Nonlinear pricing in drug benefits and medication use: the case of statin compliance in Medicare Part D.

Pharmacy coverage is an essential benefit in health insurance programs because prescription drugs are cost-effective treatments for many health conditions. However, like other health benefits, drug benefits include consumer cost-sharing mechanisms to control moral hazard. Cost-sharing can be designed in various ways, but it often involves a nonlinear price schedule in which the drug price varies depending on consumers' accumulated drug expenditures. With a deductible, consumers experience a decrease in price once reaching a spending threshold. A coverage gap is another example on nonlinear pricing; consumers experience a steep increase in price once entering the gap. The coverage gap in Medicare Part D is followed by catastrophic coverage, but some pharmacy benefits may have a hard cap with no coverage once the cap is reached. Economic models suggest that under a varying price schedule, consumers anticipate that their current consumption will increase the likelihood of reaching the spending threshold, after which price decreases or increases; they will incorporate that future price change in their current consumption decisions (Keeler, Newhouse, and Phelps 1977; Ellis 1986). With a coverage gap, the “effective” price is higher than the actual copayments before the gap. While an extensive literature shows that cost-sharing decreases the demand for prescription drugs (Goldman, Joyce, and Zheng 2007), consumers' responses to the effective price under nonlinear pricing have not been widely examined. Studies assessing drug benefits with a gap or cap are limited to examining whether overall drug use or compliance with certain drugs falls when consumers enter the gap or reach the cap (Joyce et al. 2002; Zhang et al. 2009a; Fung et al. 2010). These analyses implicitly assume that the presence of a gap or cap does not affect drug utilization before the gap or cap. However, as discussed above, if consumers anticipate that any spending makes them more likely to hit the gap, they may reduce their drug use even before the gap. Without accounting for this possibility, the effect of varying price schedules on drug utilization is likely to be underestimated. We examine how consumers' drug use responds to expected prices in Medicare Part D, which features nonlinear pricing due to a coverage gap. We focus on enrollees' compliance with statins—the dominant lipid-lowering agents and the drug class with the highest reimbursement in Part D ($6.0 billion or 9.7 percent of Part D spending in 2007; Medicare Payment Advisory Commission 2010a). Statins are an important treatment to prevent and manage coronary heart disease, whose annual cost estimate is about $165.4 billion (Lloyd-Jones et al. 2009). Goldman, Joyce, and Karaca-Mandic (2006) and Gibson et al. (2006) reported that increased statin compliance decreases cardiovascular hospitalizations and emergency room visits. We analyze stain compliance prior to the coverage gap, where the effective price is higher than the actual copayment. To our knowledge, we are the first to examine the impact of the presence of a coverage gap on pre-gap drug compliance. Our study thus provides information that could be useful in refining drug benefit designs, particularly for drugs with high clinical values, which reduce adverse health outcomes (Chernew, Rosen, and Fendrick 2007). The findings also provide implications of the Part D benefit change mandated by the 2010 Affordable Care Act (ACA)—filling in the coverage gap—for drug compliance among Medicare beneficiaries. The potential impact of this ACA expansion on pre-gap drug compliance has not been recognized by policy makers. We construct each enrollee's effective price as her expected price at the end of the year, and we examine how pre-gap statin compliance responds to that price. Using records from a random sample of Part D enrollees in 2008, we find that enrollees' statin compliance is sensitive to their effective prices. The presence of a gap decreases statin compliance even prior to the gap, suggesting that this impact should be considered in designing drug benefits and that closing the gap in Part D will improve pre-gap statin compliance.