• Medicare drug plan formulary design

    In a 2009 Health Affairs article, Kevin Outterson and Aaron Kesselheim describe a variety of options for reducing drug costs to the Medicare program. One of the approaches they describe is similar to one I’ve studied myself, letting Part D plans implement tighter formularies.

    Medicare limited the freedom of Part D plans to control their formularies through rules such as the safe harbor guidelines established by the U.S. Pharmacopeia and MMA’s requirement that Part D plans cover at least two drugs per class.

    The CMS went beyond the statute, requiring at least one drug in each subclass as well. In addition, the CMS has given special protections to six classes of drugs, requiring that “all or substantially all drugs” in the classes be included in the formularies. This rule effectively eliminates Part D drug price negotiations over anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals, and immunosuppressants. In other classes, Part D plans routinely exclude some drugs as part of the normal commercial formulary process. The 110th Congress solidified and expanded the protected classes. The July 2008 physician payment update legislation gave the CMS clear statutory authority to expand the protected drug classes and created a cumbersome process that delays competition within the classes.

    These rules limit the negotiating power of Part D plans andmake drugs in those classes more expensive. A Milliman study found that these six protected classes accounted for 16.8–33.2 percent of Part D drug costs by Part D plan administrators. Reversing this one rule would decrease prices in these classes by 9–11 percent, for a projected Part D savings of $511 million per year.

    Now $511 million is a tiny fraction of the over $500 billion spent on Medicare annually. It’s even a small part of the approximately $68 billion spent on the program’s drug benefit. So, this is not even in the ballpark of making a noticeable dent in Medicare spending. Nevertheless, it’s just another example of how program design can cost taxpayers money. These things do add up!

    Commercial insurance products aren’t subject to such formulary requirements, as far as I know. Is there anyone outside the drug industry who thinks it is a good idea to impose them in one of the “free-market” arms of Medicare? How ’bout we let the market get us the best prices and we let beneficiaries decide with their feet which type of formularies they like? There are about 50 stand-alone Part D plans available everywhere. Seems like enough competition to let up on the reins, no?

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    • Austin –

      This is one of the areas where many consumers and policy folks are divided. As you pointed out, there are great savings from the negotiating clout of being able to exclude drugs from drug formularies. But then certain drugs are not available to beneficiaries, even though some may need them for clinical reasons. For example, antidepressants are often very heterogenous in their effects – certain ones work on certain individuals. Additionally, people who have drug allergies tend to have issues. So, should we permit drug formularies where (the albeit small numbers of) beneficiaries do not have access to drugs they actually need? This is viewed as a major concern in the 6 classes of clinical concern, including cancer drugs, antidepressants and others. So the MIPPA required plans to cover all or substantially all drugs. At the same time, most people do not necessarily need the most expensive drugs. Perhaps the appropriate response is step therapy requirements (i.e. that patients have to first try and fail on several other drugs before an expensive drug is covered). But those requirements are already permitted, even in the 6 categories of clinical concern. Of course, with an unintegrated health system, most docs don’t know what drugs are on formulary or what steps are required when they write a script. My experience is that when you get to the pharmacy you discover the problem and then have to go back to the doc and then back to the pharmacy. Occasionally, some of the steps aren’t even covered outpatient drugs, or they’re drugs you’ve taken but your plan has no record of (because you they’re OTC or were taken before joining this plan). If Medicare were like the VA health system, with doctors who all know the formulary (since they are generally VA docs), and with a formulary exception process that the doctor pursues and which takes <5 minutes, I might not mind having a strict formulary.