Are private insurers in the United States using cost-effectiveness analysis evidence to set their formularies?

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By Elizabeth Brouwer

As prices rise for many prescription drugs in the United States (US), stakeholders have made efforts to curb the cost of medications with varying degrees of success. One option put forth to contain drug spending is to connect drug coverage and cost-sharing to value, with cost-effectiveness analysis being one of the primary measures of drug value.

In 2010, a payer in the Pacific Northwest implemented a formulary where cost-sharing for prescription drugs was driven by cost-effectiveness evidence. This value-based formulary (VBF) had 5 tiers based on cost-effectiveness ranges determining a patient’s copay amount, aka their level of cost-sharing (Table 1). There was allotment for special cases where a drug had no alternatives or treated a sensitive population, however a majority of the drugs fell within each of these categories. Later analysis found that this VBF resulted in a net (including both payer and patient) decrease in medication expenditures of $8 per member per month, with no change in total medication or health services utilization. A 2018 literature review found slightly different (but still optimistic) results, that value-based formulary design programs increased medication adherence without increasing health spending.


Given the potential benefits of implementing value-based cost-sharing for prescription drugs, we wanted to know if other private payers in the US were using cost-effectiveness value evidence to set their drug formularies. If private payers were “moving toward value,” we would expect to see cost-sharing for high-value drugs getting cheaper relative to cost-sharing for low-value drugs (Figure 1).


To test this theory, we used claims data from a large portion of Americans with private, employee-sponsored health insurance to find the average out-of-pocket cost for each prescription drug in each year from 2010-2013. The collapsed claims data were then linked to the value designation (or “tier”) for each drug. We used a random effects model to see how out-of-pocket costs changed each year in each cost-effectiveness category. (For more details on our methods, please check out our paper, which was recently published in PharmacoEconomics journal).

The results revealed a few interesting trends.

Cost-sharing for prescription drugs was trending toward value in those years, but in a very specific way. Average cost-sharing across all “tiers” decreased over the time frame, and drugs with cost-effectiveness ratios below $10,000 per quality-adjusted life-year (QALY) were getting cheaper at a faster rate than those with cost-effectiveness ratios above that threshold. But there was no distinction in cost-sharing for drugs within those two groups, even accounting for generic status.

Additionally, the movement toward value that we saw was largely the result of increased use of generic drugs, rather than an increased use of more cost-effective drugs. Splitting the data by generic status showed that we are not using higher value drugs within generic and brand name categories (Figure 2).


Figure 2Source

Our results indicate that there is probably space in private drug formularies to further encourage the use of higher value drugs options and, conversely, to further discourage use of lower-value drug options. This is particularly true for drugs with ICERs in the range of $10,000-$150,000 per QALY and above, where payers are largely ignoring differences in value.

One limitation of the analysis was that it was restricted to years 2010-2013. Whether private payers in the US have increased their use of value information since the implementation of the Affordable Care Act in 2014, or in response to continually rising drug prices, is an important question for further research.

In conclusion, there is evidence indicating payers have an opportunity to implement new (or expand existing) VBF programs. These programs have the potential to protect patient access to effective medical treatments while addressing issues with affordability in the US health care system.


ISPOR’s Special Task Force on US Value Assessment Frameworks: A summary of dissenting opinions from four stakeholder groups

By Elizabeth Brouwer


The International Society for Pharmacoeconomics and Outcomes Research (ISPOR) recently published an issue of their Value in Health (VIH) journal featuring reports on Value Assessment Frameworks. This marks the culmination of a Spring 2016 initiative “to inform the shift toward a value-driven health care system by promoting the development and dissemination of high-quality, unbiased value assessment frameworks, by considering key methodological issues in defining and applying value frameworks to health care resource allocation decisions.” (VIH Editor’s note) The task force summarized and published their findings in a 7-part series, touching on the most important facets of value assessment. Several faculty of the CHOICE Institute at the University of Washington authored portions of the report, including Louis Garrison, Anirban Basu and Scott Ramsey.

In the spirit of open dialogue, the journal also published commentaries representing the perspectives of four stakeholder groups: payers (in this case, private insurance groups), patient advocates, academia, and the pharmaceutical industry. While supportive of value assessment in theory, each commentary critiqued aspects of the task force’s report, highlighting the contentious nature of value assessment in the US health care sector.

