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Article Excerpt
In 2007, approximately 3.81 billion prescriptions were dispensed in the United States (IMS Health 2008), and the associated pharmacy costs accounted for 10.1 percent of the nearly $2 trillion in national health care expenditures (KFF/HRET 2007). Between 1994 and 2003, prescription drug expenditures increased in excess of 10 percent annually; and though moderating in recent years, they still rose by 8.6 percent from 2005 to 2006 (CMS 2008). Insurers have responded with more complex pharmacy benefit designs to encourage their members through financial incentives to make lower cost decisions. Although many studies have investigated the impact of patient cost sharing on prescription drug utilization, few have accounted for the other elements of benefit design. Furthermore, pharmacy utilization trends related to demographics, brand and generic drug pipelines, and prescription delivery options have also been largely unstudied. Finally, the extant literature in this area has largely focused on absolute levels of prescription drug utilization, yet pharmacy benefit managers (PBMs) and their recommended plan designs are often evaluated using relative utilization measures such as the generic dispensing rate (GDR). This paper examines the relationship between pharmacy benefit design and prescription drug utilization, including both absolute and relative measures of generic, brand, retail, and mail use. Using a plan sponsorlevel panel dataset, the econometric analysis addresses the potential endogeneity of pharmacy benefit design by way of linear fixed effects modeling.
BACKGROUND
Health insurance spreads financial risk but also induces moral hazard (e.g., Cutler and Zeckhauser 2000; Phelps 2003). Insured individuals consume greater quantities of health care services than they would have in the absence of insurance because they face "prices" (as copayments/coinsurance) that are below full costs. Health plans, employers, governments, and other insurance plan sponsors rely on the incentives embedded in benefit designs to reduce this undesirable inefficiency. In the context of prescription drug insurance, the optimal policy would not only balance the gains from risk avoidance with the losses from moral hazard but would also take into account how changes in medication adherence (particularly for chronic conditions) might affect overall health services utilization and costs (Newhouse 2006; Ellis and Manning 2007). Although physicians prescribe the treatment regimen, they do not necessarily do so with drug cost or formulary placement in mind (Shrank et al. 2005). Consequently, it is the patient who must inquire about lower cost alternatives under his/her prevailing insurance and ultimately choose to fill the prescription as written, change to a less costly drug, use mail service fulfillment, or forego treatment.
Elements of Pharmacy Benefit Design
Incentivized formularies, the cornerstone of many prescription benefit structures, classify drugs into tiers based on safety, clinical effectiveness, acquisition cost, availability of comparable medications, and other criteria (Mullins, Palumbo, and Saba 2007). The amount paid by the patient for a medication increases with tier placement. Typically, generic drugs deemed therapeutically equivalent (identical in strength, concentration, and dosage form) to a brand drug are assigned to the first tier. Brand drugs, which are patent protected and manufactured by a single pharmaceutical company, are normally placed in higher tiers. In three-tier formularies, brand drugs are divided into second-tier (preferred) brands and third-tier (nonpreferred) brands, which often include brands with an available generic equivalent (i.e., multisource brands). In four-tier formularies, brand drugs may be further differentiated with higher member shares for lifestyle drugs or specialty medications such as biologics. As of 2007, approximately 75 percent of covered employees were enrolled in plans with three or more tiers, up from 27 percent in 2000 (KFF/HRET 2007). In three-tier plans, copayments have increased from 2000 to 2007 with generic, preferred brand, and nonpreferred brand prescriptions growing on average 37.5, 66.7, and 48.3 percent to average copayments of $11, $25, and $43 (KFF/HRET 2007). Among two-tier employer-sponsored plans, generic copayments averaged $7 and brand copayments averaged $23 in 2007, an increase of 42.9 and 64.3 percent since 2000 (KFF/HRET 2007).
In addition to cost sharing, prescription drug plans include other tools to motivate patient behavior. First, members may incur a dispense-as-written (DAW) financial penalty when a multisource brand prescription is demanded despite the availability of a generic equivalent. Two types of DAW penalties may be imposed: (1) a DAW penalty if the patient refuses the generic formulation and (2) a DAW penalty if either the patient or provider refuses the generic formulation. Another mechanism that is seeing increased use is the deductible, a fixed dollar amount that must first be paid by the member before insurance benefits pay out. In recent years, consumer-directed health plans have gained in popularity, and these benefit designs often combine high deductibles with health retirement/savings accounts. A third strategy employed to control prescription drug costs is to encourage plan participants to allow mail delivery of their medications for chronic conditions. This is most often accomplished by offering lower patient out-of-pocket (OOP) costs per medication day supplied or by limiting the number of refills allowed at retail pharmacies. Finally, a prescription plan might also contain a maximum allowable benefit (MAB), which places a cap on the amount covered by the payor. This is in contrast to a maximum out-of-pocket (MOOP), which limits the member's financial responsibility.
Utilization Impacts of Pharmacy Benefit Design
At least since the Rand Health Insurance Experiment (RHIE; Manning et al. 1987), researchers and policy makers have been concerned with the relationship between plan design and the demand for medical care. Of particular interest has been the impact of cost sharing on utilization. In the context of prescription drugs, Gemmill, Costa-Font, and McGuire (2007) provide an excellent literature review on the topic and derive a "corrected" price elasticity of demand estimate of -0.209 via a metaregression analysis. Other studies of pharmacy benefit design have consistently found higher patient cost shares and more formulary tiers to be associated with (1) greater use of lower cost drugs (Nair et al. 2003; Rector et al. 2003; Huskamp et al. 2007; Landon et al. 2007; Mager and Cox 2007), (2) lower overall utilization either in the form of treatment discontinuation or noninitiation (Motheral and Fairman 2001; Fairman, Motheral, and Henderson 2003; Huskamp et al. 2003; Nair et al. 2003; Goldman et al. 2004; Landsman et al. 2005; Brixner et al. 2007; Gilman and Kautter 2007, 2008; Chernew et al. 2008), (3) decreased plan sponsor expenditures (Motheral and Fairman 2001; Fairman, Motheral, and Henderson 2003; Brixner et al. 2007; Gilman and Kautter 2007, 2008; Landon et al. 2007), and (4) by definition, higher consumer costs per prescription.
Fewer studies have investigated the impact of incentivized formularies and cost sharing on relative utilization measures. The GDR, the proportion of all prescriptions filled as generic, is often used to evaluate PBMs and their recommended plan designs. Moreover, the Centers for Medicare and Medicaid Services (CMS) consider GDR a performance metric for Part D prescription drug plans (CMS 2006). Leibowitz, Manning, and Newhouse (1985) and more recently Motheral and Fairman (2001) reported no significant change in GDR following the implementation of an aggressive change in benefit design. In a cross-sectional study of 3,979 plan sponsors, Mager and Cox (2007) found three-tier formularies had GDRs that were on average 2 percentage points higher than two-tier structures. Landon et al. (2007) conducted a 2-year, pre-post study of formulary changes within a single, large health plan and noted that implementing a third tier or increasing member copayments was associated with a 1-4 percent decrease in nonformulary drug use, a comparable increase in both generic and preferred drug utilization, and...
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