Table 1 Direct and indirect forms of prescription drug charges and their incentives

Direct

   Co-payment

The user pays a fixed fee (flat rate) per item or service.

The patient may decrease the volume of drugs consumed or may decrease the number of prescriptions filled while increasing the size of each prescription. The patient has no incentive to consume cheaper drugs unless co-payments are lower for these drugs.

   Co-insurance

The user pays a fixed proportion of the total cost, with the insurer paying the remaining proportion.

The patient may decrease the volume of drugs consumed and may only request a larger pack size if this produces savings. The patient has an incentive to consume cheaper therapeutic medications.

   Deductible

The user bears a fixed quantity of the costs, with any excess borne by the insurer; deductibles can apply to specific cases or to a period of time.

When patients are not close to the deductible level, they may decrease the volume of drugs consumed and/or switch to cheaper therapeutic alternatives. As they near the deductible limit, they have an incentive to consume more drugs and more expensive drugs to push themselves over the deductible.

Indirect

   Reference pricing (RP)

A reference price refers to the maximum price for a group of equal or similar drugs that the insurer will reimburse the user. If the user chooses a drug that costs more than the reference price, he or she must pay the difference.

The patient is likely to decrease his or her consumption of drugs that are priced above the reference price and switch to alternative drugs priced at or below the reference price.

Differential charges

   Multi-tier formularies

Typically, these contain two or three tiers. The first tier consists of generic drugs, which have the lowest co-payment. The second and third tiers generally comprise brand-name drugs, which can be split into preferred and non-preferred drugs (where non-preferred drugs are the most expensive in the tier). Multi-tier formularies are most commonly used in the United States.

The patient has an incentive to switch from brand-name medications to generic medications and from non-preferred medications to preferred medications.