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The Tier 4 Phenomenon: Shifting the High Cost of Drugs to Consumers

by Bill Walsh, AARP Knowledge Management/Strategic Analysis, AARP Research, March 2009

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Cost shifting that employers and insurers are utilizing in regard to expensive drugs on the “fourth tier” of drug plan formularies is the focus of this report. Concerned that fourth tiers are being used to saddle consumers with an unfairly large share of drug costs, AARP looked at the pervasiveness of the Tier 4 benefit design in both the Medicare and commercial markets and conduct a survey of large employers in an effort to predict the growth of fourth tiers in the future.

It was found that consumers are increasingly being asked to pay a larger share of the costs of expensive, breakthrough drugs. Specifically, it was found that:

  • Some 90 percent of Medicare Part D prescription drug plans and some 10 percent of commercial health plans – covering more than 20 million Americans – have created a special pricing category for specialty and injectable drugs known as a “specialty tier” or “fourth tier.”
  • Specialty drugs are currently among the most expensive drugs on the market, with prices that can range from $5,000 to more than $300,000 per year. These prices are rising: last year, prices of specialty drugs rose at three times the rate of inflation.
  • Fourth tiers often charge consumers 25 percent to 35 percent of the drug price. Already in 2009, some Medicare coinsurance rates grew significantly higher. One of the largest plans will increase coinsurance from 25 percent to 43 percent for Tier 4 drugs.
  • A beneficiary who makes $30,000 a year and doesn't qualify for Medicare's safety-net protections would have to forego basic living expenses to afford even “low-cost” specialty drugs.
  • While specialty drugs found on fourth tiers are used to treat conditions that affect less than 5 percent of the population, that number is expected to grow as new drugs are approved and the drugs that are already on the market are used to treat an expanding array of conditions.

For more information contact Bill Walsh, AARP Knowledge Management/Strategic Analysis, at 202-434-2488. (12 pages)