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Terese Rushton McGregor with her daughter is Katha, in wheelchair, and family in Blackfalds, Alberta on Wednesday, July 29, 2015. McGregor and her husband regularly have to to struggle with insurance companies over the cost of drugs ($120,000 per year) which are needed to combat a rare disease that afflicts Katha.

John Ulan

Every day, 10-year-old Katharina McGregor takes two white capsules with breakfast and two with dinner. Katha, as she is called, has a rare genetic disease and the pills have let her swim and sing and watch the movies she loves. But they come at a hefty price. The drugs cost $120,000 a year.

Her parents, Amory and Terese McGregor, have overseen the medication regimen ever since Katha was diagnosed at the age of seven with Niemann-Pick disease, type C. The condition means she can't properly metabolize cholesterol, so lipids build up in her liver, spleen and brain. The drug she takes, called Zavesca, is not a cure, but it can slow the progression of the illness and treat her symptoms.

Finding the money to pay for the pills has been a roller coaster ride for the family, who live in the town of Blackfalds, Alta., outside Red Deer. The insurance plan at Mr. McGregor's workplace, a steel pipe manufacturer, initially pledged to cover the drug claims with no limit. That brought relief since reimbursement of Zavesca isn't approved for this disease under Alberta's provincial health plan, in the way it is in Ontario, British Columbia and Quebec.

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Within six months on Zavesca, her parents say Katha went from being withdrawn and often wheelchair-bound to dancing and talking to anybody who walked by on her Make-a-Wish trip to Disney World. "It has been almost three years of her being almost a normal kid again," Ms. McGregor said.

But the McGregor family was left scrambling after the insurer pulled the plug one year into treatment, saying a financial cap had been hit. Swiss manufacturer Actelion Pharmaceuticals Ltd. agreed to give Katha the drugs at no charge, while her medical specialist appealed to the province for support. The family received some good news just a week ago, when Mr. McGregor's company's new insurance provider agreed to cover Katha for a year. But they worry about what will happen then.

"This shouldn't have to be another stress that we're dealing with," Ms. McGregor said. "It shouldn't be this big of a fight to get a drug that is life or death, especially when you have drug coverage."

The McGregor family is typical of many Canadians who are caught in a high-stakes game of hot potato with governments, drug makers, insurers and employers for the costly medications they need. The situation is expected to worsen as a growing number of Canadians seek promising new treatments not only for rare diseases, but also for late-stage cancers and chronic conditions, such as rheumatoid arthritis and high cholesterol.

These specialty drugs – in some cases near-miracle cures – make up an increasing proportion of the total dollars spent on prescription medication, which hit nearly $29-billion last year. That will put pressure on governments and businesses with health insurance plans, especially since Canada already has some of the highest prescription drug prices in the world. As Canada's growing population of seniors seeks medical treatment for chronic diseases and improved screening processes catch conditions earlier, there will be even more stress.

Pharmaceutical coverage in Canada is a patchwork system. Various levels of government pay for about 42 per cent of prescription drug costs, according to the Canadian Institute for Health Information. Provincial and territorial health plans cover drug therapy in hospitals under the Canada Health Act, as well as prescriptions for those in need, based on factors such as age, income, and medical condition. Ottawa covers two percentage points of the overall government share as the drug buyer for First Nations communities, prisoners and the military. About 22 per cent of all the money spent on medication is paid by individuals as out-of-pocket expenses. The remaining 36 per cent is paid for by private insurance, mostly through workplace benefit plans that support employees and their dependents.

All of these payers will feel the pinch of rising drug costs, and some provincial and territorial health ministers are now rallying for a national system that would negotiate lower prices and more evenly distribute pharmaceutical coverage. With a federal election less than three months away, the topic is likely to remain in the spotlight. But, so far, discussions about how it might work have largely excluded employers and insurers, through which billions of dollars are spent annually on drugs for millions of Canadians.

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Insurance companies such as Manulife Financial Corp. and Sun Life Financial Inc. administer thousands of voluntary company-sponsored health-benefit plans throughout Canada – only Quebec employers must provide some coverage. Businesses have long viewed this coverage as a critical investment in employee wellness, productivity and retention. But the steady increase in the cost of specialty drugs is beginning to spook some employers, leading to a quiet clampdown on the depth of coverage they offer. Insurers, too, are grappling with costs and a system that many say is at risk of becoming unsustainable.

"We've hit a bit of a wall on the financial side and it's pushing people to look for change," said Stephen Frank, vice-president of policy development and health at the Canadian Life and Health Insurance Association.

Some, like Steve Morgan, a professor in the school of population and public health at the University of British Columbia, say it is time the private sector found its voice in the debate over the future of drug coverage.

"One of the most important actors in that dialogue is Corporate Canada," said Mr. Morgan, who has spent 20 years studying pharmaceutical policy. "I don't mean the insurers; I mean the employers – the manufacturing sectors, the tech sectors, the resource sectors, the transportation sectors in this country – the biggest employers, who bear the brunt of the current burden in terms of private costs of medicines, need to be part of the dialogue and, to date, they have not been."

