Impact of 3-Tier Pharmacy Benefit Design and Increased Consumer Cost-sharing on Drug Utilization

Published Online: October 01, 2005
Pamela B. Landsman, MPH, DrPH; Winnie Yu, PharmD; XiaoFeng Liu, PhD; Steven M. Teutsch, MD; and Marc L. Berger, MD

Objective: To estimate responsiveness of prescription demand within 9 therapeutic classes to increased cost-sharing compared with constant cost-sharing.

Study Design: Retrospective prescription claims analysis.

Methods: Between 1999 and 2001, 3 benefit plans changed from a 2-tier to a 3-tier design (cases); 1 plan kept a 2-tier design (controls). Study subjects needed 24 months of continuous coverage and a prescription filled ≥3 months before the benefit change for a nonsteroidal anti-inflammatory agent (NSAID), a cyclooxygenase (COX-2) inhibitor, a selective serotonin reuptake inhibitor (SSRI), a tricyclic antidepressant (TCA), an angiotensin-converting enzyme (ACE) inhibitor, a calcium-channel blocker (CCB), an angiotensin-receptor blocker (ARB), a statin, or a triptan. Changes in use were compared with the Wilcoxon signed rank test. Elasticity of demand among cases was calculated.

Results: Generally, medication possession ratios decreased for cases and increased for controls between 1999 and 2000. Switch rates increased for cases and decreased for controls for all classes but CCBs. Switches to lower copayments for ACE inhibitors, statins, and triptans occurred more often for cases. Discontinuation-rate changes for cases were 2 to 8 times those for controls. Generic-substitution rates depended on availability and initial generic utilization. Elasticity of demand for drugs was generally low, -0.16 to -0.10, for asymptomatic conditions (ACE inhibitors, ARBs, CCBs, statins), and moderate, -0.60 to -0.24, for symptomatic conditions (COX-2 inhibitors, NSAIDs, triptans, SSRIs).

Conclusion: Use of retail prescription medications within 9 specific therapeutic classes decreased as copayment increased. Demand for pharmaceuticals was relatively inelastic with these copayment increases.

(Am J Manag Care. 2005;11:621-628)

Because healthcare expenditures are expected to continue to rise, health insurers continue to seek ways to slow the growth in spending by managing utilization and shifting costs to the consumers while maintaining a high level of customer satisfaction and quality outcomes. Although pharmaceutical spending accounts for only 7% of total healthcare expenditures, the rate of spending growth for prescription medications has outpaced other areas of medical care. In 2001 prescription drug expenditures rose 16%, while those for hospital care and physician services rose 8% and 9%, respectively.1 Drug utilization review, prior authorization, generic substitution, and closed formularies are some of the methods used by providers of pharmacy benefits to stem this tide. Most common among employers are incentive-based or multitiered formularies, where consumer cost-sharing increases for products on higher tiers compared with lower tiers.

In 2000, 80% of health plans with prescription benefits offered 3-tier formularies compared with 36% of plans 2 years earlier.2 In 2004 the average copayment for generic drugs (tier 1) was $10; preferred branded drugs (tier 2), $21; and nonpreferred branded drugs (tier 3) $33.1 Joyce et al estimated adding a third tier for nonpreferred brands to a 2-tier plan at a copayment of $30 decreases overall drug spending by 4% among plan participants with employer-sponsored drug coverage.3 Additional studies such as that by Huskamp et al have shown changing from a 1-tier or 2-tier plan to a 3-tier plan impacts the purchasing decisions of consumers more substantially with respect to their overall drug consumption,4 but the impact of decreased utilization on health outcomes has not been evaluated.4-6 Two recent studies evaluated the impact of increasing prescription drug copayments on uses of other healthcare services. Motheral and Fairman found that enrollees who were moved from a 2-tier to a 3-tier pharmacy benefit had modestly lower prescription utilization with no increase in physician office visits, emergency room visits, or hospital stays in the 11 months after the benefit change.4 However, Goldman et al found that doubling the copayments in a 2-tier plan for antidiabetic, antiasthmatic, and antiulcerant agents resulted in a 17% increase in predicted annual emergency department visits and a 10% increase in predicted annual hospital days for persons with the respective conditions.7

Several studies from the 1980s and early 1990s showed that demand for prescription drugs were highly inelastic, with values between -0.33 and -0.10 for small absolute changes in price.8 As out-of-pocket costs and price differentials between products on different tiers continue to rise, consumers may be more sensitive to changes in prescription drug costs than previously reported. This study uses a pre-post analysis of 3 managed care populations whose pharmacy benefits changed in mid-2000 from a 2-tier to a 3-tier design, compared with a managed care population that had no change in a 2-tier benefit design during the same time period. We evaluated changes in utilization patterns such as medication possession ratio, discontinuation rates, and switches to lower-tier products, as well as the elasticity of demand for medications in 9 major therapeutic classes.


