Research Reveals Manipulation in Drug Pricing Tiers

New paper outlines how the tiered system that health plans use to reimburse drugs is being abused, costing $4.2 billion.

Since the 1980s, health care insurers have established tiered pricing systems, commonly known as formularies, that determine what Americans will pay for their drug prescriptions. The formularies are designed to help patients choose less expensive medicines that are just as effective as pricier ones, ideally creating a virtuous pricing cycle that fosters a healthy market with systemic incentives. However, new evidence from an analysis of Medicare claims from 1 million patients over six years shows widespread manipulation in today’s system.

Instead of working as intended, formulary system abuses conservatively cost patients and the government over $4.2 billion in 2015 alone, a figure that has climbed sharply since 2010. The average cost per beneficiary of abnormal tier placement grew from $11 in 2010 to $72 in 2015. The findings were published in a paper by Robin Feldman, Arthur Goldberg Distinguished Professor of Law at UC Law SF.

Under the current system, patients end up paying drug prices based on which tier their insurer places the drugs they need, and not on the lowest available price. Across the six years of Feldman’s analysis, from 2010 to 2015, the number of medications placed on inappropriate tiers increased from 43% to 65%. Many complex drivers lead to these misplaced drugs, including misaligned incentives, such as rebates and kick-back schemes, among pharmaceutical companies, pharmacy benefit managers, and insurers, Feldman found.

Generics are Losing, Which Drives Up Pricing
Generic drugs are also increasingly losing out in the current system. The percentage of generics on the most preferred tier dropped from 73% to 31% between 2010 and 2015. The percentage of generics on all other tiers increased. A thriving generic market is critical to injecting competition into the pharmaceutical drug marketplace and serves to drive down pricing.

Feldman says it is concerning to see the erosion of generics as a low-priced alternative in the formularies because all of these factors drive up drug prices.

“Something is seriously amiss with the tiered drug pricing system,” said Feldman. “Soaring pharmaceutical prices is a challenging and complex problem, deeply affecting the lives of patients throughout the U.S.”

List Pricing Would Help Reveal Net Pricing
Feldman recommends that regulators and legislators reform the formulary rules to require that drugs are assigned to tiers based exclusively on list price. Basing tiering on list price would put an end to the rebate and kick-back schemes that hurt consumers and society at large and would circumvent the notoriously difficult task of identifying net prices. Feldman suggests that Medicare could lead the way by using its unique market position and tweaking its existing regulations on tiering toward list price, which would transform all Medicare plans and cause a ripple effect in the private insurance markets.

“There is no magic bullet,” Feldman said. “But the current off-kilter price tiering system contributes substantially to the problem of high drug prices in the U.S. and costs patients and the government billions of dollars annually.”

“With a tiered formulary system that is based truly on list price, consumers will benefit when they purchase reasonably priced drugs, generating significant cost savings for consumers, health plans, and the government,” Feldman said.

SOURCE: Feldman, Robin. 2019. The Devil is in the Tiers. Available online at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3490065