Why Comparing Drug Prices Drops Costs for Employers and Patients

A University of California at Berkeley study has found that a “reference pricing model” — comparing brand name and generic medications and adjusting co-pays to encourage patients to choose the lowest cost drugs — delivers “significant cost-savings that increase over time.”

The study, which is featured in The Journal of American Medicine (JAMA), examined changes in prescriptions and pricing for more than 1,300 non-specialty drugs before and after an alliance of private employers began using reference pricing. The research team found that implementing reference pricing measurably lowered prescription drug spending for the employer (plan sponsor) as well as reduced costs for employees over time.

According to the study, after reference pricing was put in place, physicians increased their prescriptions for the low-cost drugs, an increase that was associated with a reduction of prices paid by employers and cost sharing paid by employees. Reference pricing may shift the mix of drugs dispensed to those offering the lowest prices to the employer and employee and away from those offering the highest rebates to the pharmacy benefit manager, according to the authors.

The study used a model developed by a company called ActiveRADAR that applies proprietary algorithms to drive savings of more than 20%. ActiveRADAR’s reference pricing model compares all brand name and generic medications within a therapeutic category, identifies the clinically appropriate and least expensive therapeutically equal option, and adjusts co-pays to encourage patients to select the lowest cost alternatives. The approach encourages patients to switch to lower-priced drugs and drives down drug prices immediately, according to the study.

The study builds upon previous research published in the New England Journal of Medicine (NEJM) in 2017, using the same employee population and adding another two and a half years of data to bring the total research period to five years.

“While our initial research found that reference pricing curbs prescription drug spending for employers, this follow-on study indicates that reference pricing also reduces costs for patients, and that both groups continue to see increased savings over time,” said lead author James C. Robinson, PhD, director of the Berkeley Center for Health Technology at the School of Public Health.

The net effect of the 2017 NEJM study was nearly 20% lower drug spending for employers and a 10% increase in cost-sharing for patients. The new JAMA study found that, over time, cost-sharing declined by more than 20% as physicians and patients adjusted to the new pricing incentive. By five years after implementation, savings to employers are substantial and cost-sharing to employees is lower than prior to implementation. Results also indicate reference pricing may shift the number of dispensed drugs from those with higher rebate amounts for prescription drug benefit managers to those with the lower price point for employers and patients.

“The U.S. healthcare system has long struggled to function as an efficient marketplace, and prescription drug pricing is one of the most dramatic examples of how out-of-control costs can get when normal supply and demand dynamics are not present,” said David Henka, CEO and president, ActiveRADAR. “This ongoing UC Berkeley research is pivotal as it indicates that a proven and powerful mechanism for reining in drug prices is available right now.”