The Devil in the Tiers
77 Pages Posted: 5 Dec 2019 Last revised: 13 Feb 2020
Date Written: November 19, 2019
Prescription drug spending in the United States soared in the last decade, fueled by rising drug prices. A critical mechanism for restraining drug prices is the formulary system, which dictates the drugs that will be reimbursed. Formularies are divided into tiers that determine how much patients pay. The system traces back to the American Revolution. Although tiering should reflect the cost of a drug—and reward patients who choose generics over brands—something is seriously amiss.
Using Medicare claims data, I followed roughly one million patients between 2010 and 2017, finding troubling amounts of irrational tiering and wasted cost. Increasingly, generics have been shifted to more expensive—and therefore less accessible—tiers. The percentage of generics on the most preferred tier dropped from 73% to 28%; the percentage of drugs on inappropriate tiers rose from 47% to 74%. Considering only costs paid by patients and the federal low-income subsidy program, tier misplacement cumulatively cost society $13.25 billion.
An unruly problem demands a disruptive solution. To fix the formulary system, this article advances the counterintuitive regulatory reform that tiering should be based on a drug’s list price. Yes, list price—that badly maligned, roundly dismissed figure—should become the touchstone. This would deter incentive-distorting rebate schemes while recognizing that many people already pay list price. Basing tiering on list price is a remarkably streamlined approach for cutting through a wide swath of perverse incentives and manipulations. After all, at the end of the day, it is the price that matters.
Keywords: drug prices, formulary, healthcare, tier system, incentive, insurers, list price, rebate schemes
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