Research Confirms Growing Popularity Of Three-Tier Formularies

Plan sponsors, employers and pharmacy benefit managers (PBMs) alike need innovative approaches for drug benefit plan design that will not bankrupt their organizations.  Plan sponsors are using a well-known stable of drug benefit management tools to contain costs.  While these tools have contributed to the complexity of the drug benefit, they are effective in curbing the rate of increase in drug expenditures.

Formulary designs and copayment structures that give members incentives to use the most cost-effective drugs--especially generic drugs--are critical for a well-managed drug benefit.  The three-tier formulary epitomizes this concept, allowing plan designs to expand from traditional incentives for generic drug utilization to also encouraging the use of specific brand-name drugs.  This design encourages patients to use cost-effective branded drugs when generic drugs are not appropriate. 

The use of three-tier formularies has increased dramatically over the past few years.  See Figure 1: Increase in Use of Three-tier Formulary, 1998-2001.  The use of multi-tier formularies is expected to continue to grow.  Additionally, it appears some plan sponsors are beginning to identify additional categories of drugs to which they are assigning different cost sharing levels such as a 100 percent coinsurance for lifestyle drugs.

Much has been learned about the use of cost sharing incentives as part of the three-tier formulary concept. One important component of this is the difference in the cost sharing amount between the different tiers.  Figure 2: Trends in Retail Copayment for Three-Tier Plan Designs, 1999-2001 on page two, reports the average dollar figures for copayments over the past three years. 

The modest increases in first-tier copayments--in comparison to higher increases in second- and third-tier copayments--reflects thoughtful plan design.  By keeping cost-sharing increases for first-tier drugs to a minimum, plan sponsors have found an economic incentive to increase generic utilization.  By increasing the difference between the second and third tier from $10.58 in 1999 to $14.45 in 2001, plan sponsors are encouraging the use of preferred brand drugs in the second tier.

In addition to confirming the value of incented formularies, the PBMI research findings quantify other industry trends.

Research Highlights

• Employers' use of restricted pharmacy networks has not increased in spite of an average of 1.4 percent lower AWP discount compared to a full-access network.

• Average wholesale prices (AWP) are declining in both retail and mail-service pharmacies.

• As a complement to incented formularies, generic drug use requirements and mandatory mail-service help provide increasing control over cost and drug mix.

• Cost sharing will have to continue increasing as double-digit drug price inflation continues. Although percentage coinsurance makes patient copayments more complex to calculate, it indexes cost sharing against inflationary pressures.

• Employers are embracing step therapy as an additional way to curb inappropriate utilization.

PBMI's seventh annual drug benefit plan design and drug cost survey was the subject of a recent presentation at the Academy of Managed Care Pharmacy meeting given by PBMI President Michael Deskin. He shared shared top-line research findings with more than 2,000 professionals involved in prescription drug benefits.

In addition to the detailed presentation of research findings, PBMI's report includes three case studies of successful cost and utilization management strategies. The report features supplemental articles on the value of health care coalitions, reimportation of drugs, and the implications of the Health Insurance Portability and Accountability Act of 1996.  PBMI prepared the Takeda Prescription Drug Benefit Cost and Plan Design Report based upon a survey it conducted of nearly 500 employers.  To order a copy of this report, visit www.pbmi.com.

Top