Thursday, April 17, 2008

Tier 4 Co-Pays and Pharmacy Prices

Monday’s New York Times story about on Tier 4 co-payments (Co-Payments Soar for Drugs With High Prices) generated a lot of attention. The article highlighted the heavy financial burden placed on patients when their insurance plans require 20-30 percent co-payments on very expensive specialty drugs. 86% of Medicare drug plans now have a Tier 4 co-payment level.

The New York Times editorialized that “something has gone terribly wrong when patients have to pay thousands of dollars a month for drugs that they need to maintain their health — and possibly save their lives.” PCMA used the story to advocate for generic biotech products or biogenerics. Brass and Ivory, a “carnival of MS bloggers,” has a good round-up of reactions to the story from patients and others around the web.

Here’s my Drug Channels spin—I don’t see how patients can appropriately manage their piece of the pie under these new programs without adequate access to pricing information. The story also illustrates how the economics of the pharmacy supply chain can have unintended and unseen influences on benefit design and patient behavior. Below, I take a look at Copaxone , a treatment for multiple sclerosis that was highlighted in the Times story. Even an industry expert like me had trouble gathering the right data.


Here’s the real problem: How should we manage the growing costs of specialty drugs? According to the latest Express Scripts Drug Trend Report:

  • Specialty drug spend increased by 14% in 2007, with about 60% of the increase due to increased utilization and only 35% due to price increases.
  • Non-specialty spending grew by only 4.4% in 2007.
  • Specialty spending is forecast to grow through 2011 at 18-20% per year, which will be 3-4X the rate of non-specialty spending.

Conventional (economics) wisdom holds that shielding consumers from the true costs of their health care decisions will lead them to “over-consume” health care. The theory of consumer-directed health plans is built around this notion. In many situations, the theory works. For instance, seniors under Medicare Part D are highly motivated to keep their total drug costs below the lower end of the doughnut hole. As a result, more seniors are trying to get the biggest bang for their buck by accepting generic substitution, as well as shopping around at pharmacies. (See Part D and Generics.)

Presumably, tier 4 plans could both offset payer’s costs while also encouraging lower utilization use of expensive specialty drugs by patients. However, the situations described in this article are much different because:

  • there are no generic alternatives;
  • the drugs are essential for care;
  • the drugs cost thousands of dollars per month; and
  • typical cost-sharing ratios put substantial financial burdens on patients.

Thus, tier 4 plans could be totally counterproductive and ultimately more costly if they lead to non-adherence to therapy, excess hospitalization, etc.


Even if we put aside the essential nature of these drugs, there are still two more prosaic challenges that the NYT article ignores completely:

(1) How easily can a consumer manage their co-payment levels?

(2) What price should be used as the basis for the co-pay computation?

Let’s look at Copaxone, which features prominently in the Times’ story of Ms. Robin Steinwand of Maryland. Under Ms. Steinwand’s (now discontinued) pharmacy benefit plan, Kaiser Permanente increased her co-pay from a flat $20 per month to 25% of the drug’s cost (up to a maximum of $325). She hit the $325 maximum in the first month.

In theory, co-pays calculated as a percent of a higher cost drugs should motivate a consumer to shop aggressively for the pharmacy that offers the lowest drug cost and therefore the lowest dollar co-pay.

But is that even possible? Here’s what I found for Ms. Steinwand's hypothetical search:

Maryland’s Prescription Drug Price Finder provides little help. It only lists the comparative list prices for 26 commonly used drugs. Other states, such as New York, typically gather data on the top 150 most prescribed drugs. However, Copaxone generates only $300 million in retail pharmacy sales (#112 nationally in 2007 per Verispan data), so the drug is unlikely to appear on any state price finder sites.

I was also unsuccessful in getting prices from the websites of CVS, Walgreens, or Wal-Mart, so my assistant Angela called some Maryland pharmacies to gather the following range of “list prices”:

  • CVS (Silver Springs, MD): “approx. $2,200” but must be special-ordered
  • Wal-Mart (Laurel, MD): $2,343.68 but must be ordered from Wal-Mart Specialty Pharmacy in Florida
  • Rite-Aid (Silver Springs): $2,390.99
  • Walgreens (Potomac, MD): $2,560.99

Knowing a bit about the pharmaceutical industry, I managed to turn up the following publicly available information. I doubt the average consumer would be able to locate and interpret these data.

  • Average Wholesale Price (Q4:2007) = $2,096.54 (from Florida’s ACHA site, among other places)
  • Average Sales Price (during Q4:2007) = $1,564.47 (from CMS’ drug pricing files)

According to the article, the drug was being dispensed from a retail pharmacy at a “cost” of $1,900, which suggests that Kaiser was reimbursing the pharmacy at around AWP minus 10%. Given typical channel mark-ups, I presume that the pharmacy would not have covered its acquisition cost without the $325 co-payment. (No, I am NOT implying that pharmacy kept the difference between ASP and AWP-10%.)


