The Cost of Reference-Priced Generic Drug Coverage

ID NAME GOES HERE 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

ID NAME GOES HERE 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

ID NAME GOES HERE 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

ID NAME GOES HERE 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

ID NAME GOES HERE Co-payments in Two Generic Plans

ID NAME GOES HERE Estimated Plan Costs (PMPY)

ID NAME GOES HERE Plan Costs by Therapeutic Class (Ages 18-64)

ID NAME GOES HERE Plan Costs by Therapeutic Class (Ages 65+)

ID NAME GOES HERE Generic Alternatives to Leading Brands

ID NAME GOES HERE Generic Alternatives to Leading Brands

ID NAME GOES HERE 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

ID NAME GOES HERE 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

ID NAME GOES HERE 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

ID NAME GOES HERE Response #3 Continue to use brand name drugs and maintain volume –No change in health –Plan costs decrease –Beneficiary OOP costs increase

ID NAME GOES HERE 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?

ID NAME GOES HERE 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