Reference Pricing Has a Significant Impact on Drug Selection, Spending

August 29, 2017
The Center for Biosimilars Staff

In recent years, drug spending has increased with the launches of new, high-cost drugs and with price hikes for established drugs. One method of controlling such increases in drug spending is reference pricing, a framework under which an insurer or employer establishes a maximum contribution that it will make toward the price of a drug or a procedure in a therapeutic class.

In recent years, drug spending has increased with the launches of new, high-cost drugs and with price hikes for established drugs. One method of controlling such increases in drug spending is reference pricing, a framework under which an insurer or employer establishes a maximum contribution that it will make toward the price of a drug or a procedure in a therapeutic class. A study recently published in the New England Journal of Medicine finds that reference pricing is associated with a significant change in drug selection and spending for US patients covered by employment-based insurance.

Researchers James C. Robinson, PhD, MPH; Christopher M. Whaley, PhD, and Timothy T. Brown, PhD analyzed the RETA Trust, a national organization of 55 Catholic organizations that purchases health care for its employees. In 2013, the trust instituted a reference-pricing program for 1302 outpatient drugs across 78 therapeutic classes (the classes were defined according to the American Hospital Formulary Service Pharmacologic—Therapeutic Classification, which is also used to classify drugs for Medicaid and Medicare Part D formularies). The researchers analyzed spending on these drugs both before and after the implementation of the reference-pricing system, and compared the trust study group to a labor union group that was not subject to reference pricing. The study included 1,122,741 prescriptions that were reimbursed over the period from 2010 to 2014.

In the year before the trust instituted the reference-pricing program, drugs in the 78 therapeutic classes were responsible for 56.1% of the trust’s $15.9 million in pharmacy benefit spending. When the reference-pricing program began, the trust’s payment was limited to the price of the least expensive drug in each therapeutic category. Patients who used higher-priced drugs were provided with information about cheaper alternatives, and were instructed to consult with their physicians (who could submit exemption requests on clinical grounds; the trust’s policy was to honor all such exemptions, and to pay more for the drug selected by the physician). Patients were required to pay price differences for higher-cost drugs if they did not obtain physician-directed exemptions.

The researchers used pharmacy claims to analyze the prescriptions written for the reference-price drugs in each therapeutic class for the trust group and the labor union group. The researchers employed multivariable difference-in-differences regressions to measure the association between reference pricing and 3 endpoints: the probability that a prescription would be written for the lowest-priced drug within its therapeutic class, the price paid for that drug, and the copayment.

The researchers found that, prior to the implementation of the trust’s reference system:

  • The median variation in monthly prices of a reference-price drug and the most expensive drug in its therapeutic class was $222
  • The median percentage of prescriptions written for the lowest price drug in a therapeutic class was 6.8%
  • The percentage of prescriptions written for the highest-price drug in a class ranged from 0.02% to 37.1%

The researchers report that, in the quarter after implementation of the trust’s reference-pricing system:

  • The share of the lowest-priced reference drug in each class for the trust group increased to 69.7% (from a previous 62.4%) of all prescriptions written, while no significant change was seen in the labor union group
  • The frequency with which prescriptions were filled for the reference-price drugs in each therapeutic category was 7% higher in the trust group than in the labor union group; that difference translated to a rate of use of the lowest-priced drug that was 11.3% higher among the trust employees than among the labor union members
  • The trust paid prices that were 13.9% lower than those paid by the union

The study’s authors note, however, that the use of the lowest-price drugs was rising before implementation of the reference-pricing system due to an incentive created by the use of tiered formularies, and that both the trust and union groups benefitted from patent expiration on some high-priced branded drugs.

Implementation of reference pricing was also associated with higher out-of-pocket costs for trust employees; the trust group paid an average of 5.2% more in out-of-pocket costs—and 30.9% more in copayments per prescription—than did the union group.

The authors concluded that reference pricing was responsible for a reduction of 13.9% in the average price paid per prescription for the trust, and that, in the first 18 months after implementation, reference pricing reduced the organization’s spending by $1.34 million (and created an out-of-pocket spending increase for employees of $0.12 million).

According to the authors, reference pricing could be a valuable instrument for bringing down the cost of drugs, as it both influences the choices of consumers and the prices paid by employers. “The pharmaceutical market has an increasing potential for cost-reducing competition, as manufacturers launch branded, generic, and biosimilar products that have safety and efficacy profiles equivalent to existing treatments,” the authors say. “However, potential competition will translate into actual competition only to the extent that physicians and patients select drugs on the basis of price as well as clinical performance.”

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