Reference-Pricing Initiative

The RETA Trust is a national association of 55 Catholic organizations that purchases health care for clergy, school teachers, and other lay and religious employees.12 The trust is self-insured but contracts with private health plans and pharmacy-benefit managers to pay claims and negotiate prices with pharmaceutical manufacturers and medical providers.

During the period before the implementation of reference pricing, the RETA Trust employers maintained tiered pharmaceutical formularies for covered employees and required a $10 consumer copayment for generic drugs and a range of copayment and coinsurance levels for branded drugs. The effectiveness of the formulary had begun to weaken, however, because the copayment levels did not account for the price variation and increases within each tier. Enrollees faced an incentive to choose a drug from a low-copayment tier but not to select a low-priced drug from within the tier or to switch selection after an increase in drug price.

In July 2013, the RETA Trust instituted a reference-pricing program for 1302 outpatient drugs, which were grouped into 78 therapeutic classes on the basis of a model developed by the consulting firm RxTE Health.13 In the year before implementation, these drug classes constituted 56.1% of the $15.9 million in the RETA Trust spending under its pharmacy benefit. Therapeutic classes were defined according to the criteria of the American Hospital Formulary Service Pharmacologic–Therapeutic Classification, which is used in classifying drugs for Medicaid and Medicare Part D formularies. Drug classes were included in the reference-price initiative if there was extensive price variation among therapeutically equivalent products. Therapeutic classes that include complex and expensive specialty drugs were not included in the program but continued to be subject to the tiered formulary, in order to allow the RETA Trust to gain experience with the application of reference pricing to less complex and costly medications.

Under the reference-pricing initiative, the payment from the RETA Trust was limited to the price of the least-costly drug in each therapeutic category. Patients who used drugs for which the manufacturers charged prices that were higher than the price of the reference drug were notified that lower-priced alternatives were available. They were also advised that they should discuss the alternatives with their physicians. If physicians thought that patients would have unacceptable side effects or not have a response to the reference product or if the drug was contraindicated owing to other clinical factors, they would submit an exemption request to be reviewed by the clinical staff at the pharmacy-benefit manager contracted by the RETA Trust. The group’s policy was to accept all physician exemption requests that contained a clinical justification for continued use of an expensive drug and, in such cases, to pay for the more expensive drug. Absent a physician’s intervention, however, patients who continued to use the highest-priced drugs were obligated to pay the price difference themselves.

Pharmacy Claims and Comparison-Group Data

We obtained pharmacy claims incurred from July 1, 2010, through December 31, 2014, from the RETA Trust. Claims included a drug identifier (National Drug Code, formulation, dose, and days of treatment), price paid (allowed charge and copayments), and patients’ demographic characteristics (sex, employee or dependent status, and ZIP Code of residence). Prescription prices and copayments by patients were calculated on a uniform monthly basis. The RETA Trust drug-data file included 573,456 prescriptions over the 5-year period. We also obtained a file containing the therapeutic class to which the drug was assigned and the reference (lowest-priced) drug for the class.

Trends in pharmaceutical prices reflect the launch of new drugs, price increases for older drugs, patent expirations, new generic competition, changes in direct-to-consumer advertising, changes in manufacturer-funded patient-support programs, and other factors. In order to assess the effect of reference pricing on drug selection and pricing, it is necessary to control for changing characteristics of markets as well as the characteristics of the patients. As a comparison group against which to evaluate the experience at the RETA Trust, we obtained 549,285 pharmaceutical claims from the health-benefits trust of a labor union that maintained a drug formulary with copayments similar to those for the RETA Trust but that did not implement reference pricing. These comparison-group claims were incurred during the same period as those incurred by RETA Trust employees. We obtained these claims from EnvisionRx, the pharmacy-benefit manager currently overseeing the RETA Trust pharmacy benefit. The total number of employees who were covered by the RETA Trust and the labor union trust fluctuated with trends in employment and employer participation in the alliances. At the time of the implementation of reference pricing in July 2013, a total of 17,500 employees were covered by the RETA Trust and 30,000 by the labor union trust.

Statistical Analysis

We used pharmacy claims from 2012 to illustrate the variation in prices paid by the RETA Trust for therapeutically similar drugs before the implementation of reference pricing. Within each therapeutic category, we calculated the percentage of prescriptions for the reference drug (including drugs with a price within $5 per month of the lowest-priced drug, which also were exempted from reference-price copayments), the price of the lowest-priced drug, the maximum price charged for any drug within the class, and the difference between the highest-priced and lowest-priced drugs in the class.

For each quarter between 2010 and 2014, we calculated the percentage of prescriptions that were written for the reference drug within each therapeutic class for employees at both the RETA Trust and the union trust to illustrate trends in drug selection. For each quarter, we computed the average price paid (allowed charge) for selected drugs. We calculated separately the copayment amount paid per prescription by the patients.

We used multivariable difference-in-differences regressions to measure the association between the implementation of reference pricing and three end points: the probability that a prescription would be written for the lowest-priced reference drug within its therapeutic class, the price paid, and the copayment. Difference-in-differences analysis compares changes in the treatment group with changes in the comparison group, thereby removing the effect of market-level factors that affect both groups.14 Difference-in-differences analysis interprets the effect of reference pricing as the residual change in each RETA Trust end-point measure after subtracting the trends observed in the comparison group.

The regressions included binary variables for the insurance sponsor of the patient (RETA Trust vs. union trust), the year of the claim, the interaction between the sponsor (RETA Trust vs. union trust) and indicators for the post-implementation periods, and binary variables for each therapeutic class, the patient’s sex, and the calendar month of the year. Drug prices and copayments were measured in logarithmic units to account for skewed data and to permit the interpretation of trends as the percentage rate of change. Measurements for the statistical model were estimated with the use of ordinary least squares and include robust standard errors that have been clustered according to therapeutic drug class. A variety of alternative statistical models and methods were used as checks on the robustness of the core model. Details regarding the statistical analysis are provided in the Supplementary Appendix, available with the full text of this article at NEJM.org.