Insight to Action

Unpacking the Survey: We Limit Docs — Why Don't We Limit Drugs?

21 September 2016

The biggest debate in American healthcare has always centered around “choice”. Limiting choice became taboo after the HMO debacle of the 90s, and we continue to experience the fallout. That’s why the latest results of our survey with respect to prescriptions are so surprising.

We are now observing an increasing trend of hospitals limiting prescription drug choice by instituting 100% coinsurance on non-formulary drugs, or excluding non-formulary drugs entirely. Formularies are lists developed by Pharmacy Benefit Managers and managed care health plans. These lists generally consist of drugs that are less expensive than their non-formulary counterparts, mostly because the group managing the list negotiated a better price by pitting different manufacturers against each other. The list may also take clinical effectiveness into account, and usually (but not always) includes drugs that are good alternatives to the drugs that are excluded.

Hospital employees usually expect very broad choices, since they themselves are healthcare workers, so hospitals are among the last employers to begin implementing this type of change. With drug costs trending higher than medical costs, we can expect this trend to continue.

The question is, why wasn’t this happening in the first place? Even within an open access, no-referrals PPO plan, there is a network that offers pricing to reflect the vast difference in negotiated rates. By contrast, in the world of pharmacy benefits, non-formulary medications have traditionally been offered at copay, or a coinsurance that still fails to reflect the higher cost of the drug. For example, a drug plan might charge $10 for generic drugs, $20 for brand formulary, and $35 for brand non-formulary. The medical plan equivalent would be charging a $30 copay for an in-network office visit, and a $45 copay for an out-of-network visit. Medical plans aren’t set up this way, because out-of-network physicians may cost 10 times as much as in-network physicians, so a small dollar differential does not reflect the true cost to the plan.

Unlike the situation with out-of-network medical costs, a health plan’s ability to charge more for formulary medications is inhibited by the PPACA’s limitation on out-of-pocket expenses. If a plan charges 100% of the cost of a formulary medication, most compliance experts agree that the cost of the coinsurance must be included in a participant’s out-of-pocket maximum. Thus, the only way to truly insulate the plan from outrageous non-formulary prescription costs is to completely exclude those drugs, making them irrelevant to the out-of-pocket maximum. This means that the plan participant can no longer gain the significant benefit of the plan’s discount on that non-formulary medication (yes, even non-formulary medications may benefit from a discount). This is another example of the best intentions leading to bad results for participants.