The Cost of Reference-Priced Generic
Drug Coverage
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
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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
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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
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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
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Co-payments in Two Generic Plans
Drug type
Generic
Brand (generic in
class)
Brand (no generic
in class)
Generic Plan Generic Plan
A
B
$5
$5
$5 + costdifference
$5 + costdifference
Full cost
$15
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Plan $ (PMPY, 2000)
Estimated Plan Costs (PMPY)
$1,400
1210
$1,200
$1,000
$800
641
$600
$400
221
549
419
313
$200
$0
18 to 64
65 and older
Age Group
Generic Plan A
Generic Plan B
Status quo
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Plan Costs by Therapeutic Class (Ages 18-64)
Therapeutic
Class
Antihyperlipidemics
Antidepressants
Gastrointestinals
Antihistamines
Antivirals
ACE Inhibitors
Calcium Channel Bl.
Antidiabetics, Misc†
Beta Blockers
H-2 Antagonists
Generic Generic
Plan A
Plan B
$28.21 $28.21
$10.99 $10.99
$21.87 $21.87
$3.16
$3.16
$5.19
$5.19
$18.52
$16.95
$0.00
$6.12
$9.08
$18.52
$16.95
$19.19
$6.12
$9.08
Actual
$66.84
$58.06
$58.37
$28.79
$23.07
$19.04
$23.57
$25.01
$9.42
$9.91
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Plan Costs by Therapeutic Class (Ages 65+)
Therapeutic
Generic Generic
Actual
Class
Plan A Plan B
Antihyperlipidemics
$58.37 $58.37 $161.15
Gastrointestinals
$35.58 $35.58 $117.67
NSAIDs
$30.14 $30.14 $86.59
Calcium Channel Bl. $42.59 $42.59 $70.60
ACE Inhibitors
$38.47 $38.47 $51.31
Antidepressants
$5.36
$5.36 $52.89
Antidiabetics, Misc.†
$0.00 $37.51 $44.28
Beta Blockers
$13.21 $13.21 $30.79
H-2 Antagonists
$16.84 $16.84 $28.55
Estrogens
$4.88
$4.88 $21.61
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Generic Alternatives to Leading Brands
Leading
Brands
Leading Generics Upcoming Patent
(12/03)
Expirations*
Lipitor
Zocor*
Pravachol**
Crestor
lovastatin
Zoloft*
Effexor XR
Lexapro
paroxetine,
citalopram, 2004;
fluoxetine,
*sertraline, 2005
buproprion, etc…
Nexium
Prevacid*
Protonix
Aciphex
omeprazole;
histamine-2
blockers
*simvastatin,2005-06;
**pravastatin, 2005
*lansoprazole, 2005
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Generic Alternatives to Leading Brands
Leading
Brands
Leading Generics Upcoming Patent
(12/03)
Expirations*
Allegra*
Zyrtec
Clarinex
loratadine;
sedating
antihistamines
*fexofenadine, 2004
Actos*
Avandia
metformin,
sulfonylureas
*pioglitazone, 2006
Monopril*
Altace
Protonix
Aciphex
enalapril,
atenolol,
lisinopril,
diuretics
*fosinopril, 2004
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Patient Response
Three ways patients may respond to RP:
1. Switch from brand to generic substitutes,
holding utilization constant
2. Continue to use brand drugs but reduce
volume of drugs
3. Continue to use brand name drugs and
maintain volume.
All three responses likely to occur
• Differential impact on costs and outcomes
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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
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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
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Response #3
• Continue to use brand name drugs and
maintain volume
– No change in health
– Plan costs decrease
– Beneficiary OOP costs increase
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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?
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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
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