From blockbuster to niche

Before the rise of pricey specialty drugs, there was the blockbuster drug boom. Big-name pills such as cholesterol reducer Lipitor, blood thinner Plavix and impotence buster Viagra began filling medicine cabinets in the late 1990s, each aimed at common ailments.

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While they didn't have exorbitant price tags, each of these blockbusters generated more than $1-billion in total revenue for their drug makers. But patents on these medicines have been expiring, clearing the way for low-cost generic versions. That has left pharmaceutical companies searching for new revenue sources. Enter the next wave of treatments: specialty drugs and so-called biologics – treatments made from living cells rather than drugs that have been chemically synthesized.

These niche medications accounted for just 2 per cent of the total number of drug claims made to private benefit plans last year, according to a report by Express Scripts Canada, a health benefits management company that works with clients such as insurers, employers and governments to manage the costs and effectiveness of benefit plans. But the amount of money spent on them has ballooned to 26.5 per cent of last year's total. Continued double-digit annual spending increases could push specialty drugs up to 35 per cent of the total by 2020, the research suggests. The first $1-million drug claim landed on insurers' desks in 2009, and now industry estimates indicate that about 60 per cent of new drugs in the pipeline are high-cost specialty products.

Two trends complicate the picture for specialty drugs. First, they are difficult to replicate, meaning that when alternative treatments come to market, they don't offer much cost savings. Second, drugs that treat more common illnesses, such as autoimmune diseases, are now coming to market at prices once reserved for rare conditions. For example, Gilead Sciences Inc.'s Harvoni, which treats hepatitis C, can cost up to $71,000 for a 12-week cycle, or double that if the condition is more advanced. Bills could pile up quickly with an estimated 242,500 Canadians living with the disease. Insurers are also closely watching the development of a new kind of high cholesterol medication that could move the industry standard from pills that cost a couple of dollars each, to an injectable treatment that costs thousands.

Predicting how high prices could climb on the next wave of medications is a challenge. "There are so many variables, all the way through the approval and adoption process," said Mark Rolnick, assistant vice-president of product development for the group benefits department at Sun Life. "I think clients are starting to get a sense of, 'wow, where is the ceiling here?'"

Spreading the risks

Canadian insurers and governments are experimenting with ways to reduce the sting of high-cost claims.

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Workplace health plans generally fall into two buckets. The majority are insured plans, where an employer pays premiums to an insurance company to administer the plan, pay benefits, and take on the risk that claims will exceed estimates. A smaller proportion of plans, often at larger companies with many employees, are structured so the employer takes on the responsibility of paying claims with its own funds. In the latter scenario, employers pay a third-party insurer to administer the plan and then pay for some "stop loss" insurance, which will reimburse them for outsized specialty drug claims – but that can lead to major premium increases. Still, more than half of workers with private health care benefits are covered by the second type of plan.

The insurance industry began to spread the risk of the biggest claims in the fully insured plans they cover through a pooling system launched in 2013. The most expensive claim in the pool right now is $1.2-million, and there are seven or eight worth more than $500,000. "We're getting some experience on what the growth of those upper-end claims are like," said Mr. Frank of the insurance association. "But it's not a solution. It spreads the costs, but it doesn't bring the costs down. We need to be bulk purchasing to bring prices down."

That's the route taken by provincial governments, which boosted their buying power by creating the Pan-Canadian Pharmaceutical Alliance, or PCPA in 2010. That framework allows provinces to jointly negotiate drug prices with manufacturers. At the start of this year, the PCPA had whittled down prices on 49 brand name drugs and 14 generics. In 2013, there was also a government-led crackdown on the pricing of several popular generics. But these lower prices don't extend to the private sector, which almost always pays substantially more for drugs.

The federal government is now poised to join the PCPA. But the insurers are still waiting for their invitation. "We've been asking to be at the table," Mr. Frank said.

Insurers have also been on the fringes of the recent debate over whether Canada should create a national pharmacare program.

Several provincial and territorial health ministers, led by Ontario Health Minister Eric Hoskins, said the topic should be in the spotlight during the federal election campaign. In June, eight ministers met to discuss the costs, benefits and challenges of universal access to drugs. Mr. Hoskins said devising such a system would be a challenge, although the private sector would be "critically important."

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But not everyone agreed that the private sector should be consulted. "Some participants at the roundtable expressed the view that a proposal for a pharmacare program should be developed in isolation from the private sector," said a private summary report by government agency Health Quality Ontario.

"It just happens that, in the last few years, this has really become a hot-button issue," Prof. Morgan from UBC said. "The costs of medicines have reached a point – and they arguably reached a point 10 years ago – where the burden on employers and unions that negotiate extended health benefits for the private sector has become one that they're asking questions about: How do we sustain this?"

