Drug Benefit Chicken: An Analysis of Benefit Designs on the Health Insurance Exchanges


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As compared to employer-sponsored insurance (ESI), health plans sold on the health insurance exchanges (HIEs):

are (>3x) more likely to require that deductibles be met before Rx coverage begins;

have (as much as 5x) higher average deductibles for Rx coverage;

require higher (56% on tier 3) average co-payments once coverage starts; and, are

(1.6x) more likely to use co-insurance (patient pays a % of drug price) than fixed-dollar co-pays

Unless brand manufacturers allow their co-pay card programs to offer much larger subsidies to HIE beneficiaries – specifically subsidies large enough to get these beneficiaries’ out-of-pocket costs down to +/- $29 / Rx – demand for branded pharmaceuticals will be quite low among HIE beneficiaries

However, if brand manufacturers allow larger co-pay card subsidies on the HIEs, they betray a willingness to do the same in the far larger ESI market

Barring response from co-pay card programs, the effect of restrictive HIE drug benefit designs on total US drug demand would be <2%. Instead, the relevance of the restrictive HIE drug benefit designs is their status as a natural experiment for what might happen in the far larger ESI market

Brand manufacturers’ optimal strategy is to limit co-pay card subsidies to the amount necessary to get ESI beneficiaries’ out-of-pocket expenses to the prevailing tier 2 (+/- $29) level — and to let the higher out-of-pocket costs resulting from restrictive HIE benefit designs take their < 2% toll on US Rx demand. This almost certainly will not happen, for the simple reason that any one brand manufacturer cannot rely on the others to stick to the collectively optimal strategy – inevitably someone will cheat, magnifying losses for brand manufacturers with less generous co-pay programs

As a result, we expect brand manufacturers to give large subsidies to HIE beneficiaries to keep these beneficiaries’ out-of-pocket costs ‘in range’ – and in so doing, to prove to ESI plan sponsors and formulary managers that higher deductibles, higher co-pays, and the use of co-insurance are feasible in the far larger ESI market

It’s difficult to overstate the threat to brand manufacturers’ pricing power — shifting ESI drug benefit designs to the HIE model over a five year period would reduce US brand pricing power by as much as two-thirds


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