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Posted by Louise Gagne, FICA, FSA, October 23 2015
Generic Substitution: Can You Afford to Do Without It?

Drugs are increasingly expensive and insurance premiums go up every year. Several employers have started using traditional means to limit increases (lower reimbursement, transferring part of the premium to employees, etc.) but they still are reluctant to implement effective ways of controlling costs, beginning with generic substitution. Keep reading to learn more about this subject.

Generic substitution consists in reimbursing the cost of the generic drug even if an employee chooses to purchase the brand name drug, the difference coming out of his pocket. In some plans, the substitution clause entitles employees to purchase the branded drug at no extra cost for them when “no substitution” is written on the prescription ; in other plans, only patients who experience measurable adverse effects with the generic may keep taking the branded drug without having to pay the differential (mandatory generic substitution).

The main concerns expressed by plan sponsors to explain their reluctance to apply generic substitution have to do with the quality of the drugs and the fear of upsetting employees who will be required to obtain new prescriptions or try new drugs. An insufficient knowledge of the generated savings also contributes to slow down the introduction of generic substitution. Although the gap has narrowed, Quebec is still lagging behind other provinces in terms of generic drug use (55% vs. more than 60%).


Generic drugs are produced using the exact same active ingredients and formula as the brand name drugs; the only difference lies with non-medicinal ingredients. They are of equal quality and have the same effect on the body as their branded equivalent.

Pharmacists have the right to substitute a generic for a branded drug. Therefore, there is no need to return to the doctor’s office to get a new prescription. Also, developing the habit of asking the physician to prescribe the generic whenever possible is another way of avoiding questions at the time of purchase.

In addition, the savings are increasingly compelling. In Quebec, the price of generic drugs listed on the RAMQ list is generally 18% to 25% lower than branded drugs (price of ingredients). After factoring in the pharmacist fees and profit margin, the difference remains substantial, often by a two-to-one ratio. Without a generic substitution policy, the employees have much less incentive to choose the generic, as the major part of the drug cost (80% to 100%, depending on the insurance contract provisions) is reimbursed by the insurance plan. Therefore, the plan absorbs the price differences between the two types of drugs, affecting the premiums, as they are based on total claims.

Other recent developments are supportive of generic substitution. First, the government is finally allowing private plans to reimburse drugs based on the cost of the equivalent generic instead of the amount claimed, a practice used by the public drug insurance plan (RGAM) since its inception in 1997. This change will become effective in October 2015. Private plans with no substitution clauses will derive no benefit from this new rule (see example in sidebar). Moreover, the RAMQ has shifted from accepting “no substitution” prescriptions to mandatory generic substitution in April 2015. This change reflects a major trend throughout the industry, both public and private, towards capturing the savings related to generic drugs. Finally, an increasing number of very expensive biological and specialty drugs are coming on the market, and any measure aimed at reducing the total cost of drugs will make room in employers’ budgets to pay for them.

In conclusion, generic substitution is a means of controlling drug costs that provide savings for everyone without compromising treatments. By communicating these facts to employees, it is possible to minimize inconveniences, questions and doubts when transitioning to a generic substitution clause; this communication could even be a first step towards such a transition. This trend is here to stay and now extends to all group insurance market players. Moreover, the steady introduction of expensive drugs will force plan sponsors to make difficult choices. Why not start now? Can you afford to do without generic substitution?

As an example, let's analyse this scenario: 

  • Cost of branded drug: $50
  • Cost of generic drug: $15
  • Drug reimbursement level under the contract: 80%*
Before october 2015 : Member chooses ORIGINAL
   Plan with substitution  Plan without substitution
Drug cost $50 $50
Reimbursement Max (80% of $15 or 66%** of $50) = $33 80% of $50 = $40
Cost for member $17 $10


After october 2015: Member chooses ORIGINAL
  Plan with substitution Plan without substitution
Drug cost  $50 $50
Reimbursement Max (80 % of 15 $ or 66 % ** of $15) = $12  80 % of $50 = $40
Cost for member  $38  $10

 * Depends on the insurance contract in effect

**Minimum reimbursement required by the RGAM

In this example, the amount saved by the plan with substitution vs. the plan without substitution will be $28 (reimbursement of $12 vs. $40) instead of $7 ($33 vs. $40) as of October, and the difference will be borne by the member. However, if the member purchases the generic instead of the branded drug, it will only cost him/her $3 (80% of $15 reimbursed) in all cases.

Louise started her career at Blue Cross before working as a Senior Advisor for a large actuarial firm for more than 15 years. Fellow of the Canadian Institute of Actuaries, Louise joined AGA in June 2014. She assumes responsibility for training, provides technical support, and supplies advisory activities for the large business clientele. Louise is also lecturer at l’UQAM.
Louise Gagne, FICA, FSA