EP3, industry drug pool, CDIPC—needless to say, the insurance industry has always had a lot of insider lingo. These new terms—combined with some complicated underlying concepts—can be seriously hard to get our heads around. Case in point: the insurance industry’s drug pooling framework where recurring high-cost drug claims are brought together to allow movement of business, increase plan sustainability, and mitigate risk. Definitely complex. And the environment is set to get even more complicated with more high-cost drugs on the horizon. That’s why we decided to take a deep dive into industry drug pooling including touching base with some real experts who are right in the middle of it.
First, here’s how the industry drug pooling framework came about
You may have been hearing the term “industry drug pooling” thrown around since 2013. That’s when the Canadian Life and Health Insurance Association (CLHIA)—the not-for-profit membership organization that represents the insurance industry—worked with member insurers to establish a framework for insurers to pool recurring high-cost drug claims. Hence, the drug pooling framework was born so that by reducing the impact of recurrent drugs, insurers could provide plan sponsors (with insured drug programs) with more protection from a one-off large claim and to maintain their ability to move their business if desired. In addition to bringing the drug pooling concept to life, the CLHIA established the Canadian Drug Insurance Pooling Corporation (CDIPC) to administer it for the 24 participating Canadian group health insurers—essentially the entire industry.
Ironically, the industry thought that high-cost drugs were daunting back in 2013—little did they know the degree of new high-cost drugs that would soon be coming down the pike. In fact, as Gary Walters, principal consultant, Cedar Hill Group Inc., explains, the beginning of the concept goes way, way back. “Actually, it all started where all great ideas begin—after-hours shop talk. As a client and I (then a reinsurer) watched the final Euro soccer match in a sports bar in 2004, we started discussing our concerns regarding how the industry would be able to handle the impact of high-cost drugs starting to enter the market.”
Gary adds, “Sustainability was also on our minds as it was becoming clear that the government’s national pharmaceutical strategy wasn’t going to address catastrophic drugs any time soon. The more we talked, the more we realized that sharing the risk associated with high-cost drugs could offer some relief. Over the next few years, it was a concept that started to pick up steam, and then in 2009, we found that front-line insurers were receptive to the drug pooling concept at a CIA [Canadian Institute of Actuaries] meeting. Next, the CLHIA established a task force to start working out all the details.”
The framework includes two main components
As an overall concept, the industry drug pooling framework is logical; it makes perfect sense. Where the brain strain begins to set in is regarding all the intricacies of applying the framework. The good news is that as a plan sponsor—although it’s important to have a solid understanding of what drug pooling means for your plan—fortunately, figuring out the details is up to your plan advisor and insurer. Number crunching and running scenarios is their thing (unbelievably, even their passion). So here are the “important-to-know” aspects of the framework to keep in mind as your advisors and insurer work through the fine details day to day.
The framework includes EP3s…
- Each of the 24 participating insurers, including GSC, places eligible high-cost drug claims from all of their fully insured group drug plans into their own proprietary pools called extended drug policy protection plans or EP3s. Catchy, right? This establishes an arrangement that provides pooling protection. The pooling level is negotiated between each plan sponsor and the insurer.
- It’s important to note that, in keeping with the principles set out by CDIPC, to help maintain sustainability even with recurring high-cost claims, insurers must set premiums for plan sponsor’s fully insured drug plans without including any pooled high-cost drug claims experience. So the premiums for your EP3 pool do not depend on your claims from that pool.
- In addition, in theory, the idea is that the EP3 approach remedies the situation in the past where plan sponsors with recurring high-cost drug claims may have had difficulty changing insurers because the high-cost drug claims were still connected to the plan sponsor’s group, painting a picture of bad claims experience. This is the CDIPC principle of transferability.
And the framework also includes an industry drug pool…
- When the costs exceed the initial threshold specified by CDIPC for two consecutive calendar years, the industry drug pool supports the EP3 by removing much of the effect of high-cost recurrent drug claims.
- In the background, the 24 participating insurers spread the cost of the high-cost claims among all of the insurers by putting the claims into an industry-wide drug pool administered by CDIPC—this spreads the risk of recurring high-cost claims across all of the insurers. You can think of it as an industry-sponsored reinsurer.
Although EP3s and the industry drug pool are distinct—in that the EP3s are internal to each insurer, whereas the industry drug pool is industry-wide—both are necessary. As a result of the two components, plan sponsors shouldn’t have less reason to resort to restricting reimbursement for high-cost drugs. And in turn, plan members should continue to receive coverage even when their plan is incurring ongoing high-cost drug claims.
Gary explains that “while working through the drug pooling concept, we realized that affordability for plan sponsors with high-cost drug claims really boiled down to dealing with recurrent high-costs claims, and that there is also a reputational risk associated with not being able to provide plan members with new life-sustaining drugs or with plan sponsors no longer being able to continue their drug plan due to the impact of an ongoing high-cost claim on their premiums.
“This led to the EP3 concept as a way to protect plan sponsors from the misfortune of having a high-cost recurrent drug and the consequent impact on their premiums and thus, manage the reputational risk. Of course, we also realized that recurring claims could significantly impact EP3 pooling, particularly for smaller insurers, so establishing an industry drug pool was also necessary. For large insurers, the industry pool was necessary to allow for the EP3 pools, and so was considered the price of mitigating reputational risk across the industry.”
Drug pooling in practice today
Dan Berty, executive director, CDIPC, thinks that for the most part, the framework is doing what it was intended to do. “At the industry level, the industry-wide drug pool is working behind the scenes to share the costs of high-cost drugs across all 24 insurers. And at the individual-insurer level, EP3 pooling is working well in terms of creating a greater degree of consistency regarding managing the costs of drugs below the industry pool threshold, whereas prior to CDIPC, insured plans were tackling things in multiple directions. There are certainly opportunities for fine tuning, but overall, at the two levels, the framework is working well.”
