The Effects of Prescription Drug Cost Sharing: A Review of the Evidence

Published Online: November 01, 2005
Teresa B. Gibson, PhD; Ronald J. Ozminkowski, PhD; and Ron Z. Goetzel, PhD

Objectives: To determine whether patients respond to increased cost sharing by substituting less expensive alternatives for medications with higher levels of copayments or coinsurance, and to examine the body of evidence on the relationships between cost sharing and use of essential or maintenance medications, health outcomes, process-of-care measures (such as medication adherence and discontinuation), and costs.

Study Design: Literature review.

Methods: Healthcare reference databases and key journals were searched to identify peer-reviewed empirical studies that examined the effects of variation in the amount of prescription drug copayments or coinsurance on healthcare utilization patterns. Thirty studies met our search criteria.

Results: Higher levels of prescription drug cost sharing generally produce intended effects, namely, decreasing the consumption of prescription drugs and steering patients away from nonpreferred to preferred brand-name drugs. However, patients do not always switch to generic drugs. Although not consistently reported, the most troublesome effects associated with higher levels of cost sharing are treatment disruptions (such as lower levels of treatment adherence, continuation, and initiation) for chronically ill patients. At times, higher levels of cost sharing can affect the use of essential medications and outcomes of care.

Conclusions: Cost sharing reduces the consumption of prescription drugs but may have unintended effects on the process and outcomes of therapy. Further research is warranted in this area. The central question for health plan managers and policy makers is whether we will continue to use cost sharing as is or make modifications to reduce unintended effects.

(Am J Manag Care. 2005;11:730-740)

Prescription drug expenditures are one of the fastest growing components of national health expenditures.1 To control prescription drug costs, health plans and employers have increased prescription drug cost-sharing amounts for patients.2 Copayments for enrollees in employer-sponsored plans have risen considerably. From 2001 to 2004, the mean copayments for generic drugs increased 42.9% (from $7 to $10), while copayments for preferred brand-name drugs rose 61.5% (from $13 to $21) and copayments for nonpreferred brand-name drugs increased 94.1% (from $17 to $33).2

In addition to increasing the cost-sharing amounts, health plans continue to move away from 1-tier plans that charge the same amount for all types of drugs and away from 2-tier plans that charge a lower cost-sharing amount for generic drugs and a higher cost-sharing amount for brand-name drugs.2 As a result, 3-tier plans that assess a third, higher amount for nonpreferred brand-name drugs are now the dominant type of prescription drug benefit; 3-tier plans in 2004 applied to almost two thirds of workers.2 Although less common (representing 3% of workers), some health plans are introducing plans that assign an even higher fourth tier to cover lifestyle or very expensive medications.2-4 In this review, we synthesize and summarize the state of knowledge about the effects of increased prescription drug cost sharing on use, expenditures, and outcomes. First, we address the following question: Do patients respond to increased cost sharing by substituting less expensive medications or delivery methods (eg, mail order) for medications with higher levels of copayments or coinsurance?

Second, concerns have been expressed about the adverse effects of cost sharing on health outcomes and the process of care.5,6 In light of these concerns, we extend previous reviews of the literature and examine the growing body of evidence on the relationships between cost sharing and the use of essential or maintenance medications, health outcomes, process-of-care measures (such as medication adherence and discontinuation), and costs.

Previous reviews of the prescription drug cost-sharing literature summarized evidence related to the effects of changes in cost sharing on prescription drug use and expenditures, but the results of these studies are dated7-9 or have a focus that is different from that of this review, such as the effect of cost sharing on seniors10,11 or on vulnerable populations.12,13 Other reviews evaluated the effects of cost sharing within the broader context of pharmacy benefit management tools10,14 or are specific to multitiered formularies.15 This review is not intended to replicate the results from prior reviews but rather to provide new insights, including an assessment of the effects of changes in prescription drug copayments and coinsurance on specific measures of use, outcomes, and expenditures.


