Thursday, September 05, 2013

How the Fourth Tier Coinsurance Boom Drives Copay Offset Programs

The new 2013 Kaiser/HRET Employer Health Benefits Survey, released in August, highlights a troubling trend—the sharp growth in coinsurance for expensive specialty medications on the fourth tier of benefit plans.

Here are some pharmacy benefit highlights from this excellent survey of employer-sponsored health coverage at more than 2,000 companies:
  • Three-tier plans remain the most common benefit design, but 25 percent of employees now have a plan with four or more tiers. Products on this top tier tend to be specialty drugs.
  • Almost half of employees now face coinsurance (instead of copayments) for fourth-tier drugs.
  • Coinsurance averages 32 percent of a drug’s cost, potentially creating large financial burdens for expensive drugs. However, most employees have maximum dollar limits on this coinsurance.
As I see it, the fourth-tier coinsurance boom is closely linked to copayment offset programs. With few formulary rebates available for specialty drugs, employers and their PBMs are daring manufacturers not to cover patients’ huge out-of-pocket costs. Thus, copayment offset programs for specialty drugs are becoming a roundabout way for payers to extract discounts from pharmaceutical manufacturers.

Read on for the tracks of my tiers.


The 2013 report tracks health benefits at 2,067 firms, 90% of which offer health benefits to employees. Nearly all (98%) covered workers in these plans have a prescription drug benefit.

The survey’s sampling methodology is solid. Since many companies participate annually, the time trends are pretty reliable. Almost 80% of the firms that completed the 2013 survey also participated in 2011 or 2012.

Drug Channels readers will be most interested in the survey data on Prescription Drug Benefits (section 9). Here are links to the report and key sections:
  • Methodology (for the stats nerds—you know who you are!) 
Unfortunately, the report provides very limited break-out of results organized by employer size, industry type, and other characteristics.


For employees with third-party pharmacy benefit insurance, the share of a prescription’s cost is usually linked to benefit cost tiers. These categories define a plan member’s copayment or coinsurance. Prescription drug plans generally reward patients for using generic and lower-tier drugs by making them pay progressively higher copayments or coinsurance for drugs on higher tiers.

As Exhibit 9.1 (reproduced below) shows, the three-tier design—(1) generic drugs, (2) preferred brand-name drugs, and (3) non-preferred brand-name drugs—remains the most common, used in 59% of employer-sponsored plans. However, plans with four or more tiers have grown from 3% of employer-sponsored plans in 2004 to 23% in 2013. Note the big (and statistically significant) jump from 2012 to 2013.

On higher tiers, coinsurance is much more common than copayments. As the chart below shows, forty-eight percent of covered workers now have coinsurance for fourth-tier drugs, while only 9 percent of workers have coinsurance for first-tier drugs. Products on the top tier tend to be more expensive specialty drugs.

Fourth-tier plans offset payer’s costs and reduce utilization use of expensive specialty drugs. However, these benefit designs could also be totally counterproductive if they lead to non-adherence, excess hospitalization, and higher medical benefit expenses.


Plans with four or more tiers can create financial burdens to accessing to newer specialty therapies. Coinsurance for fourth-tier drugs averages 32%, which means that a patient would pay more than $600 for an average specialty prescription of $2,000. Fortunately, 69% of employees have a maximum dollar amount (according to Exhibit 9.9).

Employers and their pharmacy benefit managers (PBMs) typically make manufacturers of therapeutically comparable, brand-name drugs compete for placement on the plan sponsor’s formulary. See A Peek at Manufacturers’ PBM Rebates.

But unlike traditional drugs, biological specialty drugs lack generic alternatives. (An FDA review and approval process for biosimilars is still being developed.) Employers and their PBMs therefore can't negotiate traditional formulary rebates and discounts.

Thus, the coinsurance boom highlights employers' subtle, behind-the-scenes discounting strategy:
  • Make the patient pay a big share of a drug’s cost, thereby providing a discount to the payer.
  • Dare pharmaceutical manufacturers *not* to pick up the patient’s coinsurance.
Given the growth of fourth-tier coinsurance, it’s no surprise that pharmaceutical manufacturers have been stepping up copay offset programs that cover the patient’s out-of-pocket expenses. Nearly 70% of biological drugs have copay programs, compared with only 44% of traditional brand-name drugs. See A New Reality Check on Co-Pay Offset Programs. While copay offset programs generate enormous criticism, the coinsurance boom suggests that these programs will keep growing.

A final thought to ponder: For patients facing fourth-tier coinsurance and without access to copay offset programs, “Go broke or die” doesn't seem like a sensible policy to me.


Here's Smokey Robinson & The Miracles surveying pharmacy benefit design:

For a deeper dive into formulary management, you should also review Tiers of a Clown.


P.S. To my fellow readers who will be welcoming 5774: L'Shana Tovah!


  1. Adam, Great summary. A bit concerning when coupled with medical plan out-of-pocket. Seems like it will affect compliance?

  2. Gotta get me one of those suits!

  3. Adam,
    Thanks. As always, clearly insights we need. Susan's comments echo mine. Compliance. I'm still stymied by the disconnect that employers/insurers make between cost of coverage and compliance. Studies have shown many times over that compliance drives down total cost of healthcare. Even to the point that paying 100% of drugs has a huge impact on over all costs because compliance goes up so much and needless medical care is reduced. I wish you'd add this to your input above. As the sage of our time, Allen Iverson, would say if given the opportunity: "It's compliance man, compliance. I'm talking compliance..." (He being a former 76'er I thought you'd appreciate the reference.)