Do Protected Classes Increase Out-of-Pocket Drug Spending?

Since its inception in 2006, the Medicare Part D prescription drug benefit has distinguished six “Protected Classes” and required Part D plans to cover all approved drugs in those classes. Recent research suggests that the policy compromises competition and leads to substantially higher spending on protected drugs by the Medicare program and its beneficiaries. This study explores whether the Protected Class policy also influences the composition of drug formularies. While Part D plans cannot exclude any protected drugs from their formularies, they may still assign drugs to higher cost-sharing tiers and might be more inclined to do so in order to extract price concessions from drug manufacturers. If so, Medicare beneficiaries may encounter few plans that offer their preferred drugs on lower-cost tiers, increasing their out-of-pocket spending. I conduct a descriptive analysis of plan-level data from the 2006-2014 Part D Formulary Files from the Centers for Medicare and Medicaid Services to compare the likelihood of protected drugs being placed on high-cost tiers compared with unprotected drugs. I then conduct a difference-in-differences analysis using claims data to estimate the change in out-of-pocket costs for protected class drugs versus unprotected drugs for individuals with private insurance or Medicare managed care.