Even though Kaiser has altered the program described in the article, it’s clear that Tier 4 co-payments may be here to stay. However, Tier 4 co-payments seem like a half-baked idea right now. The wide variations in pharmacy prices for Copaxone make me skeptical that a savvy consumer (or payer) can ever truly figure out how to get the “best deal” on a potentially substantial out-of-pocket co-payment.

In the meantime, “Go broke or die” doesn’t seem like a sensible policy to me.


  1. One of the Big 3 shows Copaxone price to me (a small distributor in CA)at
    $1,882.16. This is about 1% over WAC.


  2. One of my concerns about Healthcare is that so-many pieces can be carved out. Everyone offers savings. But do they? Does the PBM or even the Mental Health Provider have the same goals as the Healthcare provider. There needs to be coordination.

  3. Wouldn't the patient's copayment be the same at any pharmacy contracted with her insurance company? By virtue of their contract with the third party the pharmacy agrees to sell the medication at a set price as AWP is the same at every pharmacy in the country. This is a situation where shopping around only appears to help find a pharmacy that can actually dispense specialty medication as most third party payers are restricting patients to their own specialty networks.

  4. The Times article was very interesting and it seems as though the payers are unaware (or ignoring the fact) that increasing copays on drugs such as copaxone won't change any behavior - you can't switch to a cheaper alternative.

    The op-ed pointed out the obvious that often seems to be forgotten in the move to CDHPs, HSAs, and choice. Insurers ONLY want healthy people and they will price very cheaply for young, healthy people. If you happen to have a serious illness they simply won't cover you. It is hard to blame them, given the costs they will incur and I am not sure of the answer but until there is a rational response, I think CDHPs/HSAs, etc. are problematic.

  5. One thing left out of the discussion was that Medicare Part D enrollees, after spending $4,050 OOP, move into catastrophic coverage where co-pays drop to 5%. This significantlychanges the upside costs to a patient on a very high cost drug.

  6. Why do you even consider what a pharmacy would charge? Reimbursement is set by the pbm, as is the copay. U&C prices mean nothing. I buy Copaxone for $1853.86. Reimbursement
    from 2 different plans is $1982.72,
    and $1959.14. This reflects current price. There was a price increase in January 08, previous cost was $1647.88 net, about a 13% increase by the manufacturer. You tell me where asp comes from. BTW, copays for these 2 plans were $12, and $0.

  7. To the most recent comment:

    ASP (Average Sales Price) equals the actual average price received by a manufacturer from all direct purchasers in a particular quarter.

    The ASP includes volume discounts, prompt pay discounts, cash discounts, free goods that are contingent on any purchase requirement, chargebacks, and rebates (other than Medicaid rebates). Thus, it's a good measure of the actual price that a drug makers received for a drug. ASP is typically at least 25-30% less than the published AWP (list price). It is also publicly available.


  8. More evidence that Presidential candidates recognize a slam-dunk political issue -- Senator Obama sent a letter requesting that the Office of Personnel Management "respond to reports that certain health care plans are charging unnecessarily high copayments for prescription drugs."

    Read the full text of the letter.


  9. Definition of asp is correct, but it means nothing to a retail pharmacy, as it comes nowhere close to what we pay.

  10. Adam,

    Please don't drag retail pharmacy into this one. Why?

    1. Retail pharmacy( independents) do not have negotiation rights in contracts with PBM's

    2. Retail pharmacy is not responsible for retail copays. The reimbursement formulas are based on an AWP less % formula and your suggestion that it is around AWP less 10% is not true. Most reimbursements on brand name drugs are in the AWP less 16% to 17% range. That would leave a 3% to 4% gross margin plus the astronomical dispensing fee of on the average of $2.00. Therefore, there will be no usual and customary retail prices out there that even come close to this low payment from the PBM

    3. Most PBMs have established their own specialty mail order pharmacies to handle this business.

    You might want to place blame on the benefit managers of the employees' company and on the Prescription benefit managers. Look at the recent profits of CVS-CareMark and Express Scripts. They are in the business of denying healhcare benefits so the next quarter will look better than last to Wall Street.

  11. Adam,

    Where do you get your information about ASP being AWP less 25% - 30% on Brands and that retail pharmacy is paying that price? That might apply to the wholesalers buying from the manufacture, but don't assume that is what retail pharmacy is paying the item. More disinformation from your blog

  12. Sorry, conspiracy theorists -- no disinformation here. Note that I included the following statement in the original post: "No, I am NOT implying that pharmacy kept the difference between ASP and AWP-10%." Seems clear to me.

    My sources are noted above: AWP is a published price, while ASP is the average transactional price with direct purchasers (primarily wholesalers and perhaps some large pharmacies or providers).

    I highlighted ASP b/c the article is about co-pays as a % of "drug cost," which can have different meanings. Anything more than ASP is margin for the channel (wholesaler, pharmacy, PBM, providers, etc.) to pay for operating costs and profit margin.


  13. Adam,

    The average gross margin received on brand name drugs under a PBM scenerio is 10-11% today. What is the gross margin received by the manufacturer?
    And what is the rebate being paid back to the PBM ?

    In your blog at the end you suggest that the retail pharmacy is deeply involved in the pricing process. Come on Adam !!!!