Studies were selected for this review on the basis of several MEDLINE searches, covering 1974 through April 2005. The first set of searches was based on the phrase prescription drugs, which was paired with copayments or cost sharing or multitier formulary or multitiered formulary. These terms were searched in various combinations with direct costs, indirect costs, adherence, compliance, income, socioeconomic status, and Medicaid. Studies were excluded that were not in English or were not based on study populations from the United States or Canada. The published studies that were identified were supplemented with studies from our files and with other studies that were identified in reference lists of selected publications. We selected empirical studies using claims-based data sources in which cross-sectional or longitudinal variation in the amount of copayments or coinsurance occurred, permitting an examination of the relationships between variation in these types of cost sharing and use patterns.

We identified 30 studies that met our criteria. More than one third (11/30) of the studies reviewed herein were not addressed in prior reviews. Most of the unreviewed studies postdated prior reviews or did not fit the criteria for more recent reviews.10-12,15 Each study was assessed to determine whether the findings revealed that cost sharing had a significant (nonzero) effect, no effect, or mixed effects (some nonzero and some not significantly different from zero) on measures of prescription drug use.


Cost Sharing

Cost sharing is defined as the direct charge to a patient at the time a prescription is filled. Cost sharing represents the price of the prescription drug to the insured patient, while insurance covers the remainder of the cost. This review addresses the effects of the 2 most common forms of prescription drug cost sharing, namely, copayments, a flat fee assessed per prescription (eg, $10), and coinsurance, a fixed fraction of each dollar of cost (eg, 20%).2

Economic Framework

Economic theory states that, when a patient is assessed the full price of a prescription drug and has enough information to assess the drug's benefits and adverse effects, he or she will consume an optimal amount of the drug, given his or her preferences and income constraints. The theory assumes that rational patients will weigh the costs and benefits of drugs vs other methods of producing health and will consume combinations of these that maximize their health, subject to their income constraints.

Having prescription drug insurance motivates patients to consume more drugs than they would normally consume, because the price to the patients is lower than the full price.16,17 Raising the price of the drug via higher levels of cost sharing is expected to have the following economic effects, although this list is not exhaustive:

Changes in Consumption. Higher prices are expected to move patients up the demand curve and closer to the economically optimal amount, resulting in a reduction in consumption.

Substitution. Patients are likely to search for less expensive substitutes as the prices of prescription drugs rise. Therefore, if they discover a good substitute, patients are likely to consume smaller quantities of prescription drugs and larger quantities of the substitute.

Value. A price increase would decrease the likelihood that drugs of low value, for which the cost exceeds the benefit, would be used.16,17 Conversely, patients would be price insensitive for high-value drugs, such as those that are life sustaining, and would be expected to continue to fill prescriptions. However, this assumes that consumers have adequate information to evaluate the benefits and costs of drugs, which has not been established.18

Previous studies8,12,17,19 demonstrated the first effect, that higher levels of cost sharing result in reductions in prescription drug use. These studies found that, similar to most healthcare services, the demand for prescription drugs is insensitive to price changes. Most estimates of price elasticity suggest that a 10% increase in price, for example, would decrease use by less than that, ranging from 1% to 4%. However, the price elasticity of different medication classes can vary widely.20,21

We devote the next sections of this review to an analysis of several issues. First, we determine whether patients use larger quantities of drug substitutes as a result of cost sharing. Next, we evaluate whether patients distinguish between high-and low-value drugs by examining studies that relate to the use of various classifications of prescription drugs (eg, essential and nonessential medications). On a related note, we determine if patients are making well-informed decisions by assessing whether higher levels of cost sharing are associated with declines in patient health, patient care, and medical outcomes. Finally, we summarize the effects of higher levels of cost sharing on healthcare expenditures.


During the past 2 decades, health plans introduced different formularies that provided economic incentives, via higher patient cost-sharing amounts, for patients to use lower-cost prescription drugs or nondrug substitutes. Many studies addressed herein estimated the effects of incentive-based formularies on the use of substitutes, such as preferred brand-name drugs, generic drugs, and over-the-counter drugs. Several studies also estimated the effects of incentive-based formularies on the use of mail-order pharmacies, which are typically marketed as being less expensive than retail pharmacies.

We review the evidence in these areas to determine whether the use patterns of potential drug substitutes increased as cost sharing rose. We conclude that patients appear to be responding to some, but not all, financial cost-sharing incentives to switch to close drug substitutes (Table 1). To date, we found no studies that address the use of nonmedical substitutes, such as physical exercise, in response to higher levels of cost sharing.


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