1. The Cost of Reference-Priced Generic Drug Coverage

2. ID NAME GOES HERE-2 0204 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

3. ID NAME GOES HERE-3 0204 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

4. ID NAME GOES HERE-4 0204 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

5. ID NAME GOES HERE-5 0204 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

6. ID NAME GOES HERE-6 0204 Co-payments in Two Generic Plans

7. ID NAME GOES HERE-7 0204 Estimated Plan Costs (PMPY)

8. ID NAME GOES HERE-8 0204 Plan Costs by Therapeutic Class (Ages 18-64)

9. ID NAME GOES HERE-9 0204 Plan Costs by Therapeutic Class (Ages 65+)

10. ID NAME GOES HERE-10 0204 Generic Alternatives to Leading Brands

11. ID NAME GOES HERE-11 0204 Generic Alternatives to Leading Brands

12. ID NAME GOES HERE-12 0204 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

13. ID NAME GOES HERE-13 0204 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

14. ID NAME GOES HERE-14 0204 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

15. ID NAME GOES HERE-15 0204 Response #3 Continue to use brand name drugs and maintain volume –No change in health –Plan costs decrease –Beneficiary OOP costs increase

16. ID NAME GOES HERE-16 0204 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?

17. ID NAME GOES HERE-17 0204 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