How specialty drugs are redefining employee benefits

The cost of prescription drugs has become one of the biggest drivers of employee benefit plans, accounting for 30 per cent or more of the total expenses in employee benefit plans in Canada. As benefit costs continue to rise and workplace health needs grow more complex, employers are under increased pressure to balance affordability with sufficient coverage for their employees. While employers are familiar with the steady costs of traditional medications, specialty medications are reshaping the landscape.

High-cost prescription drugs are often used to treat specific, complex, and chronic conditions, targeting conditions like autoimmune disease, cancer, multiple sclerosis, cystic fibrosis, rheumatoid arthritis and obesity management, requiring special handling, storage, administration, and monitoring. Yet, while specialty drugs can have a significant impact on the quality and longevity of life, they come at a huge price to employers and their overall benefit plan package.

When employee benefits were first conceived, drug plans mainly covered high-frequency, low-cost medications like antibiotics and blood pressure prescriptions, but starting in the 1990s, they were forced to adapt to low-frequency, high-cost medicines for chronic diseases like cancer or conditions like multiple sclerosis.

Now, the industry is encountering a ‘middle ground’ where there is growing demand for common, yet relatively high-cost and high-frequency medication. Unfortunately, an increase in the use of a drug does not lead to a reduction in price, as there are no economies of scale. As volumes go up, the total cost goes up proportionately, which directly impacts premiums.

Specialty drugs are no longer fringe within private Canadian drug plans. According to data from the Canadian Institute for Health Information (CIHI), public drug spending climbed to $18.4 billion in 2023, a 6.7 per cent rise over 2022. Medications costing over $10,000 per year make up nearly one-third (32.8 per cent) of total plan spending, despite being used by only a small percentage of claimants. Between 2018 and 2023, private plan drug costs surged 14.1 per cent year over year, propelled largely by the “drug-mix effect,” which increased the use of higher-cost drugs.

Ozempic (semaglutide) is an example of this. The drug has become a brand name for diabetes treatment and is extensively used for weight loss in North America, Europe, and Asia. Beyond its popularity and buzz, the numbers speak volumes. Ozempic drove a $662 million public-sector spend in 2023 (up from $434 million in 2022) and accounted for 6.6 per cent of total eligible drug spend under employer plans.

As claim costs rise, premiums must follow. Medium-sized plans (100–999 claimants) already have the highest average annual cost per claimant (around $909–$931 in 2023), compared to large plans (approximately $807) or small ones. Unlike large corporations, mid-sized companies lack the extensive workforce to absorb significant financial setbacks. Although stop-loss insurance or substantial pooling can mitigate risks, these solutions invariably add costs to a medium-sized plan, which already contends with elevated risk exposure.

Specialty drugs like gene therapies can cost half a million to a million dollars each, creating potential breakthroughs but massive financial burdens. Even when they are effective, the ROI is long-term, not immediate. Moreover, the benefits of these drugs and therapies often accrue to the public system, rather than directly to the employer.

For employees, the barriers are high: financial (out-of-pocket cost), administrative (prior authorizations or coverage restrictions), or eligibility-related (off-label vs. approved use). Even when a drug exists, access is not guaranteed, which can lead to lower productivity, absenteeism, and retention issues. While specialty drugs can be a big-ticket expense, they can have a substantial impact on employee wellness and retention that employers must consider.

Gone are the days of employee benefit plans just covering inexpensive, everyday prescriptions. The landscape has shifted to an era where life-changing drugs come with price tags that can destabilize entire budgets. The challenge for employers today is finding a way to balance innovation and access with sustainability, supporting employees’ health without breaking the system.

Specialty drug costs will only continue to rise as medical technology and innovation accelerate. Every few years, new therapies enter the market with higher price tags and broader patient demand. To keep pace, employers must remain agile and flexible, adapting their benefit plans to manage costs while still supporting the health and well-being of their employees.

Employers can use plan maximums, stop-loss pooling, and utilization management to protect many claimants without high costs, while containing the costs associated with the few claimants with specialty drug needs, but potentially leaving them without affordable access to the medications they need. In the long run, collaborating with insurers and even the government to share the financial burdens of specialty drugs could go a long way.

Gary Walters is the chief actuary at GroupHEALTH Benefit Solutions. He has over three decades of diverse actuarial experience in the employee benefits insurance and reinsurance sectors. He has pioneered innovative financial solutions and advised on insurer interactions with public health plans and drug management strategies.