Three common themes emerged, however, among the dissenting opinions:

  1. Commenters saw CEA as a flawed tool, on which the task force placed too much emphasis

All commentaries except the academic perspective bemoaned the task force’s reliance on cost-effectiveness analysis. Payers, represented in an interview of two private insurance company CEOs, claimed that they do not have a choice on whether to cover most new drugs. If it’s useful at all, then, CEA informs the ways that payers distinguish between drugs of the same class. The insurers went on to claim that they are more interested in the way that CEA can highlight high-value uses for new drugs, as most are expected to be expensive regardless.

Patient advocates also saw CEA as a limited tool and were opposed to any value framework overly dependent on the cost per QALY paradigm.  The commentary equated CEAs to clinical trials—while informative, they imperfectly reflect how a drug will fare in the real world. Industry representatives, largely representing the PhRMA Foundation, agreed that the perspective provided by CEAs is too narrow and shouldn’t be the cornerstone for value assessment, at least in the context of coverage and reimbursement decisions.

  1. Commenters disagreed with how the task force measured benefits (the QALY)

All four commentaries noted the limitations the quality-adjusted life-year (QALY). The patient advocates and the insurance CEOs both claimed that the QALY did not reflect their definition of health benefits. The insurance representatives reminded us that their businesses don’t give weight to societal value because it is not in their business model. Similarly, the patient advocate said the QALY did not reflect patient preferences, where value is more broadly defined. The QALY, for example, does not adequately capture the influence of health care on functionality, ability to work, or family life. The patient advocate noted that while the task force identified these flaws and their methodological difficulties, it stopped short of recommending or taking any action to address them.

Industry advocates wrote that what makes the QALY useful—it’s ability to make comparisons across most health care conditions and settings—is also what makes it ill-suited for use in a complex health care system. Individual parts of the care continuum cannot be considered in isolation. They also noted that the QALY is discriminatory to vulnerable populations and was not reflective of their customers’ preferences.

Mark Sculpher, Professor at the University of York representing health economic theory and academia, defended the QALY to an extent, noting that the measure is the most suitable available unit for measuring health. He acknowledged the QALY’s limitations in capturing all the benefits of health care, however, and noted that decision makers and not economists should be the ones defining benefit.


  1. Commenters noticed a disconnect between the reports and social/political realities

Commenters seemed disappointed that the task force did not go further in directing the practical application of value assessment frameworks within the US health care sector. The academic representative wrote that, while economic underpinnings are important, ultimately value frameworks need to be useful to, and reflect the values of, the decision makers. He argued that decision-makers’ buy-in is invaluable, as they hold the power to implement and execute resource allocation. Economics can provide a foundation for this but should not be the source of judgement relating to value if the US is going to take-up value assessment frameworks to inform decisions.

Patient advocates and industry representatives went further in their criticism, saying the task force seemed disconnected from the existing health care climate. The patient advocate author felt the task force ignored the social and political realities in which health care decisions are made. Industry representatives pointed out that current policy, written in the Patient Protection and Affordable Care Act (PPACA), prohibited a QALY-based CEA because most decision makers in the US believe it inappropriate for use in health care decision making. Both groups wondered why the task force continued to rely on CEA methodology when it had been prohibited by the public sector.


The United States will continue to grapple with value assessment as it seeks to balance innovation with budgetary constraints. The ISPOR task force ultimately succeeded in its mission, which was never to specify a definitive and consensual value assessment framework, but instead to consider “key methodological issues in defining and applying value frameworks to health care resource allocation decisions.”

The commentaries also succeeded in their purpose: highlighting the ongoing tensions in creating value assessment frameworks that stakeholders can use. There is a need to improve tools that value health care to assure broader uptake, along with a need to accept flawed tools until we have better alternatives. The commentaries also underscore a chicken-and-egg phenomenon within health care policy. Value assessment frameworks need to align with the goals of decision-makers, but decision-makers also need value frameworks to help set goals.

Ultimately, Mark Sculpher may have summarized it best in his commentary. Value assessment frameworks ultimately seek to model the value of health care technology and services. But as Box’s adage reminds us: although all models are wrong, some are useful. How to make value assessment frameworks most useful moving forward remains a lively, complex conversation.

