Constraints on Formulary Design Under the Affordable Care Act

The impact of a national formulary expansion on diabetics

This paper estimates the causal effect of the expansion of Colombia's national prescription drug formulary to include five new types of insulin on the healthcare utilization and costs of type I diabetics and explores the mechanisms through which outpatient cost reductions are realized. We find that expanded coverage generates an increase in the cost of insulin for type I diabetics equal to 17% of their baseline healthcare costs. At the same time, their annual outpatient care utilization falls by 1.9 claims. We devise tests to explore the relative importance of two mechanisms by which the expansion may have lowered type I diabetics' non-drug healthcare utilization: spillovers from drug to non-drug spending and rationing of care. We find no evidence that the formulary expansion reduces the rate of complications from diabetes and find substantial declines in non-drug costs even among the subset of diabetics with no scope for spillovers. We find large reductions in the utilization of discretionary care including diagnostic tests, but no such declines for the use of essential drugs, suggesting that rationing of care is the primary driver of observed cost savings.

Screening in Contract Design: Evidence from the ACA Health Insurance Exchanges

We study insurers' use of prescription drug formularies to screen consumers in the ACA Health Insurance exchanges. We begin by showing that exchange risk adjustment and reinsurance succeed in neutralizing selection incentives for most, but not all, consumer types. A minority of consumers, identifiable by demand for particular classes of prescription drugs, are predictably unprofitable. We then show that contract features relating to these drugs are distorted in a manner consistent with multidimensional screening. The empirical findings support a long theoretical literature examining how insurance contracts offered in equilibrium can fail to optimally trade off risk protection and moral hazard.

Partnering with the Department of Insurance: Coordinating a clinical and regulatory review of formulary benefit designs

This case report summarizes a partnership between Butler University College of Pharmacy and Health Sciences and the Indiana Department of Insurance. The report outlines the review of qualified health plans sold on the marketplace. Details are provided on how the College responded to requests by the department to provide a more comprehensive review of marketplace formularies. This included the development of clinical appropriateness tools for multiple disease states. The aim of this partnership was to improve prescription coverage for Indiana residents and address formulary design discrimination.