4-Tier (or More) Drug Plans on the Rise

Employers are offsetting ‘specialty’ drug costs through higher premiums and co-pays

By Stephen Miller, CEBS July 31, 2015

Employers have been using multitier prescription drug plans for many years, but new data shows a significant increase in the use of four-tier plans that typically cover the highest-cost drugs, as well as major increases in corresponding median co-pays—a trend that is expected to continue.

The findings are based on responses from 9,950 employers sponsoring 16,967 health plans nationwide, surveyed in the latter half of 2014 by United Benefits Advisors (UBA), an alliance of independent benefit advisory firms.

According to the survey, 57.1 percent of all prescription drug plans in the U.S. use three tiers (such as low-cost generic drugs, formulary brand drugs and nonformulary brand drugs); 6.8 percent retain a two-tier plan; (such as generic drugs and brand-name drugs) and 32.9 percent offer four tiers or more.

Plans that add a fourth or more tiers do so to cover, with the highest plan co-pays, the most expensive specialty drugs such as high-cost biologics (produced using recombinant DNA technology). The survey showed that since 2009:

The number of four-tier plans grew from 13.6 percent to 32.9 percent of all plans offered by U.S. employers, a 141.9 percent increase.

The number of three-tier plans decreased 20.4 percent (from 71.7 percent to 57.1 percent) and the number of two-tier plans fell 45.6 percent (from 12.5 percent to 6.8 percent).

UBA expects that specialty drug costs will continue to drive the maximum possible co-pay increases in tier 4. “Not only must co-pays cover the rising costs of these drugs driven by the pharmaceutical industry but they must cover the merging physician commissions given for some specialty drugs,” said Mike Mulqueeney, vice president of Johnson & Dugan Insurance Services Corp., in a UBA media release.

“We’re already seeing some employers using a six- or even seven-tier drug plan,” added Carol Taylor, employee benefit advisor at D&S Agency. “When you have an employee taking a drug that costs $30,000 a month, a $100 co-pay is not sustainable. Eventually, we’ll reach a point where the insurers won’t be able to recoup the cost of prescription drug cost increases. Because of the out-of-pocket maximums put in place by the [Affordable Care Act], the only way to offset the increased prescription drug costs will be through higher premium increases.”


“Employers with 500 to 999 employees haven’t had to go with four-tier plans yet,” said Vicki Ferentz, vice president of Acadia Benefits Inc. “Because prescription costs are increasing at a very rapid pace, and new, much more expensive drugs are coming to the market, they will be forced to look at adding a fourth and maybe even a fifth tier.”

Co-Pay Design

Most plans require the consumer to pay co-insurance (a percentage of the drug’s cost) after the flat-dollar-rate co-pay. The survey shows that, since 2010, the number of two-tier plans with a prescription co-pay only (no co-insurance) fell 42.9 percent, and the number of three-tier plans with a co-pay only fell 20.6 percent.

Among additional survey findings:

In 2014, four-tier plans had median co-pays of $10 (tier 1), $35 (tier 2), $55 (tier 3) and $100 (tier 4).

Since 2012, tier 4 median co-pays have grown 25 percent.

Median co-pays in two-tier plans have stayed flat the last three years at $10/$30.

However, for three-tier plans, the median co-pays in tiers 2 and 3 increased 16.7 percent and 10 percent respectively from 2013, to $10/$35/$55.

“Since generics are usually less than $10—especially with players like Wal-Mart, Target and Kroger doing $4 promotions—plans can’t keep raising the tier 1 co-pay,” said Pamala McIntire, benefits advisor at Reames Employee Benefit Solutions.

“That low tier-1 co-pay not only makes economic sense given the price of the drugs in that tier, but it also aids in driving generic utilization,” added Elizabeth Thomas, account strategist from Albers & Co.

Stephen Miller, CEBS, is an online editor/manager for SHRM. 


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