In terms of bumps along the road, Erin Crump—our very own GSC director of pricing & corporate analytics—who works day to day with the framework, feels that a main issue is misunderstanding. “There is still a lot of confusion at all levels among advisors, brokers, insurers, and plan sponsors. Communication is definitely a trickle down from the insurer because a plan sponsor’s understanding depends on what information they get from brokers and advisors who get their information from the insurers. If the broker or advisor doesn’t explain it well—or doesn’t fully understand it—the plan sponsors are also confused.”
Gary agrees and feels that “one of the mistakes we made was leaving the explanation of everything solely to the insurers on an individual company basis where communicating the details of the company’s specific EP3 overshadowed communicating the general principles. It’s led to a lot of confusion and misunderstanding. For instance, although EP3 is the most important aspect for plan sponsors to understand, the focus seems to be more on the industry drug pool, which is completely behind the scenes and doesn’t impact the relationship between plan sponsors and insurers.”
Overall it seems that some insurers did a good job with communication, and others less so, but as Dan explains, “Some insurers are more heavily weighted on a fully insured book of business so their emphasis was to tell the drug pooling story because it’s a big piece of what they do. Whereas others have much less of a weight on fully insured business, their business is more distributed in the ASO and refund market, so although pooling is important, it’s less of an emphasis.”
In addition, Dan elaborates, “In any case, most plan sponsors aren’t in the business of understanding the depth of insurance, they rely on the broker and advisor community as a proxy from the insurer. However, it’s pretty clear that understanding pooling for brokers, advisors, and plan sponsors is more like a five to six out of ten rather than, let’s say, an eight out of ten. But it’s a complex story, and for a broker or advisor it’s just a small piece of everything else.”
Dan also touches on the principle of transferability explaining that he feels it is being achieved but only to a degree. “There is enough anecdotal evidence from brokers and from off-line insurer discussions that suggests plans with a certificate with very large claims don’t typically move, or at best, it is highly unusual. It seems that insurers are not overly interested in providing quotes when claims are in excess of $250,000. Thus, I’d characterize transferability as working to a degree but not without challenges.”
Fortunately, regarding communications, Dan’s role has been expanded to include an emphasis on providing education more broadly on what the framework is all about. For example, he feels there is a lot of misunderstanding regarding the rising costs of pooling charges. However, currently CDIPC doesn’t have access to the data; it’s up to the insurers to tell the story of their cost trend. However, Dan explains that CDIPC is going to try to compile some of that information so that CDIPC can show at the industry level the data that backs up why costs are what they are.
“For plan sponsors these costs essentially represent the cost of the claims within the EP3, but because the financials behind the framework are very complex, plan sponsors may not necessarily think of the pooling charges in this way,” Dan explains. “For instance, in terms of costs, it’s helpful for plan sponsors to understand that there isn’t a standard starting point for EP3 pooling; it typically starts between $10,000 and $15,000, then enters the industry drug pool at the threshold of $32,500. For the first year of a high-cost drug claim, amounts over the EP3 pool’s starting point are at least partly pooled in the plan’s designated EP3 pool. That said, the insurer is prohibited from experience rating the plan. Then in the second year anything from $32,500 to a maximum pooling amount of half a million dollars is covered by all insurers through CDIPC. So even in year two—and then beyond year two—there is the cost of covering drugs in this range, which is shared by all plan sponsors. And now there are many more drugs that fall into that category.”
Interestingly, even with more communication and even if the framework were crystal clear to everyone involved, Gary feels that it’s important for the industry to recognize that drug pooling on its own was never intended as a long-term solution to very high priced drugs, it just buys us additional time to develop a more comprehensive solution.
Not a long-term solution
Even given that the number and dollar amount of high-cost drugs has far exceeded what anyone could ever have expected way back when discussion about the framework began, Gary explains that drug pooling should only ever be considered part of the solution. “The bigger question is: do high-cost drugs represent a societal issue that everyone needs to get involved in? I would say yes. Insurers, advisors, plan sponsors, government, health care prescribers, and the pharma industry—we all need to collaborate because we certainly won’t find solutions by all going in different directions. We need to talk inclusively and constructively.”
Dan agrees, explaining that, “From what I can see, without the framework some plans would have had to halt coverage, which obviously would have had negative effects. So the framework has met its intent in that regard—and it will continue to do so—but the high cost of drugs is definitely a bigger societal issue that, as time goes on, is becoming more urgent to tackle.
Erin also feels that there is a lot more work that needs to be done beyond the framework: “Drug pooling doesn’t make plans sustainable in the long term, and we don’t want plan sponsors limiting their plans with strategies like drug caps. That hurts the most vulnerable plan members in their population. So we need to take a multi-faceted approach.”
So what has our plunge into the industry drug pooling framework tell us for the future? The final words are really creativity and collaboration.
Canadian Drug Insurance Pooling Corporation website, retrieved March 2017: http://cdipc-scmam.ca/
Canadian Life and Health Insurance Association website, Canadian Drug Insurance Pooling Corporation, retrieved March 2017: https://www.clhia.ca/domino/html/clhia/CLHIA_LP4W_LND_Webstation.nsf/page/1E92C4ED60A4002F852579CA00678818?OpenDocument
Canadian Life and Health Insurance Industry Launches Industry Initiative to Protect Canadians’ Drug Coverage, Canadian Life and Health Insurance Association, April 3, 2012, retrieved March 2017: https://www.clhia.ca/domino/html/clhia/clhia_lp4w_lnd_webstation.nsf/page/B573ED1EB3CE940685257EAC0065911C