Reference Pricing Models for Prescription Drugs May Contain Costs

September 17, 2018 - Reference pricing models for prescription drugs may help to contain spending and reduce high costs for beneficiaries, says a new report from the Commonwealth Fund.

Currently, most payers use tiered drug formularies to manage drug costs, but tiered formularies are not helpful for addressing variations in drug prices, the team said.

A tiered drug formulary requires consumers to pay more in cost sharing for more expensive drugs. Tiered formularies can help payers contain costs, but don’t account for pricing variations for prescriptions, the team said. Tiered formularies also don’t allow payers and consumers to evaluate discrepancies in drug prices that can range between hundreds or thousands of dollars.

Reference pricing divides drugs into therapeutic classes, which allow a payer to identify an average price to use as a reference point.  Consumers purchasing drugs either pay higher copays for more expensive drugs or lower copays for cheaper drug alternatives.

A reference pricing model can lead to significantly lower prescription costs for a payer or employer under the right market conditions, the team found.

For example, RETA Trust, a national coalition of Catholic organizations that purchases insurance for employees, saw a significant increase in cost savings by switching from a tiered drug model to a referencing pricing model.

RETA’s previous tiered formulary could not contain aggressive price increases for both generic and brand-name therapies. The median monthly price of prescriptions varied by $222 between the least and most expensive drug within the most-prescribed therapeutic categories.

RETA’s average price paid for drugs fell by 14 percent after implementing a reference pricing model. The model also created $1.3 million in employer savings. The findings expand upon a previous analysis of RETA’s reference pricing outcomes that found reference pricing also encouraged more consumers to fill their prescriptions with a lower-cost drug.

However, implementing a referencing pricing model could be challenging for payers and pharmacy benefit managers (PBMs) that have relied on tiered formularies as a major component of their business models, said the Commonwealth Fund.

The team believes that payers and employers have been able to use tiered formularies to steadily shift cost burden of prescriptions onto beneficiaries.

Popular cost-shifting strategies include extending deductibles to include pharmacy services, which may have negative consequences for medication adherence. While this may be a benefit for payer, patients may not purchase their medications due to the additional financial strain of paying out-of-pocket.

RETA saved on employer costs, but employees’ cost sharing increased by 5.2 percent under the reference pricing model.

PBMs negotiate drug price rebates with their clients and can either keep part of the rebate or pass it on to a payer. PBMs also can decide to pass on the full rebate to an employer and charge a similar administrative fee.

Under a tiered formulary, PBMs have a financial incentive to purchase more expensive drugs since they can earn a higher rebate from the manufacturer, and in return, more money from the payer.

In order to implement reference pricing successfully, payers should include up-to-date information on drug prices at multiple distribution channels, the team advised.

Making reference price information available at retailers, pharmacies, and other purchasing locations can help consumers identify their cheapest possible drug alternative. Providers also require drug pricing information so they can select low-priced alternatives for their patients.

Payers and employers could also design reference price models to provide quality information about prescriptions in order to avoid patient safety risks, the team said. Quality information may help payers use reference pricing models to adequately address incorrect prescribing practices.

“Reference pricing targets the price of the drug, not its appropriateness for the patient’s condition,” the Commonwealth Fund explained. “Unfortunately, the US healthcare system is characterized by both overprescription and underprescription, because of excessive drug marketing, distorted incentives, and lack of affordability. Reference pricing should be embedded in a larger system of consumer-directed information and incentives.”

The team also suggested that payers could pair reference pricing models with alternative payments models, such as bundled payments, to lower provider incentives to prescribe higher-cost drugs.

Reference pricing is just one option for payers to transition from a tiered formulary structure to a drug pricing model that focuses on both the cost and quality of prescription drug treatments.