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New industry-wide prescription drug pooling agreement

The Canadian Life and Health Insurance Association (CLHIA) has announced a new industry-wide agreement to protect fully-insured private drug plans from the financial impact of recurring catastrophic drug claims that threaten the sustainability of these programs. The effective date of the new industry pooling arrangement is January 1, 2013.

The Need for Industry Pooling

Specialty prescription drug therapies to treat serious chronic conditions are continually increasing in their therapeutic effectiveness as well as in cost. Some of these innovative new therapies cost well over $50,000 annually, and are often prescribed to treat long-term illnesses such as genetic enzyme disorders, cancer and auto-immune disorders. Such medications represent significant ongoing costs to private group health insurance programs, and forecasts suggest that high-cost therapies will only become more prevalent in the years to come. Claims data from the CLHIA indicate that the number of claims in excess of $25,000 has been increasing at over 20% per year since at least 2008.

Plan sponsors generally have a stop-loss pooling arrangement to protect their group health insurance programs against catastrophic claims. A pooling arrangement removes drug (and sometimes health) claims in excess of a stipulated threshold from the plan sponsor’s claims experience for renewal rate-setting purposes and transfers the cost of these pooled claims to the insurance carrier. The insurance carrier, in turn, charges an additional expense for this protection, often referred to as the pool charge, which is usually included in the health premium rate.

As a result of the increase in high cost drug claims, insurers have been increasing their minimum threshold level as well as their pool charge to offset rising pooled claims costs. This has exposed plan sponsors to increasingly higher premium rates, threatening the sustainability of benefit programs, especially for small-to medium-sized employers.

As a result of this trend, a plan sponsor may negotiate to exclude a specific high-cost drug, to exclude an entire drug classification, or to cap drug coverage. These cost-containment measures may reduce a plan sponsor’s premium increase, leaving the members to bear the cost of those drugs on their own or with the support of a public drug plan (if applicable).

Plan sponsors with undesirable claims experience may be unable to gain relief from the strain of high‑cost drugs due to their insurer’s reluctance to offer a market study quote. In such an instance, a plan sponsor may be prevented from making a move to another, more competitive, carrier.

The Industry Pooling Agreement

CLHIA has introduced the industry-wide pooling program to support insurers and plan sponsors in managing recurring catastrophic drug costs, a move that will help improve the sustainability of group programs through improved sharing of risk.

Twenty-three life and health insurance companies, representing 100% of the private prescription drug insurance market in Canada, have agreed to collectively protect fully insured private drug plans from the full financial impact of recurring high‑cost drug claims (not single-incident claims), thus ensuring that members within these plans will continue to have access to essential prescriptions. Note that this pooling arrangement is limited to fully insured drug plans and does not apply to ASO (Administrative Services Only) plans.

The participating companies have agreed to the following new measures:

  • Mandatory internal pooling – A participating insurer will place all recurring prescription drug claims from fully insured plans in excess of a threshold in a self-administered pool. This threshold is determined by the participating insurer but is subject to a $25,000 maximum. Minimum standards will preclude an insurer from charging plan sponsors premiums based on their number or value of pooled claims.
  • Joint industry pool for very large and recurrent claims – This will help spread the cost of such claims amongst individual insurers, make it easier for smaller insurers to participate in pooling, and ensure that a robust number of providers remains in the market. Certificates (plan member plus dependents) with recurring drug claims in excess of $50,000 for at least two consecutive years (initial threshold) and in excess of $25,000 (ongoing threshold) in subsequent years will be moved into the joint industry pool.
  • Transferability of group insurance plans – When bidding on a new block of business currently covered by another participating insurer, the bidding insurer will price the benefit program without reference to any pooled claims. Plan sponsors with high-cost claims are therefore no longer disadvantaged as insurers cannot take their pooled claims into account when providing quotes. This could potentially enable a plan sponsor who would previously have been tied to its existing provider to move to a new insurer.

For more information on the new industry pooling arrangement and its impact on your benefit program, please contact your Morneau Shepell consultant for a more detailed discussion.