The Impact of a Three‐Tier Formulary on Demand Response for Prescription Drugs

Haiden A. Huskamp, Richard G. Frank, Kimberly A. McGuigan and Yuting Zhang

Journal of Economics & Management Strategy, 2005, vol. 14, issue 3, 729-753

Abstract: A large number of health plans and employers have adopted three‐tier prescription drug formularies in an effort to control rising prescription drug costs. We assessed the behavioral response to three‐tier adoption by estimating econometric models of the probability of selecting drugs assigned to the third tier with the highest co‐payment requirement and changes in expected out‐of‐pocket (OOP) spending. We concluded that implementation of the three‐tier formulary resulted in some shifting of costs from the plan to enrollees and some bargaining power gained for the payer, with plan savings from manufacturer rebates a likely result.

Date: 2005
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