The Effect of Consumer Driven Health Plans on Pharmaceutical Cost & Use: Do 3-Tier Plans Have a Competitor? Stephen T Parente Jon B Christianson Roger Feldman July, 2005

Questions to be Addressed  What is the impact of CDHP on total cost?  What is the impact of CDHP on pharmacy cost?  Is there a general pharmacy utilization effect?  Is there a specific pharmacy utilization effect? Therapeutic groups Brand vs. generic Chronic patients  Is there a CDHP pharmacy consumer price effect?

Why Focus on Pharmacy  Fastest rising cost sector of health economy  Recent innovations in both CDHP and non- CDHP marketplace Non-CDHP: 3-tier consumer payment CDHP: Consumer prices vary by employee/patient total expenditure level  CDHP ‘shopping’ tools are most advanced for pharmacy market

3-Tier Overview  Three tiers jointly determined and priced by employer/insurer/pharmaceutical benefits management firms (PBMs)  Common in most health plans  Example of structure (price 500mg of X): Tier 1 ($20): Generic Tier 2 ($40): Brand-preferred pricing Tier 3 ($60): Brand-no preferred pricing

Definity Health as CDHP Model Definity Health Care Advantage Web- and Phone- Based Tools Health Tools and Resources Care management program Internet enables Health Coverage Preventive care covered 100% Annual deductible Expenses beyond the PCA Personal Care Account (PCA) Employer allocates PCA 1 Member directs PCA Roll over at year-end Apply toward deductible 2 Annual Deductible Preventive Care 100% Health Coverage Annual Deductible 1 Employer selects which expense apply toward the Health Coverage annual deductible. 2 Paid out of employer’s general assets. PCA $$

CDHP Pharmacy Expenditure Model: Chuck’s Story ONE 1/1/05 to 4/17/05: Chuck’s Rx $800 expenditures are ‘debited’ from his family’s PCA. For example, his Clarinex prescription with price of $85 for a month supply is charged to the account. His copayment is $0. TWO 4/18/05: Chuck’s son breaks his leg playing Bocce Ball. Son’s bills total $1,700. Total expenditure for 2004 are now $2,500. Rx now paid out of pocket. THREE: 7/5/05: After Chuck Jr.’s fall and $500 of Rx and medical care, Rx is now paid with a 10% co-insurance until 1/1/2006. Annual Deductible $1,500 Preventive Care 100% Health Coverage Annual Deductible PCA$1,500 $3,000 Drug prices negotiated used a PBM, but no tiered prices are in play.

Conceptual Model of CDHP versus 3- Tier Pharmaceutical Budget & Demand Money Medical Care Spending HRA deductible d a b Co-pay Budget c CDHP Budget A to B: Care Account B to C: Deductible C to D: Catastrophic insurance w/no coinsurance

Study Hypotheses  Greater price sensitivity in a CDHP than 3-tier plan Incentive to conserve $$ if healthy Incentive to seek best price for Rx if chronically ill to use all PCA $$ ‘cost-effectively’  More proportionate use of generics in the 3-tier than the CDHP  No change in price elasticity for specific drugs between CDHP and 3-tier

Study Setting  3-Tier Designs offered by a large employer in their Point of Service (POS) and Preferred Provider Organization (PPO) in  Employer and introduced CDHP in 2001  Variation in cost sharing by contract  Take-up of CDHP approximately 15%  General caveat: Employer’s experience can be quite different due to: Alternatives offered Plan design Communications with employees Sponsor’s objectives for the plan

Presentation of Results  Results are limited to three groups of employees who worked for the firm continuously for four years ( ) where: 1.Employee chose the CDHP in 2001, 2002 and Employee chose another health plan in 2001, 2002 and  This limitation removed 70+% of all employees from the analysis  We want to see both adoption and maturing impact of CDHP while controlling for prior spending 2000: Pre-CDHP experience controls for prior spending 2001: CDHP adoption year : CDHP ‘maturation’ years

Econometric Specification Used difference-in-difference approach Generate unadjusted (year 2000 means) and regression- adjusted comparisons. Regression adjustment based on two-part model Regressors included: age, gender, illness burden, number of dependents, FSA election and income. Subsequent tests for regression to the mean in overall expenditures and use found the problem to be present, but not to a degree that would influence our results.

Impact of CDHP on pharmacy cost NOTE: These are results from a restricted continuously enrolled sample of 27% of the total employee population and are not a reflection of the plans’ expenditures.

Is CDHP general pharmacy use different? NOTE: These are results from a restricted continuously enrolled sample of 27% of the total employee population and are not a reflection of the plans’ full experience.

Is CDHP general pharmacy use different?  CDHP cohort has initial lower probability of pharmacy use as well as volume of use compared to a POS. The trends turns positive in  CDHP cohort has lowest initial pharmaceutical expenditure, but increases by 25% in  Consumer-driven component might work for pharmacy if long term effects don’t drive up use of unnecessary scripts.

Is brand name pharmacy use different for CDHP enrollees? NOTE: These are results from a restricted continuously enrolled sample of 27% of the total employee population and are not a reflection of the plans’ full prescription drug experience.

Is there a difference in pharmacy use for CDHP patients with chronic conditions? NOTE: These are results from a restricted continuously enrolled sample of 27% of the total employee population and are not a reflection of the plans’ full prescription drug experience.

The Health Economics Punch line: Did the CDHP Group Act Differently at the BC Kinks? NOTE: These are results from a restricted continuously enrolled sample of 27% of the total employee population and are not a reflection of the plans’ full prescription drug experience. YES …and YES LHS: Any Rx Service, 0 or 1

Is pharmacy use different by the ‘Top 5’ therapeutic drug groups? NOTE: These are results from a restricted continuously enrolled sample of 27% of the total employee population and are not a reflection of the plans’ full prescription drug experience.

Are there more specific differences in CDHP pharmacy use?  CDHP population has general and significant trend toward higher use across major therapeutic classes.  The CDHP population made the most use of brand name drugs by 2002 and  The proportion of brand name drugs to all drugs increases over time in the CDHP.  The PPO is associated with decreased use of drugs among patients with chronic illnesses, but with a general increasing cost trend.

Summary  Early evidence suggests overall costs in CDHP are less than 3-tier pharmacy plans by the second year, but increase thereafter.  Significant differences exist in pharmacy expenditure between PPO and POS.  CDHP pharmacy expenditures are initially less than 3-tier pharmacy plans.  CDHP probability of use in three of the top 5 Rx therapeutic classes is higher than 3-tier plans.  CDHP chronic condition cohort drug use is generally higher than 3-tier population.  Brand name drug use higher in CDHP, but overall cost is lower. Suggests 3-tier model may not be very effective in comparison if pharmaceutical expenditures are less and brand consumption is higher.

Next Steps  Examine other employers’ data for comparison.  Examine employers willing to provide more than two years of data to see longer-term CDHP effects.  Get other CDHPs for comparison data (e.g., Lumenos, Aetna, United Healthcare’s iPlan).  Examine specific chronic illnesses where drug consumption is critical to treatment (e.g., depression, heart disease, epilepsy).