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The New Drug Pooling Arrangement

Shirley LeongExecutive DirectorCanadian Drug Insurance Pooling CorporationToronto, Ontario

8D-1

The Challenge

• Catastrophic Drug claim costs are undermining the sustainability of group drug plans– Growth in prescription drug costs has exceeded the

level of inflation in Canada – Private plan costs could double by 2019

8D-2

Drug Landscape is Changing

• Number of claims exceeding $25,000 per year is growing – Incidence rate is increasing by more than 20% per

year

• More Specialty medicines are being used– Require special handling, distribution and

administration and are used to treat chronic, complex diseases

• Extremely efficacious, expensive drugs are being used on small numbers of patients

8D-3

Example

Kalydeco• Fixes a genetic mutation found in 4% of patients

with cystic fibrosis– Equates to 100 patients in Canada

• National drug review panel has ruled the drug very effective

• Annual cost?

8D-4

Example

Kalydeco costs $300,000 per year

“Vancouver CF patient “X”used to spend a lot of time in hospitals with lung infections brought on by the disease. But since starting on the drug 3 years ago, …the 9-year-old’s condition has improved immensely…”X” is able to take Kalydeco through her family’s private insurance”

Source: CTV news, May 2013

8D-5

High Cost Drug Claims Management

• Historically high cost drug claims were rare and of short duration

• Traditional methods of mitigating risk exist – high amount pooling, formularies, plan maxima

• Newer benefit management tools– Prior authorization, step therapy, mandatory generics

8D-6

High Cost Drug Claims Management

• Shift now occurring • Growing number of situations where expensive

drugs will be used for many years to stabilize or ameliorate chronic conditions– Increasing use of these amongst younger people

8D-7

Concerns with Current Mechanisms

• Poorly suited to manage known, recurrent expensive claims

• No consistent approach in the market• Pooling charges continue to grow

8D-8

Canadian Drug Insurance Pooling Corporation

• Formed out of recognition of current challenges• Industry initiative• Addresses many of the needs of carriers and

plan sponsors

8D-9

Which Carriers are Participating?

• Twenty four carriers, who collectively account for 100% of supplemental group health business in Canada are participating as Founding Members

8D-10

A Principles Based Two Part Solution

1. Mandatory insurer EP3 internal pooling operating within a managed, standard framework

2. Joint industry pool for very large and recurrent claims which is not visible to the plan sponsor

8D-11

EP3

8D-12

Key Features of Mandatory EP3

• All EP3 plans must adhere to the principles outlined in the framework– All fully insured groups must participate in the EP3

program of their insurance company—they cannot opt out

– Participating insurers must place all large drug claims, from all of their fully-insured group business, in a self-administered pool or pools

– Pools must not be based on claim experience (no good pool/bad pool)

8D-13

Principles Based Framework

• Designed to:– Insulate eligible groups from the full financial impact

of rare, recurring high cost drug claims– Allow groups more ability to shop for a new provider

at reasonable rates even when they experience a recurring high cost drug claim

– Define the parameters of the industry pool

8D-14

Key Principles

• Availability—All fully insured groups in Canada should be able to purchase group extended healthcare coverage

• Affordability—Coverage should be affordable• Transferability—All fully insured groups should be

able to select the participating insurer of their choice and not be tied to their current participating insurer in the presence of a large recurring drug claim.

8D-15

Key Principles (continued)

• Viability—All member companies should be able to abide by the principles and continue to offer coverage

• Participative—Any sustainable solution should be available to all interested eligible insurance companies.

• Competitive—Any solution must be pro-competitive and continue to encourage an active and vigorous competition in the market.

8D-16

Maintaining Competitiveness

• Individual participating insurers can set premiums based on the experience of the entire EP3 pool, or based on any other non client-level experience criteria.

