Cost-Sharing and Elasticity Estimates in a Value-Based Formulary

The standard economic model for health insurance dictates that optimal insurance accounting for moral hazard should set cost-sharing levels proportional to the price elasticity of demand; all things being equal, treatments that are more price elastic ought to have a higher level of cost-sharing. Yet, others have observed that when faced with cost-sharing, patients may underuse beneficial treatments due to underestimation of the marginal benefit of treatment. Based on these observations, other researchers have argued that optimal insurance should take into account both welfare loss due to moral hazard and welfare loss due to incorrect estimation of marginal benefit.  We previously demonstrated that a cost-sharing strategy informed by population average cost-effectiveness can reduce medication costs without negative impact on non-medication costs or health outcomes. Yet it is unknown whether a CEA-driven cost-sharing strategy would be similar to a strategy based on elasticity estimates in terms of cost-sharing. In a market where consumers have full information on the marginal benefits of treatment, the two strategies would set cost-sharing in the same way. However, if consumers have imperfect information about the marginal benefits of treatment, the strategies may differ in cost-sharing levels.

In order to investigate optimal insurance design, we exploit an exogenous change in pharmacy benefit in a Preferred Provider Organization employer-sponsored plan in the Pacific Northwest that, in 2010, implemented a value based formulary (VBF) benefit that explicitly used cost-effectiveness analysis (CEA) to determine medication copayments.  Pharmacists at the health plan trained in economic evaluation obtained incremental cost-effectiveness ratio (ICER) estimates for each medication in the pharmacy benefit (either from published sources or from de novo estimation). Medications with higher ICER’s (lower average value) were placed in higher copayment tiers. Specifically, medications with ICERs ranging from cost-saving to $10,000/QALY were placed in copayment tier 1 ($20 copay), medications with ICERs from $10,000/QALY to $50,000/QALY were placed in copayment tier 2 ($40 copay), medications with $50,000-150,000/QALY were placed in copayment tier 3 ($65 copay) and medications with >$150,000 /QALY were placed in copayment tier 4 ($100 copay). We utilize pharmacy claims data from the year before and after VBF policy implementation and a control group composed enrollees of health plans with no changes in pharmacy benefits to estimate a difference-in-difference model for price elasticity of demand for pharmaceuticals, overall, and by copayment tiers informed by CEA. Our overall elasticity estimate was -0.16 for the number of fills of a medication per quarter. Our elasticity estimates for copayment tiers informed by CEA were -0.06 for tier 1, -0.60 for tier 2, -0.77 for tier 3, and -0.87 for tier 4. Thus, we observed a general trend of increasing elasticity with increasing copayment tiers. Thus, we observed a general trend of increasing elasticity with increasing copayment tiers. These results suggest that a cost sharing strategy based on elasticity estimates may be similar to a cost sharing strategy informed by CEA.