February 26, 2012

Pharmacare 2020

Current and Future Role of Private Insurance

1

Current role of private insurance in healthcare

3

Private coverage supplements public system

• Supplementary health insurance takes over where government coverage ends and accounts for roughly 14% of total healthcare spending in Canada

2011 Total Direct Health Spending ($27.1B)

Private Supplementary Health ($21.2 B)

Hosp Accom ($1.5B)

Vision Care ($1.0

B)

Travel Ins ($618 M)

Paramed

($1.2 B)

Dental Care ($6.8B)

Drugs ($10.1B)

Income Replace't ($5.9 B)

STD ($1.2 B)

LTD ($4.7B)

Drugs are managed as just one component (roughly 37% of total) – employers balance all of their benefits to attract and retain employees, as well as to ensure a

healthy and productive workforce

NB: roughly $1.1B of additional spending on AD&D, CI, Creditors DI etc.

4

Complex and siloed system to manage within

• Insurers operate a national service within a siloed and heterogeneous government system that has at least 14 different government drug plans

• Siloed provincial system is true for most services offered under a supplemental health plan. For example:

– Paramedical: massage therapy, chiropractic, physiotherapy, osteopaths etc. may have different provincial standards depending on whether regulated

– Dental: 12 different provincial dental fee guides and colleges– Hospital rooms: private/semi private rates vary by provinces and for Ontario vary by

hospital – Etc

• This drives complexity and cost for insurers and employers – particularly those that deal in all provinces and jurisdictions

• The private insurers are highly flexible and sophisticated as a result and will fill in gaps to whatever public system is in place

5

Drug coverage: importance of private varies by province

• Relative importance of private insurance increases from west to east as it is a function of the provincial plans in place in each province.

Saskatc

hewan

Alberta

Manito

ba

Quebec

British

Colu

mbia

Onta

rio

Prince

Edward

Isla

nd

Nova S

cotia

Newfoundla

nd

New Bru

nswick

0.20

0.30

0.40

0.50

0.60

Ratio of Private Payers Costs to Total Costs

Source: CLHIA, CIHI

Drug Coverage

Dramatic Change: Back and Front Office

7

Back – office: outsourcing and consolidation • Today in excess of 80% of drug claims now processed electronically; any remaining paper claim

adjudication is also outsourced

• This has commoditized drug plan adjudication and allowed insurers to outsource this activity to PBMs who have significant scale and expertise in IT

• Interestingly, many public plans leveraging same platforms

Prov of Ontario

Sun Life

GWL

Desjardins

ManulifeNIHB

Prov of Alberta

Prov of N.S. & NB

I.A.

** NB: Drugs only and select insurers shown here for illustration

8

Front-office changes: active management of plans• All carriers are actively promoting numerous drug plan management solutions to clients. For

example:

– Promote / require generic substitution and managed formulary designs

– Preferred Provider Networks

– Cost controls at point of service – maximum drug pricing, limitations in mark-up, frequency of dispensing (90 day for generic)

– Prior authorization - right drug, right time

– Case management – including health coaching

• As January 1st, the industry's Canada wide drug pooling solution is in effect

– Unique in the world and likely Canada's largest pool of drug risks

Employer Responses: Why not more pick-up?

• Fundamental changes, like those implied by active drug plan management strategies, have direct employee impacts and are difficult

• In current environment where salary increases are capped, lay-offs etc. employers reticent to touch benefits

• Economic and legislative environment has required focus on other significant financial issues (i.e. pension liabilities) as employers have taken a shorter term focus

• Many industries have collective bargaining agreements that cannot be changed easily

• Recent cost trend has been more moderate – taking off some of the immediate pressures on firms

• There is not full awareness or understanding of future cost projections

• BUT: 28% of employers surveyed in late 2011 in the Sanofi Canada Health Care Survey, were considering making reductions to prescription drug benefits due to cost

10

Net of it all: Very strong record on cost

• Misperception that insurers are poor managers of cost relative to public plans

• Private insurers have as good or better track record at managing overall drug costs in Canada

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

0.0

100.0

200.0

300.0

400.0

500.0

600.0

Private vs Public Drug Cost Growth (1990 - 2009)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

50.0

100.0

150.0

200.0

250.0

Private vs Public Drug Cost Growth (2000 - 2009)

2005 2006 2007 2008 200985.0

100.0

115.0

130.0

Private vs Public Drug Cost Growth (2005 - 2009)

Source: CIHI

Future role of private insurance industry in Canada

12

The optimal system will be a mixed system of private and public that leverages the strengths of each

Private insurers will continue to play a role in drug coverage in Canada

13

Relative strengths of public and private providers

• Neither a purely public or purely private solution will lead to an optimal pharmacare system

• The optimal system, will incorporate the strengths of each

Private Market Solutions Public Market Solutions

Highly responsive and adaptive to users and changes in the market

Ensures universality

Innovative and risk taking Legislative and regulatory making authority

Provides choice to individuals Can set minimum standards

Quick, national solutions "Democratic"

Cost effective Cost effective

Summary of key points

15

Summary• Insurers operate national solutions within a heterogeneous and siloed Canadian system

– This increases costs and complexity for private insurers and employers

• Rapid change is occurring in the private insurance market – both on the back office and front office

• Private insurers have excellent track record of meeting patients' needs and managing of costs

• The optimal system for Canadians going forward will be a mixed system that leverage the strengths of both the public and private sectors