The devil in the tiers1

Prescription drug spending in the USA has soared, fueled by rising drug prices. A critical mechanism for restraining drug prices is the formulary tiering system. Although tiering should reflect the cost of a drug—and reward patients who choose less-expensive drugs—something is seriously amiss. Using Medicare claims data from roughly one million patients between 2010 and 2017, this article finds troubling amounts of distorted tiering and wasted cost. Increasingly, generics are shifted to more expensive—and therefore less accessible—tiers. The percentage of generics on the least-expensive tier drops from 73% to 28%; the percentage of drugs on inappropriate tiers rises from 47% to 74%. Considering only costs paid by patients and the federal Low-Income Subsidy Program, tier misplacement cumulatively costs society $13.25 billion over the time period. An unruly problem demands a disruptive solution. This article advances the counterintuitive regulatory reform that tiering should be based on a drug’s list price. Yes, list price—that roundly dismissed figure—should become the touchstone. This would deter incentive-distorting rebate schemes while recognizing that many people already pay list price. It is a remarkably streamlined approach for cutting through a wide swath of perverse incentives and manipulations.