• Carriers can have multiple EP3 solutions for different market segments if they choose

8D-17

Maintaining Competitiveness

• All other aspects of the EP3 can be customized by each participating insurer including: – pricing– the pooling threshold (although must be <= "ongoing

threshold")– maxima (as long as potential still exists for pooling)– whether the pooling is done on an individual drug

amount or a certificate amount – requiring co-payments or deductibles (subject to a cap

of $1,100/$2,200 for deductibles)– formulary design

8D-18

Examples of Acceptable Plans

Carrier Deductible Formulary Maxima EP3 Threshold Certificate/Individual

A 25/50 Open Unlimited $10,000 Individual

B 50/100 Open‐Prior Auth req’d

Unlimited $15,000 Certificate

C 25/50 Closed‐ODB

$100,000 $12,000 Certificate

8D-19

Which Groups Qualify?

• Fully Insured Plans (announced June 7, 2011)– Fully insured plans do not include plans that are – Administrative Services Only (ASO), – Refund accounting, or – ASO with Stop loss

8D-20

Why Fully Insured Plans?

• Original concern focused on small groups– Difficulties recognized

• E.g. fluctuating size

• Fully insured groups selected– Self selected, understood their need for an insured

product– Plan sponsor already recognized their inability to

manage fluctuating claims

8D-21

Benefits to Plan Sponsors

• Consistent approach in the market to pooling for drug claims

• a baseline for fully insured groups regarding pooling of large drug claims

• Carriers cannot move a group from a “good pool” to a “bad pool”

• Carriers cannot experience rate based on the number or value of pooled drug claims for a particular plan sponsor

8D-22

Protecting Against Adverse Selection

• To keep the pools viable, there are safeguards against adverse selection– Pre-existing exclusions do not apply to existing drug

claims of groups with Founding Members that were fully insured group plans as of June 7, 2011

– Pre-existing exclusions apply to existing claims of "new" eligible groups (e.g., an ASO group becomes a fully insured group, or a sponsor initiating a drug coverage for the first time).

8D-23

Protecting Against Adverse Selection

• Mandatory exclusion from both EP3 and Industry Pool• Exclusion must be removed if certificate

subsequently falls below Ongoing Threshold for two consecutive years

Claim greater than Ongoing Threshold in

prior year

• Optional exclusion from EP3 pool• Pre-ex can be removed - if removed, cannot be

reapplied in the future• If excluded from EP3 pool, must be excluded from

Industry pool

Claim less than Ongoing Threshold but greater than

EP3 Threshold in prior year

• Insurer can offer EP3 coverage• At end of year one, all high cost claims MUST be

audited by carrier to establish if pre-existing exclusions should apply

• Must exclude all pre-existing claims as per rules outlined above

New plan—no historical information available

8D-24

Protecting Against Adverse Selection

• Important:– May be a significant difference between carriers in

pre-existing policy – Differences between the use of the ongoing threshold

vs. EP3 pooling point could be significant

8D-25

How Does It Work?

8D-26

EP3

• Insurance Company has an EP3 plan which pools claims at the individual level at $10,000

Family Member

Paid Claim Amount

EP3 pooledamount

CertificateHolder

$300 0

Spouse  $102,000 $92,000

Child  $50 0

Family Total $102,350 $92,000

8D-27

Impact on Plan Sponsor

• Claims exceeding $10,000 on any one individual go into the EP3 pool

$200,000 Total amount paid in drug claims for this policyholder for all certificates

$92,000 EP3 pooled amount

$108,000 Total amount allotted to Policyholder 

8D-28

Impact on Plan Sponsor

• Renewal Calculation may only use non-pooled claim payments

• If Plan Sponsor goes to market– Companies who decide to quote may not take pooled

claims into consideration

8D-29

Effect on Reimbursement

• Insurers will continue to adjudicate drug claims as they do today with their own policies and procedures

• Paid claims are the key metric for determining pooling– The insurance company has already adjudicated and

paid the claim—the presence or absence of the pool has no effect on this

• No impact to ASO and refund accounting policies

8D-30

Plan Sponsor

• Plan Sponsor: no further impact for the plan sponsor– Continues to have EP3– Continues to work as before with advisor/insurer

8D-31

Advisor

• Advisor: – monitor financial experience as always– Maintain awareness of EP3– Understand the differences between carriers regarding

pre-existing claim exclusions– Understand the differences in product offering

e.g., Different EP3 pooling points

8D-32

For Plan Sponsors and Advisors:

The story ends here.

