Nearly two dozen life insurers are banding together to share the risk of claims for expensive drugs, as costly new treatments for illnesses such as cancer and auto-immune diseases become more common.
Discussions about this idea, which will be announced Tuesday, began roughly two years ago among a handful of Canadian insurers. The talks were spurred along when, for the second year in a row, an individual made a single drug claim that topped $1-million.
The move, which applies to workplace drug benefit plans that are insured, will lower the chances that an individual's coverage will be cancelled because they need a rare drug, or that their employer's plan will see its premiums spike. Large insurers, such as Manulife Financial Corp. and Great-West Lifeco Inc. , and smaller players, such as Saskatchewan Blue Cross, are participating.
It is an example of how the industry is seeking to make benefit plans – a key source of profits for the sector – more sustainable in the face of an aging population and escalating health-care costs. Prescription drug costs make up about half of the value of claims in a typical extended health-care plan.
Canadian insurers paid about $9.5-billion in prescription drug costs in 2010, and that amount is expected to rise. At the same time, provincial governments are seeking to offload more costs: Ontario said in its budget last week that it will cut the proportion of drug costs it pays for wealthy seniors.
The industry is also seeking to protect its reputation as more individuals and employers face heart-wrenching decisions about improving an individual's quality of life, or merely keeping them alive, at costs of $50,000 or more per year.
The problem is becoming more acute as medical research churns out new therapies, many of which result in steep bills.
"We want to be seen as being good citizens and don't want to see situations occurring where there's somebody who, because of the way the business is set up, is falling through the cracks," said Paul Boundy, vice-president of business development and group benefits at Sun Life Financial Inc. "It's not as critical an issue today as it will be five years from now."
There are more than 110,000 group plans in Canada that cover more than 23 million people for extended health-care benefits. The plans are roughly divided evenly into two categories – insured, where the employer pays premiums and the insurance company pays for the benefits; and uninsured, where the employer pays the benefits out of the company's pocket.
This industry move only applies to insured plans, although those involved are not ruling out an extension to uninsured corporate plans, which are administered by insurers, at some point. "We needed to start with what we had complete control over, which was the fully insured business," said Stephen Frank, vice-president of policy development and health at the Canadian Life and Health Insurance Association.
Because plans are renewed annually, a high claim in one year can cause premiums to rise for the whole plan the next year. To prevent the cost increase, some employers will negotiate a new plan that does not cover the cost of that expensive drug, leaving the individual without coverage.
"What you're seeing is select employers facing some pretty significant price increases that are causing them to make some dramatic changes to their plans," said Mr. Frank.
The insurers have essentially agreed to pool all of their very expensive drug claims, and to ignore those claims when setting premiums for individual companies. While premiums generally are expected to continue rising across the board due to higher costs, the industry says this will stop premiums at any one company from spiking due to extreme drug claims.
Industry-wide, the number of claims topping $25,000 has been rising by 20 per cent a year in recent years. In 2010, there were more than 1,900 individual claims from fully insured plans that exceeded that amount.