Consumers Face Higher Costs As Health Plans Seek to Control Drug Spending

Originally published by the Center for Studying Health System Change (HSC), a nonpartisan policy research organization that operated with principal funding from the Robert Wood Johnson Foundation.

Issue Brief No. 45 -- November 2001

Authors: Glen P. Mays, Robert E. Hurley, Joy M. Grossman

Prescription Drug Spending Puts Plans and Consumers Under Pressure

Confronted with relentless growth in pharmaceutical spending throughout the 1990s, health plans had been trying to bring costs under control through a combination of negotiated price discounts, efforts to change physician prescribing habits, and measures to moderate the volume and mix of drugs that consumers demanded. Because these strategies had yielded only limited results, plans were moving rapidly to three-tier benefit designs that offered broader drug choices but shifted more of the cost burden to consumers. Based on interviews with health plan executives across the 12 nationally representative communities HSC visited every two years, this issue brief examined the strategies plans were using to contain drug spending and the consequences for consumers.

How Pharmacy Spending Grew So Fast

Since 1990, U.S. spending on prescription drugs had more than doubled, growing far faster than spending on any other category of health care and raising questions about whether pharmaceutical products would remain affordable. Drug spending accounted for 35 percent of the cost increase facing private insurers in 1999. The expansion of prescription drug insurance coverage during this period had reduced financial barriers for many consumers -- out-of-pocket drug spending fell from 48 percent of total prescription costs in 1990 to 27 percent in 1998 -- but broader coverage also fueled large increases in drug utilization. Prescribing patterns had shifted toward newer, more expensive brand-name products, a trend attributed partly to the relaxation of regulations governing direct-to-consumer drug advertising. While price increases played a role in spending growth, more than three-quarters of the increase during the 1990s was driven by changes in the volume and mix of drugs used rather than by price hikes alone.

In 2000, the rate of growth in prescription drug spending declined for the first time in seven years -- welcome news for health plans, but also a signal that consumers might be facing growing financial and administrative barriers to needed medications.

Three-Tier Pharmacy Benefits Spread Rapidly

The most pronounced change in pharmaceutical management during this period was the rapid adoption of three-tier pharmacy benefit structures. Under these designs, consumers paid the lowest out-of-pocket costs for generic drugs, higher costs for preferred brand-name medications, and the highest costs for non-preferred brands. The proportion of health plans offering a three-tier design nationally jumped from 36 percent in 1998 to 80 percent in 2000, and nearly all plans interviewed by HSC had adopted the structure for their commercial products over the preceding two years. Typical copayment structures ranged from $5-$10-$25 in markets like Boston to percentage-based coinsurance designs such as 10-30-50 percent in Orange County and Seattle.

A handful of plans resisted the three-tier trend. Kaiser Foundation Health Plan in Orange County and Group Health Cooperative in Seattle, both traditional HMOs, worried that tiered benefits would penalize patients who needed appropriate but costly therapies, thereby interfering with optimal treatment decisions. Blue Cross of California took a middle path, waiving higher coinsurance for second- and third-tier drugs for members who participated in disease management programs.

Formulary Changes and Utilization Management Tactics

Beyond benefit design changes, plans were rethinking their formulary strategies. Some plans adopted closed formularies that covered only listed drugs unless a medical necessity exception was granted. Others began excluding second-generation drugs that were designed as replacements for older medications approaching patent expiration. On the utilization management front, plans deployed physician profiling programs that identified patients who could be switched to less expensive alternatives, implemented prior authorization requirements for drugs subject to overuse, and tested bonus programs that rewarded physicians for meeting drug utilization targets.

Purchasing Strategies and Emerging Benefit Models

Plans were also working the purchasing side by negotiating directly with manufacturers for volume discounts and promoting mail-order pharmacy options that offered consumers reduced copayments. Blue Cross of California was exploring reference pricing, a model widely used in Europe under which the plan sets a fixed monthly benefit limit for each drug class based on the cost of a low-priced drug within that class, requiring consumers to pay the difference for higher-priced alternatives. Some plans in Phoenix and Lansing, Michigan, were considering annual caps on pharmacy coverage, an approach already common in Medicare+Choice plans. Others were looking at pharmacy deductibles as an additional cost-containment tool.

Implications for Consumers and Policy

The rapid shift to three-tier benefits and other cost-sharing strategies raised questions about the impact on consumers' pharmaceutical care. While the designs gave consumers more choices, they also exposed patients to substantially higher out-of-pocket costs, particularly for branded medications. The implications were most concerning for patients with chronic conditions who required ongoing therapy with specific drugs and had limited ability to switch to cheaper alternatives without clinical consequences. Whether employers would embrace the emerging models -- annual caps, reference pricing, pharmacy deductibles -- remained uncertain and was likely to depend on consumer reactions and the magnitude of cost savings these approaches could deliver.

With many of the nation's top-selling prescription drugs coming off patent in the following two years, overall consumer cost sharing could decline unless plans adjusted their generic-tier copayments upward. The interplay between patent expirations, generic substitution rates, and benefit design decisions would shape the trajectory of drug spending and consumer costs for years to come.

Sources and Further Reading

AHRQ -- Federal health care quality research agency.

Centers for Medicare & Medicaid Services -- Federal agency overseeing public health insurance programs.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and funding.

Commonwealth Fund -- Research on health care costs, coverage, and access.