Study Population

This study is a retrospective 2-sample cohort analysis of prescription medication utilization among managed care enrollees. The study population (cases) was made up of 3 geographically dispersed managed care plans, each of which adopted a 3-tier pharmacy benefit system in the first half of 2000 (Table 1). Immediately before the benefit switch, plans 1, 2, and 3 provided a traditional 2-tier prescription benefit covering generic and formulary brand products. Plans 1 and 3 mandated the new benefit for all members, whereas plan 2 adopted it only for members of a preferred provider organization. Plan 4, the control population (controls), had the same 2-tiered benefit structure as plan 2, but retained the 2-tier formulary during the evaluation period, 1999-2001. The analyses utilized enrollment data and pharmacy claims for 1999 through 2001.


For inclusion in this analysis, members were first required to have 24 months of continuous enrollment, 12 months immediately before their plan benefit change (prechange period) and 12 months after their plan benefit change (postchange period). If these members had a prescription filled during this time for medications within any of the therapeutic areas of interest, they were then assigned to 1 or both of 2 analysis groups. First, for each drug class of interest, members with a prescription filled at least 3 months before the end of the prechange period were retained for time-series analyses related to drug utilization. Second, the subset of cases with at least 2 prescriptions filled for a drug class of interest within the 3 months before the benefit change was retained for estimation of elasticity of demand.

Members were excluded from all analyses if they obtained any medications through mail-order pharmacies (5%), as there were substantial differences between copayment rate and quantity of supply between mail order and retail prescriptions. Additionally, 20% of members whose copayment for a prescription was inconsistent with their drug benefit were excluded from analysis. This group included those without a copayment recorded on their prescription claim or with a copayment amount recorded that did not match the copayment tier as reported by the health plan. The latter were excluded to attain a more accurate estimate of the impact of the copayment change on drug utilization.

Drug Classes

Several criteria were applied when selecting the drug classes under study. The population of users of medications within the drug class had to be of sufficient size to make reasonable inferences about the population at large. The drug classes also had to be used to treat a variety of chronic and acute, and symptomatic and asymptomatic conditions. Nine commonly used therapeutic classes for 5 conditions were selected for analysis: angiotensin-converting enzyme (ACE) inhibitors, calcium-channel blockers (CCBs), and angiotensin-receptor blockers (ARBs) for cardiovascular conditions; cyclooxygenase 2 (COX-2) inhibitors and nonselective nonsteroidal antiinflammatory agents (NSAIDs) for pain; selective serotonin reuptake inhibitors (SSRIs) and tricyclic antidepressants (TCAs) for depression; 3-hydroxy-3-methylglutaryl coenzyme A reductase inhibitors (statins) for lipid lowering; and serotonin 5- HT1 receptor agonists (triptans) for migraine.

Statistical Analysis

The prechange period refers to the 12 months preceding implementation of the 3-tier benefit, and the postchange period refers to the 12 months after implementation of the 3-tier benefit. Persistency outcomes such as medication adherence (as measured by medication possession ratio), switching within a drug class, and discontinuation rates were measured for both the prechange and postchange periods among both cases and controls. Net changes in persistency measures for the 2 populations then were compared by using the Wilcoxon signed rank test. Two-sided tests with an alpha of .05 were used for all study analyses to determine statistical significance.

Binary indicators were created to allow tracking of enrollees who were switched to another product within the same drug class during each 3-month interval for the 4 quarters of the prechange and postchange periods. Overall switch rates and the proportion of these enrollees with a switch from a product with a higher copayment to one with a lower copayment are presented. Switches from a brand name to a generic product also were examined when a chemically equivalent generic was available. A drug was considered to be discontinued if a patient did not fill a prescription for any drug in the same therapeutic class for at least 30 days after completion of the last prescription. Cumulative discontinuation rates for the 6-and 12-month prechange and postchange periods for the cases and the net changes at 12 months for both the cases and controls are presented.

Elasticity of Demand

To estimate elasticity of demand, the subset of cases with at least 2 claims for any medication within the selected therapeutic areas during the 3 months before the benefit change was retained. Elasticity of demand was defined as the ratio between the percent change in average monthly number of prescriptions filled and the percent change in copayment from the prechange to the postchange periods. Alternatively, elasticity of demand is the percent change in monthly prescription fills given a 1% increase in copayment. To adjust for differing lengths of time on therapy (because not all patients were on therapy for the full 24 months under study), the average monthly number of prescriptions during the prechange and postchange periods—rather than the total number of prescriptions—was used to calculate percent change in drug utilization.

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