Tuesday, September 14, 2010

Big Growth in Four-Tier Drug Benefits

The Employer Health Benefits 2010 Annual Survey, a new report by the Kaiser Family Foundation and the Health Research and Educational Trust, made the news with the finding that employers are passing more health-insurance costs onto employees in 2010. See Employers Sharply Raise Workers' Share of Health Costs.

Buried in the report is an important pharmacy benefit trend—the growth of plan designs with four or more tiers. One out of eight employers now have high-tier plans, almost double the pre-economic meltdown proportion from 2008.

Why should you care? Because four-tier plans can pose enormous financial burdens on patients who pay co-insurance—a percentage of drug costs—rather than a fixed dollar co-payment. I wrote about these patient challenges way back in 2008 in Tier 4 Co-Pays and Pharmacy Prices.

Pharmaceutical manufacturers also need to make sure that certain products don’t end up on a fourth tier because it can dramatically reduce or eliminate access for patients. In the lexicon of a pharmaceutical manufacturer, four-tier plans pose a significant challenge to the payer marketing function, something I am seeing first-hand in my consulting work with drug companies.


The latest survey is based on responses from 2,046 companies. 1,892 (92.5%) of these companies offer health benefits to employees. Methodology geeks can read more in the Survey Design and Methods.

Drug Channels readers will be especially interested in the section on Prescription Drug Benefits. Here are links for your reading pleasure:

A formulary classifies drugs into different cost tiers—categories that define the plan member’s co-payment or co-insurance levels. Prescription drug plans financially reward patients for using generic and lower-tier formulary drugs by requiring the patient to pay progressively higher co-payments or co-insurance for drugs on higher tiers.

The three-tier formulary—generic drugs, preferred brand-name drugs, and non-preferred brand-name drugs—remains the most common in the EHBS survey. However, plans with four of more tiers have grown from 3% of employer-sponsored plans in 2004 to 13% of these plans in 2010. Exhibit 9.1 below (source) shows the growth of four-tier pharmacy benefit designs.

As you can see, the biggest jump occurred during the past two years spanning the economic downturn and current weak recovery.

Exhibit 9.4 (not pictured) summarizes average co-payments and co-insurance for plans with three, four, or more tiers. Average co-payments in four-tier plans are $11, $28, $49, and $89.


Co-insurance rates average a troubling 36% for tier 4 drugs. The EHBS survey didn’t ask which products end up on the fourth tier, but in my experience, these drugs tend to be lifestyle or expensive specialty drugs.

Guess what? Costs for these drugs are soaring.
Presumably, four-tier plans offset payer’s costs and encourage lower utilization use of expensive specialty drugs by patients. On the other hand, four-tier plans could be totally counterproductive and ultimately more costly if they lead to non-adherence to therapy, excess hospitalization, etc.

I’m not aware of any fact-based perspectives on how this trade-off is playing out in the real-world of four-tier plans. Feel free to send me any studies or research that address this question.

I also don’t see how a patient can appropriately manage co-insurance under a tier 4 design without adequate access to pricing information. Regular readers know that pharmacy prices, reimbursement amounts, and acquisition costs are a mystery to both consumers and (often) payers. Walmart’s UK subsidiary ASDA launched a “not for profit” pricing model for cancer drugs (Walmart Starts Another Pharmacy Price War), but this type of transparency doesn’t exist here.


The Onion, America’s Finest News Source, captured reactions to the study in its American Voices piece Health Insurance Costs Shifting To Workers. As always, a very intriguing set of responses from everyday citizens.

And here's Smokey Robinson & The Miracles singing about pharmacy benefit design.


  1. Adam, another example of how we view healthcare in silos instead of looking at the total picture. How many studies do we need that show a strong link between adherence and compliance with lower healthcare costs? Why do companies focus so much effort on the cost of drugs when it is only 10% of the cost of healthcare but can have the biggest impact on reducing the cost of healthcare, not to mention employee productivity.

    Keep up the good work and keep putting the word out there!

  2. I'd like to mention the disincentive of mail order and preauthorizations.

    My old plan allowed 90 day fills at retail. Generics were $10 for a 90 day fill, brands varied - generally 20% of negotiated rate - but were capped at $200 for a 90 day fill. My current plan requires mail order for 90 day fills, with generics at $37.50 and brands at $87.50. The average price paid with my previous plan for 90 day fills on brands was approximately the same as I pay now.

    As far as generics go, I have scripts spread out over 3 different pharmacies because I can get better pricing on most 90 day fills without sending them out to Senator Lieberman's constituent.

    Preauths peeve me to no end. I was diagnosed with a particular condition 4 years ago, and insurance companies are incredulous because I am not a grade school student. They would use MIB reports to deny me coverage if I omitted it from an individual insurance application, why don't they just read the darn report they've already paid for?