1. Impact of Multi-Tiered Copayments on Cost and Use of Prescription Drugs among the Elderly Presented at AcademyHealth Annual Research Meeting Presented by Boyd Gilman, PhD John Kautter, PhD June 28, 2005 411 Waverley Oaks Road, Suite 330 · Waltham, MA 02452-8414 Phone: 781-788-8100 x187 · Fax: 781-788-8101, BGilman@rti.org

2. 2 Purpose of Study n To evaluate the impact of multi-tiered copayments on cost and use of prescription drugs among the elderly in employer- sponsored health plans n To assess the differential effects for enrollees who are taking drugs primarily for treatment of chronic conditions n To decompose overall impact into a ‘price’ effect (due to higher copay for all drugs) and a ‘substitution’ effect (due to wider differential between copay for similar drugs)

3. 3 Policy Motivation n Medicare will start offering a prescription drug benefit (Part D) on January 1, 2006 n Part D will be administered through private health plans that are allowed to set their own enrollee cost sharing rules as long as they: l Are actuarially equivalent to standard benefit l Do not discriminate against beneficiaries by increasing cost sharing of a drug used for a particular illness n Employers may drop retiree coverage, forcing retirees to purchase Part D

4. 4 Copayment Structures n Apply fixed enrollee payment amounts to different types of drugs depending on payee preferences l Tier 1 for generic drugs l Tier 2 for preferred brand name drugs l Tier 3 for non-preferred brand name drugs n Tiered copayments are designed to: l encourage generic substitution l reduce use of drugs with low therapeutic value l limit plan spending

5. 5 Use of Tiered Rx Copayments among Retiree Health Plans n According to KFF survey of employer- sponsored retiree health plans: l 81% of firms use multi-tiered Rx copays l Use of 3-tiered programs grew from 55% in 2003 to 58% in 2004 (2-tiered plans fell) l Average Rx copays in 3-tiered plans are: u $10 for generic u $20 for preferred brand name u $35 for non-preferred brand name

6. 6 Current Literature n Studies suggest that tiered copays may lower use of drugs l Motheral & Fairman (2001) l Joyce, Goldman & Escarce (2002, 2004) l Huskamp (2003) l Briesacher & Kamal-Bahl (2004) n Study suggests that lower use may be caused by substitution of mail order prescriptions with longer days supply l Thomas & Wallack (2003)

7. 7 Data n Medstat’s 2002 MarketScan databases: l Medicare Supplemental and COB File u Enrollment info for over 1 million enrollees in retiree health plans u Rx claims for enrollees u Medical claims for enrollees l Benefit Plan Design File u Extracts information on Rx and medical benefit features

8. 8 Important Sample Caveats n Benefit plan information extracted for only 27 health plans n 27 health plans drawn from only 10 firms, with almost very little intra-firm variation in drug benefits n Less than ½ enrollees are linkable to benefit plan design file n Several important plan design features are reported as unknown n High degree of correlation between plan design features n Sample based on large, unionized, self-insured firms, and thus not representative of Medicare population

9. 9 Classification of Plans by Drug Copayments

10. 10 Enrollment and Drug Payments by Copayment Tier

11. 11 Basic Model Access i =  +  1 Demographics i +  2 Health Status i +  3 Plan Characteristics i +  4 Medical Benefits i +  5 Drug Benefits i + ε i

12. 12 Model Outcomes n Access outcomes l Number of prescriptions filled – normalized by 30-days supply to account for potential mail-order substitution l Total drug expenditures – measured as ingredient costs to account for differences in dispensing fees n Other outcomes l Enrollee drug payments l Percent of prescriptions filled by generic drugs

13. 13 Model Covariates

14. 14 Estimation Procedure n Outcomes annualized to adjust for proportion of year enrolled n Generalized linear model weighted by proportion of year enrolled n Standard errors adjusted for within-firm correlation of error terms n Payments estimated over claimants only (roughly 90% of enrollees submitted claim) n Models run separately over claims for drugs used primarily to treat chronic conditions

15. 15 Impact of 3-Tiered Copayment Program on Use and Cost of Rx

16. 16 What’s driving these results: copay amounts or copay tiers? n Copayment programs are designed to promote: l Efficient use of drugs by raising the price of all drug equivalents (i.e., increasing copay amounts) l Generic substitution by widening the price differential between drug equivalents (i.e., increasing copay differentials)

17. 17 Price and Substitution Effects n ‘Price effect’ measures the change in drug use following a change in marginal copays of drug equivalents. l Likely to lead to higher total spending and lower drug use. n ‘Substitution effect’ measures the change in drug use following a change in the copay differentials between drug equivalents. l Likely to lead to lower total spending with little change on total use.

18. 18 Decomposition Model Access i =  +  1-4 Other Covariates i +  5 Copay Level i +  6 Copay Differential i + ε i n Copay level = lowest plan copay amount n Copay differential = difference between highest and lowest plan copay

19. 19 Decomposing the Price & Substitution Effects

20. 20 Conclusions n More aggressive enrollee cost sharing is associated with: l Fewer prescriptions filled l Lower total payments and higher enrollee payments l Higher proportion of Rx filled by generics n Smaller reduction in drug use and greater generic substitution among those with chronic conditions n Increasing copay differentials through multi-tiered program associated with: l Greater generic substitution l Smaller reduction in use of drugs

21. 21 Policy Implications n More aggressive enrollee cost sharing may promote efficient use of Rx, but may also create barriers to access n Multi-tiered programs may be better than higher marginal copays for achieving efficiency without sacrificing access n Responsiveness to price incentives and, thus, impact on access, may vary depending on type of condition treated n Need to monitor impact of enrollee cost sharing programs on access and health outcomes in Part D plans