actually caps the amount of spending by the employer” and will not be as valuable to the employee in five or 10 years.

Restrictions on coverage of paramedical services has also been effective in lowering overall costs, say plan administrators.

Orthotics and orthopedic shoes, for example, used to be something that only athletes were prescribed. Today, they’re the fourth most costly extended health care benefit, after hospitals, vision care and drugs, accounting for roughly 18 per cent of costs, Mr. Khemani says. Physiotherapy accounts for about 17 per cent of extended health billing, and massage therapy about 12.5 per cent, he said.

Plan sponsors are increasingly demanding doctors’ prescriptions to ensure that the use of such services is deemed necessary, and that has dramatically cut down on their use, he says.

“It’s important to understand what you want to cover and why, if the health care landscape is changing and resources are continuing to get scarce,” says Mr. Schmidt of Aon Consulting.

Disease management and prevention programs, such as smoking cessation and flu shot clinics, are being pushed by benefits consultants, but they acknowledge that they are hard to justify from an economic standpoint. “The difficulty is that you have to invest money in them and don’t always see the return, or don’t see it for a period of time,” Ms. Bonnett says. “Employers question, is this my responsibility? What if [a provincial health plan] gets the results?”

Mr. Schmidt has run into the same problem. “If I’m a vice-president of HR and I go to the CFO saying I want to implement a plan to combat obesity and obesity-related diseases, he’ll question whether that’s within the domain of an employer.”

Getting employees on side is half the battle, benefits consultants say.

While unions oppose health spending accounts and aren’t keen on cost-sharing plans, they’ve been open to measures that curb costs without jeopardizing coverage, says CAW economist Jim Stanford, citing as an example restrictions on orthotic shoes for General Motors of Canada Ltd. employees in Oshawa, Ont.

“What we found was as soon as people in Oshawa heard that 10,000 CAW members had access to $400 a year for orthotics, well lo and behold, on every street corner there was someone offering orthotics for $400.” To counteract this, a list of approved providers was drawn up, so “fly-by-night operators” couldn’t tap into the resource.

“The more money we can save on that kind of thing, the more money we’ll have to negotiate other kinds of health benefits,” Mr. Stanford said.

Anil Verma, a University of Toronto professor specializing in labour-management relations, says compromise between employers and employees will be the order of the day.

“This is one area where some degree of collaboration can pay off on both sides,” he says. “Employers take money out of the same pot, whether for wages, pensions, or benefits. If the unions put up a wall, the employers will cut somewhere else, and I think smart unions know that. I think it’s a matter of sitting at the table and deciding what kind of tradeoff they can do.

“What’s not in the cards,” he adds, “is the status quo.”

The cost of drugs

A snapshot of national drug expenditure trends, compiled by the Canadian Institute for Health Information:

From 1985 to 1999, national drug expenditures increased by 250 per cent — equivalent to twice the percentage increase in total health expenditures (124 per cent).

In 1999, prescribed drugs worth $10.1-billion accounted for about 76 per cent of all drug expenditures. Spending on prescribed drugs is expected to have grown by 381 per cent between 1985 and 2001, twice the percentage increase for non-prescribed drugs (163 per cent).

The increase in drug spending per capita is largely due to increased utilization and the introduction of new drugs, considering that the consumer price index, the industrial product price index for drugs, the Patented Medicine Prices Review Board’s index, and the provincial drug plan price indexes have remained virtually unchanged since about 1993.

From 1985 to 1992, national drug expenditures increased by 12.1 per cent annually, on average, well beyond that which can be attributed to economy-wide inflation and population growth.

Between 1992 and 1996, drug spending increased by about 4.9 per cent a year, and was kept in check largely because of restraint initiatives by provincial and territorial governments. Drug spending increases shot up after that, to about 10 per cent in 1997 and 1998, and 8 per cent in 1999. Increases of 7 per cent in 2000 and 9 per cent in 2001 were forecast.