CHOICE Institute Director Discusses Amazon Health Care Announcement

You may have heard the big news that came out of Seattle recently: Amazon is partnering with Berkshire Hathaway and JPMorgan Chase to address health care costs and quality by creating an independent health care company for their employees. Further details of their plan remain a secret to the general public, and the companies are likely still working out logistics amongst themselves. Given the 1.2 million employees involved in the three companies, however, many in the health care industry are thinking through the likely impact of this new partnership.


Director of the CHOICE Institute and professor of health economics at the University of Washington, Anirban Basu was recently referenced in two regional blogs describing the potential significance of the proposed plan:

According to Anirban Basu, a health care economist at the University of Washington, the trio could do a number of things to reform the health care system just by their sheer size and power alone. While most small and individual health care buyers have little power when it comes to directly negotiating with either health care providers or pharmaceutical companies, this partnership could change that—at least for those who qualify for it. Currently, price negotiating falls on third-party pharmacy benefit managers, at a cost then passed on to consumers.

Besides taking on bargaining power, Basu says Amazon may even open primary care clinics for their employees, but this could expand beyond their base.

It is important to note that while the new health plan may eventually have industry-wide effects, its scope will be limited to the companies’ employees at the beginning. And it is hardly a new phenomenon for employer groups to choose self-insurance as a means to control costs.

Henry Ford was one of the first industry giants to start his own health care insurance and delivery system in 1915, and America’s largest managed care organization, Kaiser Permanente, originally started as a health care program for employees of the Kaiser steel mills and shipyards.

Another important item to note is that America’s health care system has already been undergoing fundamental changes. While the United States Congress remains divided about how to move forward with the Affordable Care Act and improve the nation’s health care system overall, private health care companies are making their own moves. Hospital and insurance markets are becoming increasingly consolidated (with less competition to control prices), and some health care stakeholders are partnering and consolidating in innovative ways to capture market share (for example, the pharmacy company CVS Health just bought insurance company Aetna in January 2018).

Amazon’s new health care company could simply be joining these trends: historic trends of self-insuring companies to cut costs or newer trends of consolidating aspects of American health care for increased market power. However, it is entirely conceivable that the potent combination of Amazon (a technology industry giant), JPMorgan Chase (a banking industry giant), and Berkshire Hathaway (an investment giant) will bring something new to the table. Vox and StaTECHery are among many media outlets offering interesting predictions.

After the announcement, stock prices for major health care industries (e.g., Anthem, UnitedHealth, CVS, and Walgreens) experienced a sell-off as investors worry about the implications. However, experts believe that the current market would weather the storm due to the massive operational costs necessary for the partnership to enter the health care market. Moreover, the scale of Amazon, Berkshire Hathaway, and JPMorgan Chase will not be enough to compete with larger health care industry giants that already have purchasing power.

Will this health care partnership be a game changer? Perhaps, perhaps not. But as health care economists and health policy enthusiasts, students at the CHOICE Institute will certainly be watching our neighbors with interest.

[Written with the assistance of Mark Bounthavong and Nathaniel Hendrix.]

Welcome to Incremental Thoughts, the CHOICE students’ blog

choice-who-we-are-16x9aColleagues and friends,

Welcome to our new blog! The graduate students of the Comparative Health Outcomes, Policy, and Economics (CHOICE) Institute at the University of Washington are excited to share our experience as students in health economics and outcomes research (HEOR) with you and to learn from your experiences in return.

This project came about from a meeting of our student chapter of the International Society for Pharmacoeconomics and Outcomes Research (ISPOR), when we thought through ways to network more with other students and to find ways to engage with the conversations around HEOR taking place online. Blogs and Twitter have made the field’s luminaries easier than ever to contact, but at the meeting it emerged that many of us felt like opportunities for students to voice their unique perspective were lacking.

Thus, this blog. We’ll be featuring a broad range of articles here: upcoming research from our students, advice from our faculty for early career professionals in the field, and tips and tutorials on both established and newer methods.

Our blog is a collaborative effort, and we have many people to thank. We’re able to pay for this thanks to a grant from the ISPOR student network. And of course, the support of our professors has been essential — in particular, our senior editors Beth Devine and Ryan Hansen.

We’d love to have you along for this experiment!

Your editors,

Elizabeth Brouwer

Nathaniel Hendrix