8D-33

For Member Companies:

• The story continues– Industry pooling is invisible to everyone except CDIPC

and the carriers

8D-34

Industry Pool

• Carriers have created an industry pool for large drug claims

• Risk mitigation tool • The cost of pooled drug claims will be shared by

all participating insurers

8D-35

Different Pools for Different Types of Claims

• Eligible certificates will come from individuals not covered under seniors care, or other programs

(ON, AB, Maritimes, Territories)

• Enhances the current pooling protections in Quebec

• CDIPC will take Quebec pooling into account• Eligible certificates will come from individuals with

claims for drugs not on the provincial formulary

(Quebec)

• Eligible certificates will come from individuals with claims for drugs not on the provincial formulary

(BC, Manitoba, Saskatchewan)

8D-36

How the Industry Pool Works

• Claims are aggregated at the certificate level by calendar year

• To qualify for the industry pool, the family’s claims must exceed $50,000 (“initial threshold”) for at least 2 consecutive calendar years– Amounts exceeding $25,000 (“ongoing threshold”) in

the second and following years will be pooled

8D-37

Example:

• Carrier ABC• Group Policy 123• Certificate XXX

Calendar Year

Paid Claims for Certificate

Industry Pool

Amount in IndustryPool

2012 $50,000 No 0

2013 $50,000 Yes $21,750 

8D-38

How much goes to the pool?

Annual Total Paid Claims for a qualified certificate

CDIPC Pool Carrier

$25,000 0 $25,000

$50,000 $21,250First $25,000 is the responsibility of the carrier85% of the balance will be pooled

$28,250

$500,000 $400,000(Capped)

$100,000

$1,000,000 $400,000(Capped)

$600,000

8D-39

How is the Pool Split?

• Example: $1,000,000 in the pool

Carrier Paid Claims for all fully insured groups

% of Total paid claims

Carrier’s Share of Pool

AmtCarrier submitted to the Pool

Payment to/from Carrier from/to CDIPC

ABC Co.

$50,000,000 50% $500,000 0 Carrier pays $500,000 to CDIPC

XYZ Co.

$40,000,000 40% $400,000 $200,000 Carrier pays CDIPC$200,000

YY Co. $10,000,000 10% $100,000 $800,000 CDIPC pays carrier $700,000

Total $100,000,000

8D-40

Effect of Industry Pool on Plan Sponsors

• The industry pool has no impact on whether or not a carrier will quote

• The industry pool does not impact claim adjudication practices

• Even if a certificate hits the industry pool threshold amounts, there is no impact back to the policyholder

8D-41

Role of the Canadian Drug Insurance Pooling Corporation

8D-42

Governance and Administration

• Canadian Drug Insurance Pooling Corporation– Not for profit corporation– Day to day managed by Executive Director– Administers industry pool and ensures participating

insurers comply with EP3 and Industry Pool standards

8D-43

Governance and Administration

• By-laws and powers of the corporation comply with Industry Canada standards.

• The aspects of the agreement are overseen and managed by the Board of Directors– The initial Board is made of up 12 members plus

1 Ex Officio (CLHIA)

• All member companies receive information at an Annual General Meeting

8D-44

Governance and Administration

• Member companies interact under the direction of the pooling corporation– Working groups meet to ensure common

understanding of framework and to resolve day to day questions about the framework

– Corporation ensures competitive information is not shared and that companies retain their ability to determine business practices and processes

8D-45

Next Steps

• First official reporting to the industry pool is 2014

• Both the Initial and the Ongoing thresholds will be adjusted annually by the Board to reflect general drug inflation

8D-46

Risks and Benefits

Benefits• The industry pool mitigates the risk that all

insurers face with regard to large drug claims• Framework is designed to prevent groups from

being placed in a “bad risk” pool• Framework limits the amount of claim

experience used in the renewal rate calculation

8D-47

Risks and Benefits

Risks:• Practical application of the Framework may not

achieve the goals of the principles• Risk existed before the pools existed

8D-48

Short and long term effect on drug costs

• None anticipated• Existence or lack of pools not top of the list of

cost drivers• Pools should not impact plan design or

adjudication practice

8D-49

Summary

• Principles based• Mitigate financial risks• Two part pool

Website: www.cdipc-scmam.ca

8D-50