The Cost of Reference-Priced Generic Drug Coverage

1. The Cost of Reference-Priced Generic Drug Coverage

2. Background • Controlling the cost of pharmaceuticals remains major concern among payers • Private health plans use an array of approaches • Closed formularies • Multi-tier cost-sharing • Mandatory generic substitution (MGS) • Reference-pricing (RP) common in Europe • Insurance covers cost up to the reference price • Patients pay the extra cost of more expensive medications in the class

3. Why Reference Pricing? • Many of the top therapeutic classes currently have generic alternatives • Many blockbuster drugs will lose patent protection in the next 2 years • RP is an increasingly attractive option for employers and Medicare • Quantify the potential savings

4. Study Aims • Estimate costs of prescription drug benefit for: • Generic only RP plan • Generic-plus RP plan • Status quo • Using 2000 pharmacy claims • 18-64 year olds with EPI • 35 health plans; N=322,556 • Retirees age 65+ with EPI • 11 health plans; N=208,271

5. Methods • Estimate plan spending on top 50 classes under both RP plans • Top-50 classes account for 93-95% of spending • Inflate cost estimates accordingly • Reference price set as: • Mean generic price paid within class • $19 non-elderly; $16 elderly • Mean brand price (for classes without generics) • $70 non-elderly; $59 elderly • Simplifying Assumption: No demand response

6. Co-payments in Two Generic Plans

7. Estimated Plan Costs (PMPY)

8. Plan Costs by Therapeutic Class (Ages 18-64)

9. Plan Costs by Therapeutic Class (Ages 65+)

10. Generic Alternatives to Leading Brands

11. Generic Alternatives to Leading Brands

12. Patient Response Three ways patients may respond to RP: • Switch from brand to generic substitutes, holding utilization constant • Continue to use brand drugs but reduce volume of drugs • Continue to use brand name drugs and maintain volume. All three responses likely to occur • Differential impact on costs and outcomes

13. Response #1 • Switch from brand to generic substitutes, holding utilization constant • Reduces plan costs • Reduce beneficiary spending • Effect on health outcomes depends on degree of substitutability between brands and generic alternatives • Evidence suggests that adverse health outcomes arising from restrictions on brand coverage is smaller than commonly presumed

14. Response #2 • Continue to use brand drugs but reduce volume of drugs • Higher cost-sharing leads to less use • Reduces costs for both plan and beneficiary • Increases risk of adverse health outcomes

15. Response #3 • Continue to use brand name drugs and maintain volume • No change in health • Plan costs decrease • Beneficiary OOP costs increase

16. Limitations • Simplistic model • Does not incorporate demand response • Generic-only plan is not viable • Status quo includes wide array of drug benefits (1, 2, 3-tier co-pay plans and coinsurance) • Does not evaluate degree of substitutability and associated costs, e.g. • What fraction of patients taking Cox-IIs would have gastrointestinal problems with generic NSAIDs?

17. Impact on Innovation • Reduces incentive to develop new products in classes that contain generics • Weakens incentives to develop new products even in classes without generics • Decline in incentive to innovate is not necessarily welfare-reducing • Depends on benefits of new products compared to social costs