Below I examine the latest data on pharmacy benefits: cost sharing tier structures, copayment vs. coinsurance, and out-of-pocket obligations. As you will see, pharmacy benefit designs again increased the use of coinsurance for specialty and fourth-tier drugs.
These designs significantly raise patients’ out-of-pocket obligations—and contribute to the controversy over copay accumulator adjustment and copay maximizers. In 2023, employers’ savings and PBMs’ profits from these programs will decline—which will trigger a coming crackdown on specialty drug benefits. Beneficiary beware!
P.S. As usual, you will also enjoy some terrible Drug Channels tiers/tears puns.
TAKE A GOOD LOOK AT MY … DATA
To profile pharmacy benefits, we rely on the recent Kaiser Family Foundation (KFF) 2022 Employer Health Benefits Survey, which you can read online for free.
This survey tracks employer-sponsored health benefits of more than 1,700 companies. Fellow data nerds can click here for the full methodology.
Employers remain one of the largest payers of prescription drugs, though their share has been declining. Nearly all large employers and half of all small employers offer health benefits to employees. More than 99% of covered workers in these plans have a prescription drug benefit.
Employers offer plans with and without high deductibles. For 2022, 28% of employees were enrolled in High-Deductible Health Plans with a savings option (HDHP/SOs). For our analyses of plan designs, we consider two types of HDHP/SOs:
- HDHP/HRA: A plan with a deductible of at least $1,000 for single coverage and $2,000 for family coverage, offered with a health reimbursement arrangement (HRA).
- HSA-Qualified HDHP: A high-deductible plan that meets the federal legal requirements to permit an enrollee to establish and contribute to a health savings account (HSA). For 2022, federal law required a deductible of at least $1,400 for single coverage and $2,800 for family coverage for HSA-qualified HDHPs.
YOU’LL SEE MY COSTS LOOK OUT OF PLACE
For consumers with third-party pharmacy benefit insurance, the share of a prescription’s cost is usually linked to benefit cost tiers—categories that define a plan member’s copayment or coinsurance. In general, prescription drug plans financially reward patients for using generic and lower-tier drugs. They require the patient to pay progressively higher copayments or coinsurance for drugs on higher tiers.
For more background on pharmacy benefits and comparisons among payers, see chapters 5 and 6 of our Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.
Here are the Kaiser survey’s definitions for common terms used in its report and the charts we share below:
- Generic drugs: Drugs that are no longer covered by patent protection and thus may be produced and/or distributed by multiple drug companies.
- Preferred drugs: Drugs included on a formulary or preferred drug list; for example, a brand-name drug without a generic substitute.
- Nonpreferred drugs: Drugs not included on a formulary or preferred drug list; for example, a brand-name drug with a generic substitute.
- Fourth-tier drugs: New types of cost-sharing arrangements that typically build additional layers of higher copayments or coinsurance for specifically identified types of drugs, such as lifestyle drugs or biologics.
- Specialty drugs: Specialty drugs such as biological drugs are high cost drugs that may be used to treat chronic conditions such as blood disorder, arthritis or cancer. Often times they require special handling and may be administered through injection or infusion.
IF YOU LOOK CLOSER
The chart below summarizes the structure of different benefit plans:
- For 2022, 61% of employees in plans without high deductibles were enrolled in plans with four or more tiers. An additional 30% of employees were in plans with three tiers. Compared with 2021, a greater share of workers were in plans with four or more tiers, while a smaller share were in plans with three tiers.
- For HDHP/SOs in 2021, plans with four or more tiers were also the most common, accounting for 41% of enrollment. That figure was 44% in 2021. Three-tier plans accounted for 25% of enrollment—a decline from the 49% in 2019, 33% in 2020, and 31% in 2021.
For 2022, The share of employees in HDHP/SOs with no cost sharing tiers was 11%, compared with 3% in traditional plans. An additional 9% of employees in high-deductible plans had no cost-sharing after the deductible was met. Only 1% of employees in traditional plans faced either of these tiers.
