Health plans' creative models help four-tier formularies gain acceptance

March 1, 2005

JUST A FEW YEARS AGO, a three-tier formulary was a novelty; now more and more health plans and employers have introduced the design into their pharmacy benefits. The growth in the number of workers covered under a three-tier design has grown from 27% to 63% between 2000 and 2003.

JUST A FEW YEARS AGO, a three-tier formulary was a novelty; now more and more health plans and employers have introduced the design into their pharmacy benefits. The growth in the number of workers covered under a three-tier design has grown from 27% to 63% between 2000 and 2003, with two-tiers dropping from 49% to 23% during the same time period, according to the Henry J. Kaiser Family Foundation.

Increasingly frustrated by rising pharmacy costs, plans and self-funded employers are analyzing a variety of alternatives, among them, the four-tier formulary. Slow out of the block, the four-tier design's potential is not yet convincing enough to drive wide-scale adoption.

From her experience as a consultant, Yola Gawlik, a principal with Covance Health Economics and Outcomes Services in Gathersburg, Md., says that many payers are looking at four-tier options but few have implemented them. "They are struggling with what to put on that top tier," she says, "whether it be lifestyle drugs or injectables, and what to establish as a copayment or coinsurance."

Before embarking on a multi-tiered program, Dr. Stettin recommends that employers analyze the drugs that are forcing costs upward and how much cost-sharing can be tolerated among employees. "In addition, you have to ensure there is enough financial incentive to choose a less expensive generic over a preferred brand. If a member uses a less-expensive-but equally effective-drug, they should share in the savings," he says.

Although payers are investigating the components of the fourth tier, the first three tiers in many cases are imitating a three-tier formulary: generics, preferred brands and non-preferred brands.

The fourth tier can be reserved for lifestyle drugs, or what Dr. Stettin calls, "drugs that help make people better than well"; specialty or biotech drugs that may be appropriate to cover but demand member cost-sharing; and "me-too" drugs, whose costs have been inflated by pharmaceutical manufacturers and whose use has been strongly promoted through direct-to-consumer advertising.

Establishing appropriate copayments and/or coinsurance is critical in designing a four-tier model and should offer members the flexibility to choose a minimum or maximum out-of-pocket for drugs.

Dr. Stettin recommends 20% to 25% in the lower tiers and as much as 40% to 45% in the higher tiers to encourage members to make the most cost-effective choices and to remain compliant with their medications.

For copayments, he suggests there be at least a $15 differential between tiers to give members pause to think before making a choice. On the other hand, he advises plans and employers not to drastically increase copayments/coinsurance or members may stop taking certain medications if they believe the payment is too high.

HUMANA: FOUR-TIER PIONEER

Louisville, Ky.-based Humana is a pioneer in the development of four-tier formularies, having created its first one in 2001. What is now considered a traditional four-tier model for Humana, the first tier is comprised of lower-cost generics and brand drugs; the second tier is for higher-cost brand and generic drugs; tier three has drugs with therapeutic equivalents in the first two tiers; and the fourth tier is made up of injectables and biotech therapies.