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
Purpose of Study

To evaluate the impact of multi-tiered
copayments on cost and use of prescription
drugs among the elderly in employersponsored health plans

To assess the differential effects for enrollees
who are taking drugs primarily for treatment of
chronic conditions

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)
2
Policy Motivation

Medicare will start offering a prescription drug
benefit (Part D) on January 1, 2006

Part D will be administered through private
health plans that are allowed to set their own
enrollee cost sharing rules as long as they:
 Are actuarially equivalent to standard benefit
 Do not discriminate against beneficiaries by
increasing cost sharing of a drug used for a
particular illness

Employers may drop retiree coverage, forcing
retirees to purchase Part D
3
Copayment Structures

Apply fixed enrollee payment amounts to
different types of drugs depending on payee
preferences
 Tier 1 for generic drugs



Tier 2 for preferred brand name drugs
Tier 3 for non-preferred brand name drugs
Tiered copayments are designed to:



encourage generic substitution
reduce use of drugs with low therapeutic value
limit plan spending
4
Use of Tiered Rx Copayments
among Retiree Health Plans

According to KFF survey of employersponsored retiree health plans:
 81% of firms use multi-tiered Rx copays
 Use of 3-tiered programs grew from 55% in
2003 to 58% in 2004 (2-tiered plans fell)
 Average Rx copays in 3-tiered plans are:
 $10 for generic
 $20 for preferred brand name
 $35 for non-preferred brand name
5
Current Literature

Studies suggest that tiered copays may lower
use of drugs
 Motheral & Fairman (2001)
 Joyce, Goldman & Escarce (2002, 2004)



Huskamp (2003)
Briesacher & Kamal-Bahl (2004)
Study suggests that lower use may be caused
by substitution of mail order prescriptions with
longer days supply
 Thomas & Wallack (2003)
6
Data

Medstat’s 2002 MarketScan databases:
 Medicare Supplemental and COB File
 Enrollment info for over 1 million
enrollees in retiree health plans
 Rx claims for enrollees
 Medical claims for enrollees
 Benefit Plan Design File
 Extracts information on Rx and
medical benefit features
7
Important Sample Caveats

Benefit plan information extracted for only 27 health plans

27 health plans drawn from only 10 firms, with almost very
little intra-firm variation in drug benefits

Less than ½ enrollees are linkable to benefit plan design
file

Several important plan design features are reported as
unknown

High degree of correlation between plan design features

Sample based on large, unionized, self-insured firms, and
thus not representative of Medicare population
8
Classification of Plans by
Drug Copayments
Plan
No. of
Category Plans
A
2
B
4
C
2
D
1
E
1
F
4
G
1
H
4
I
2
J
4
K
2
No. of
Tiers
1
1
2
2
3
3
3
3
3
Coins.
Coins.
Copay Amount ($)
Coins. Rate (%)
BN BN Generic Pref.
N/Pref. Generic BN
5
5
5
10
10
10
5
10
10
5
20
20
5
15
25
5
15
35
6
15
25
10
15
30
10
25
35
20
20
30
30
9
Enrollment and Drug Payments
by Copayment Tier
No. of
% of
Tier Enrollees Claimants
Mean Drug Payments
Total Enrollee % OOP
1
2
3
$2,531
$2,473
$2,028
318,512
496
69,188
90.5
80.2
88.9
$276
$298
$528
10.9
12.1
26.0
10
Basic Model
Accessi =  + 1 Demographicsi
+ 2 Health Statusi
+ 3 Plan Characteristicsi
+ 4 Medical Benefitsi
+ 5 Drug Benefitsi
+ εi
11
Model Outcomes

Access outcomes
 Number of prescriptions filled –
normalized by 30-days supply to account
for potential mail-order substitution


Total drug expenditures –
measured as ingredient costs to account
for differences in dispensing fees
Other outcomes
 Enrollee drug payments
 Percent of prescriptions filled by generic
drugs
12
Model Covariates
Demographic Characteristics Age
Gender
Actively working
Health Status
Long-term disability
HCC Risk score
Plan Characteristics
Managed care
Medical Benefits
Physician copay
Drug Benefits
Tier level
(Copay amount)
13
Estimation Procedure

Outcomes annualized to adjust for proportion of
year enrolled

Generalized linear model weighted by
proportion of year enrolled

Standard errors adjusted for within-firm
correlation of error terms

Payments estimated over claimants only
(roughly 90% of enrollees submitted claim)

Models run separately over claims for drugs
used primarily to treat chronic conditions
14
Impact of 3-Tiered Copayment
Program on Use and Cost of Rx
All
Enrollees
Number of Rx Filled
Total Payments ($)
Enrollee Payments ($)
Percent Filled with Generics (%)
-7.2 ***
-336 ***
185 ***
4.3 ***
Enrollees with
Chronic
Condition
-2.9 ***
-121 ***
136 ***
6.0 ***
Results from regression analysis.
Omitted category = 1 & 2 tiered plans.
15
What’s driving these results:
copay amounts or copay tiers?

Copayment programs are designed to
promote:
 Efficient use of drugs by raising the price of
all drug equivalents (i.e., increasing copay
amounts)
 Generic substitution by widening the price
differential between drug equivalents (i.e.,
increasing copay differentials)
16
Price and Substitution Effects

‘Price effect’ measures the change in drug use
following a change in marginal copays of drug
equivalents.
 Likely to lead to higher total spending and
lower drug use.

‘Substitution effect’ measures the change in drug
use following a change in the copay differentials
between drug equivalents.

Likely to lead to lower total spending with little
change on total use.
17
Decomposition Model
Accessi =  + 1-4 Other Covariatesi
+ 5 Copay Leveli
+ 6 Copay Differentiali
+ εi

Copay level = lowest plan copay amount

Copay differential = difference between
highest and lowest plan copay
18
Decomposing the Price &
Substitution Effects
Substitution
Price Effect
Effect
Percent change associated with:
$5 increase in
$5 increase in diff. betw. lowest
lowest copay
and highest
amount
copays
Number of Rx Filled
Total Payments ($)
Enrollee Payments ($)
Percent Filled with Generics (%)
-8.8 **
-1.2
***
154.2
***
-10.9
-6.1 ***
-5.4 ***
***
18.5
***
3.3
19
Conclusions

More aggressive enrollee cost sharing is associated with:

Fewer prescriptions filled

Lower total payments and higher enrollee payments

Higher proportion of Rx filled by generics

Smaller reduction in drug use and greater generic
substitution among those with chronic conditions

Increasing copay differentials through multi-tiered
program associated with:

Greater generic substitution

Smaller reduction in use of drugs
20
Policy Implications

More aggressive enrollee cost sharing may
promote efficient use of Rx, but may also
create barriers to access

Multi-tiered programs may be better than
higher marginal copays for achieving
efficiency without sacrificing access

Responsiveness to price incentives and, thus,
impact on access, may vary depending on
type of condition treated

Need to monitor impact of enrollee cost
sharing programs on access and health
outcomes in Part D plans
21