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IT'S EASY TO TRACE
Below, we compare cost sharing for prescription drugs in HDHPs/SOs with plans that lack high deductibles.
The first chart below shows the utilization of copayment vs. coinsurance in employer-sponsored plans without a high deductible. The prevalence of copayments (instead of coinsurance) was roughly comparable to the 2021 figures. The use of copayments for fourth-tier drugs has dropped over time, from 62% of plans in 2020 to 48% of plans in 2022.
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By contrast, HDHP/SOs continue to favor coinsurance on lower tiers. For second- and third-tier drugs, the share of employees with coinsurance in HDHP/SOs is much higher than the share in more traditional plans. The prevalence of coinsurance for fourth-tier drugs in HDHPs increased for the third consecutive year, from 30% in 2020 to 48% in 2021 to 61% in 2022.
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The 2022 survey asked employers at firms with 200 or more workers about separate specialty drug tiers. For 2022, a majority (61%) of covered workers were enrolled in a plan that has a separate tier for specialty drugs. In plans with a specialty drug tier, 49% used coinsurance on that tier. Unfortunately, KFF did not report results by plan type for specialty drug coverage.
THE TRACKS OF MY TIERS
The chart below shows average copayments and coinsurance rates for employer-sponsored prescription drug plans with three or more cost sharing tiers. (The data are not available for HDHP/SOs vs. other plans.) The copayment levels and coinsurance rates are similar to the figures for the 2021 benefit year.
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Note that coinsurance amounts are typically based on the negotiated rate between a pharmacy and a payer. These amounts approximate a drug’s undiscounted, pre-rebate list price. Consequently, out-of-pocket coinsurance amounts can be quite high, especially for more expensive specialty drugs. It also means that most patients pay a much greater share of the prescription's net price than might be apparent from the coinsurance percentage. For instance, a 25% coinsurance for a drug with a 30% rebate is equivalent to a 36% coinsurance on the net price.
Many people with employer-sponsored insurance also have no out-of-pocket maximum for fourth-tier and specialty drugs, which further increases their financial obligation. For 2022, 26% of all workers had no out-of-pocket maximum for fourth-tier specialty drugs, and 32% had no limit for specialty drugs.
Any prescription cost sharing in these plans is of course subject to a plan's overall out-of-pocket maximum. However, the obligation can be very high. For single coverage in employer-sponsored plans in 2022, 70% of workers faced an out-of-pocket maximum greater than $3,000. An additional 21% had an OOP max greater than $6,000. Note that these limits fell below the Affordable Care Act mandates for non-grandfathered commercial health plans.
With higher copayments and the use of coinsurance, is it any wonder that so many people with insurance use discount cards instead of their benefits?
INSIDE MY HOPE IS FADING
These pharmacy benefit designs have shifted out-of-pocket spending for prescription drugs from flat copayments toward deductible and coinsurance spending. A recent IQVIA analysis found that 60% of patients’ out-of-pocket spending for brand-name drugs came from deductibles and coinsurance.
In response to these benefit designs, pharmaceutical manufacturers often offer a copayment offset (also called copay cards or coupons) that covers a beneficiary’s out-of-pocket costs for a brand-name drug.
And in response to the manufacturers' programs, payers now routinely use copay accumulator adjustment and copay maximizers to extract value from the manufacturer’s copay support and benefit from the lower spending that results. See How Copay Accumulators and Maximizers Have Changed Payers’ View of Copay Support.
In my next update on accumulators and maximizers, I’ll explain why the plans' gravy train will slow down in 2023. As it does, specialty drug benefits will get less generous. Sadly, it may also drive more companies to experiment with the unethical games of alternative funding programs, per The Shady Business of Specialty Carve-Outs, a.k.a., Alternative Funding Programs.
Deep inside, it's the patients who will be blue.
Please enjoy Philadelphia’s own Boyz II Men singing about pharmacy benefit design. Click here if you can’t see the video.