Skip Navigation U.S. Department of Health and Human Services www.hhs.gov
Agency for Healthcare Research Quality www.ahrq.gov
Archive print banner

Pharmaceutical Research

This information is for reference purposes only. It was current when produced and may now be outdated. Archive material is no longer maintained, and some links may not work. Persons with disabilities having difficulty accessing this information should contact us at: https://info.ahrq.gov. Let us know the nature of the problem, the Web address of what you want, and your contact information.

Please go to www.ahrq.gov for current information.

Insurers save with incentive-based formularies, but consumers pay more out of pocket

Insurers are increasingly offering incentive-based formularies to curb prescription drug costs. These formularies offer health plan members financial incentives, such as lower copayments, to choose drugs the insurer prefers. In turn, the insurer has bargaining power to negotiate rebates from drug manufacturers by promising an increased volume of prescriptions.

When drug formularies are organized into three tiers, health plan enrollees pay the lowest copayment for generic drugs (first tier), a higher copay for brand-name drugs the insurer prefers (second tier), and the highest copay for brand-name drugs not endorsed by the payer (third tier, nonformulary drugs).

Bruce E. Landon, M.D., M.B.A., of Harvard Medical School, and colleagues studied the impact an incentive-based formulary in the Mid-Atlantic and Northeast had on a health maintenance organization and its 1.25 million enrollees from January 1, 2000, to December 31, 2001. Changing from a single or two-tier formulary to a three-tier formulary reduced total drug spending by about 20 percent for the insurer.

However, enrollees' out-of-pocket expenses rose anywhere from 20 to more than 100 percent because of higher copays for medications that fell in the second and third tiers. These results confirm earlier studies that suggest incentive-based formularies shift costs from the insurer to the enrollee. The study is notable for examining a large and diverse number of benefit changes that varied according to the number of tiers and co-payment amounts, including one that lowered co-payments, and for using carefully matched concurrent comparison groups selected from the large cohort of enrollees.

Changing to an incentive formulary with higher copayments or more tiers also caused a modest 1 to 4 percent decrease in the use of nonformulary drugs. Researchers noted an increase in generic and formulary-preferred drugs. However, generic substitutions may not have been significantly higher, because the difference in copayments between generic and formulary-preferred drugs was generally small (usually $5). Mail-order prescription subscriptions doubled during the study because the plan offered incentives, such as receiving three months of medication for just two months of copayments.

This study was funded in part by the Agency for Healthcare Research and Quality (HS14774).

See "Incentive formularies and changes in prescription drug spending," by Dr. Landon, Meredith B. Rosenthal, Ph.D., Sharon-Lise T. Normand, Ph.D., and others in the June 2007 The American Journal of Managed Care 13(6), pp. 360-369.


Return to Contents
Proceed to Next Article

 

The information on this page is archived and provided for reference purposes only.

 

AHRQ Advancing Excellence in Health Care