Employer drug benefit plans and spending on prescription drugs.

CONTEXT: With drug spending rising rapidly for working-aged adults, many employers and health insurance providers have changed benefits packages to encourage use of fewer or less expensive drugs. It is unknown how these initiatives affect drug costs.

OBJECTIVE: To examine how innovations in benefits packages, such as those that include multitier formularies and mandatory generic substitution, affect total cost to insurance providers for generic and brand drugs and out-of-pocket payments to beneficiaries.

DESIGN AND PARTICIPANTS: Retrospective study from 1997 to 1999 linking claims data of 420,786 primary beneficiaries aged 18 through 64 years who worked at large firms (n = 25) with health insurance benefits that included outpatient drugs.

MAIN OUTCOME MEASURES: Overall drug costs; generic, single-source brand, and multisource brand costs; and drug expenditures by health insurance providers and out-of-pocket costs for beneficiaries.

RESULTS: For a 1-tier plan with a 5 US dollars co-payment for all drugs, the average annual spending was 725 US dollars per member. Doubling co-payments to 10 US dollars for all drugs reduced the annual average drug cost from 725 US dollars to 563 US dollars per member (22.3%, P<.001). Doubling co-payments in a 2-tier plan from 5 US dollars for generics and $10 for brand drugs to 10 US dollars for generics and 20 US dollars for brand drugs reduced costs from 678 US dollars to 455 US dollars (32.9%, P<.001). Adding an additional co-payment of 30 US dollars for nonpreferred brand drugs to a 2-tier plan (10 US dollars generics; 20 US dollars brand) lowered overall drug spending by 4% (P<.001). Requiring mandatory generic substitution in a 2-tier plan reduced drug spending by 8% (P<.001). Doubling co-payments in a 2-tier plan increased the fraction beneficiaries' paid out-of-pocket from 17.6% to 25.6%.

CONCLUSIONS: Adding an additional level of co-payment, increasing existing co-payments or coinsurance rates, and requiring mandatory generic substitution all reduced plan payments and overall drug spending among working-age enrollees with employer-provided drug coverage. The reduction in drug spending largely benefited health insurance plans because the percentage of drug expenses beneficiaries paid out-of-pocket rose significantly.