In a recent article in the Canadian Medical Association Journal, Prof . Morgan ran some numbers for a universal pharmacare system that would be funded entirely by the public sector. It suggests significant savings are available for companies at a low added cost for governments. The private sector would save $6.6-billion in the study's worst-case scenario, and up to $9.6-billion in the best-case scenario. But costs to government would only increase by about $5.4-billion in the worst case, or could even result in $2.9-billion in net savings.

Changing benefits

In the meantime, employers and insurers are looking for their own ways to cut costs.

"Traditionally, drug plans have been relatively open – many plans have covered virtually all drugs that require prescriptions; they often have been reimbursed at 100-per-cent coverage," said Barbara Martinez, practice leader of drug benefit solutions at Winnipeg-based insurer Great-West Lifeco Inc. Now, employers are tightening their belts, changing the benefits on which Canada's greying work force relies in a few key ways.

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More employers are looking for ways to share drug costs with employees. They're doing so by restricting reimbursement to 80 per cent of prescription costs, adding deductibles or having employees share in premium payments through paycheque deductions. While 40 per cent of Great-West's clients still offer full coverage of drugs, Ms. Martinez says more of them are thinking about changing that. Insurance consultants are also recommending caps to protect companies and insurers from high-cost claims.

Another option is to push more plan members toward generic drugs whenever possible. The private payers have been slow to embrace these lower-cost alternatives, in part because patients don't like to switch from medications that they've been on for years, even for alternatives with the same key ingredients. Patients have less choice under government health coverage.

Employers are also embracing case management services that monitor specialty drug use, including teaching people how to give injections at home and ensuring medications are taken properly. This is increasingly important as more specialty drugs that were once administered in a hospital or clinic can be taken at home, shifting the costs from the public sector to private payers.

Other cost control efforts include making sure plan members apply for government assistance where possible and moving them to preferred pharmacy networks where dispensing fee discounts have been negotiated.

Manulife created a new role for a director of pharmaceutical relations this year, hiring Laureen Rance to help address the cost and accessibility of prescription drugs. "What we are doing with the position is announcing to the pharmaceutical manufacturers we want to talk and engage with you," Ms. Rance said.

Durhane Wong-Rieger, head of the Canadian Organization for Rare Disorders, said she's "terribly concerned" about the direction private drug plans are going, and says small employers are already struggling. She's seen a group of employees give up their dental and eye insurance so one struggling staffer could get therapy. "Most of the other times, and I just had it happen again, the patient quits work," she said. One recent patient "said 'It's not fair for everybody else's premiums to go up so much to cover my drugs.' Now she's unemployed and trying to get coverage under a public plan."

'Radically different' options

With each nip and tuck to workplace plans, Corporate Canada must weigh its responsibility for the health and well-being of employees. But most companies have yet to take a position on pharmacare.

"The average employer is not paying that much attention to it yet," said Martin Chung, assistant vice-president of strategic health management at Waterloo, Ont-based Equitable Life Insurance Co. of Canada. Mr. Chung, who is also a qualified pharmacist, estimates that, within two to five years, inflationary pressures around specialty drug use will force employers to look at radically different options for their drug benefit plans. "It's going to be a dramatic difference in what they currently provide as coverage."

Michael Biskey, chief executive officer of Express Scripts Canada, predicts that future private drug plans will go the way of pension plans, where protected and guaranteed future benefits are replaced with annual contributions toward employees' retirement saving plans. His hypothesis is that "employers are going to start saying 'Okay, there's a cap on your employee benefit,'" he said. "I would call it the beginning of a crisis in the private sector."

There are many other players who have yet to join the debate, such as drug makers, distributors and pharmacies. Each is facing its own pressures and demands.

But blowing up the whole public-private system is not the only way to get lower drug prices, insurance companies insist.

"The simplest and quickest way to deal with [high drug prices] is to start leveraging our market – both public and private – to start bulk-purchasing drugs. And there's nothing within the current system that would stop us from doing that," Mr. Frank said. Such a solution could include adding the insurers to the existing PCPA program.

Prof. Morgan said the public sector should play a dominant role in drug coverage by 2020, similar to the systems in Britain and Australia. As for what insurers could do to replace the loss of their drug benefit businesses, he said: "[Insurers] might expand coverage for dental care, or vision care or physiotherapy – the list goes on," he said, adding that many Canadians also need improved access to mental health services.

Back in Blackfalds, Alta., Ms. McGregor said she is grateful for the support Katha has received from their community and that her lifeline has been secured for another year. "This medication gave us the chance to have the diagnosis and have our daughter," she said.

But the public and private sectors need to be better prepared to help other families who faces similar challenges, she said. "It should be on some kind of drug program – no one can afford this. And I realize that it might be years before someone else shows up with this disease and needs this medication, but at least they wouldn't have to go through the fight we've gone through."

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