Protecting Your Drug Plan from Rising Costs

A major concern for employers looking to control their costs is health and dental benefits. One of the fastest rising health care costs for employers is drug plans. With the advances in medicine, there seems to be new drugs every other month. Employers have to make the tough decision of balancing cost control with the wellbeing of their employees. Here are four strategies for plan sponsors to consider.

Mandatory Generic Substitution

Mandatory generic substitution is similar to generic substitution: the plan sponsor will cover the cost of the generic drug equivalent; the plan will only cover brand name drugs if your doctor prescribes it. Mandatory generic substitution takes it a step further: the plan will only cover generic drugs, even if doctor of your employee prescribes a brand name drug. This can lead to big cost savings for plan sponsors: the average cost of generic drugs is 25 per cent less costly than the brand name equivalent.

Deductible

You probably already know what a deductible is – it’s the expense amount an employee must incur before he or she can be reimbursed for a drug expense covered by your drug plan. While most drug plans have a deductible, there are different variations of the standard deductible you may want to consider.

Under a calendar year deductible, an employee’s deductible is based on drug expenses incurred between January 1st and December 31st. A second type of deductible is the per prescription deductible. Under the per prescription deductible, the deductible limited is based on the amount of prescription drugs an employee purchases.

A lot of employers make the mistake of assuming their deductible is set in stone, when in fact it’s fairly common to increase the deductible on a yearly basis. Employers can make a request to their insurance provider to update the insurance contract as required. Employers often change their deductible to reflect rising drug costs and inflation.

Co-Insurance

A large number of employers are leaving money on the table by not introducing a percentage co-insurance. A percentage co-insurance is a good way to share costs with employees. Although a co-insurance won’t cost the average employee very much, it can lead to big savings across the board.

The typical drug plan has a coinsurance between 80 per cent and 100 per cent. A percentage co-insurance as an effective way to control costs because it raises the awareness of employees about drug prices. Employees will be more likely and willing to shop around for the lowest price and look for generic substitutes, which is money back in the pocket of the plan sponsor.

Coordination of Benefits

Not to be confused with co-insurance, coordination of benefits is when an employee is covered by your drug plan and also has coverage under his or her spouse’s plan. Coordination of benefits ensures the employee isn’t paid twice for claims.

While coordination of benefits isn’t anything new, cost savings can arise from eligibility. When a new employee enrols in your benefit plan, it’s important to ask if their spouse has access to his or her own drug plan. By taking this simple question, the cost savings can add up over time.

Written by Sean Cooper

Sean Cooper is a Pension Analyst with a global pension and benefits consulting firm. He is a financial journalist with articles featured in major publications, including the Toronto Star, the Globe and Mail and MoneySense. His areas of expertise include pensions, retirement and health benefits. He has made several media appearances, including Bell Media, Newstalk 1010 and CTV. Follow Sean on Twitter @SeanCooperWrite and check out his personal finance blog at www.seancooperwriter.com.

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