Employer Drug Benefit Plans and Spending on Prescription Drugs

Published in: JAMA, Journal of the American Medical Association, v. 288, no. 14, Oct. 9, 2002, p. 1733-1739

Posted on RAND.org on January 01, 2002

by Geoffrey F. Joyce, Jose J. Escarce, Matthew D. Solomon, Dana P. Goldman

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CONTEXT: With drug spending rising rapidly for working-aged adults, many employers and health insurance providers have changed benefits packages to encourage use of fewer or less expensive drugs. It is unknown how these initiatives affect drug costs. OBJECTIVE: To examine how innovations in benefits packages, such as those that include multitier formularies and mandatory generic substitution, affect total cost to insurance providers for generic and brand drugs and out-of-pocket payments to beneficiaries. DESIGN and PARTICIPANTS: Retrospective study from 1997 to 1999 linking claims data of 420 786 primary beneficiaries aged 18 through 64 years who worked at large firms (n = 25) with health insurance benefits that included outpatient drugs. MAIN OUTCOME MEASURES: Overall drug costs; generic, single-source brand, and multisource brand costs; and drug expenditures by health insurance providers and out-of-pocket costs for beneficiaries. RESULTS: For a 1-tier plan with a $5 co-payment for all drugs, the average annual spending was $725 per member. Doubling co-payments to $10 for all drugs reduced the annual average drug cost from $725 to $563 per member (22.3%, P<.001). Doubling co-payments in a 2-tier plan from $5 for generics and $10 for brand drugs to $10 for generics and $20 for brand drugs reduced costs from $678 to $455 (32.9%, P<.001). Adding an additional co-payment of $30 for nonpreferred brand drugs to a 2-tier plan ($10 generics; $20 brand) lowered overall drug spending by 4% (P<.001). Requiring mandatory generic substitution in a 2-tier plan reduced drug spending by 8% (P<.001). Doubling co-payments in a 2-tier plan increased the fraction beneficiaries' paid out-of-pocket from 17.6% to 25.6%. CONCLUSIONS: Adding an additional level of co-payment, increasing existing co-payments or coinsurance rates, and requiring mandatory generic substitution all reduced plan payments and overall drug spending among working-age enrollees with employer-provided drug coverage. The reduction in drug spending largely benefited health insurance plans because the percentage of drug expenses beneficiaries paid out-of-pocket rose significantly.

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