Research Question: How does the existence of multiple formulary tiers, and resulting differences in out-of-pocket prices across drugs, affect utilization and negotiated payment rates? Answers to these questions have important implications for policymakers, payors and employers seeking to address the rising cost of pharmaceutical drugs.

Data: Prescription drug claims data for a particular population, together with information on the placement of drugs across formulary tiers, over a multi-year period.

Method: We will begin by identifying movements of particular drugs across formulary tiers and assessing any changes in patient utilization in response to those movements. We are working towards an estimated model of price negotiations that captures the incentives faced by both payors and manufacturers and their relative leverage in these negotiations.

Challenges: The dataset is large and complex. Some important components – like the rebates and side-payments between firms – are not observed. We will need to estimate these as part of the model.

Findings: In previous work we have found that payors’ ability to drop products from the patient choice set provides them with essential leverage to help reduce prices. We expect to find that the introduction of a tiered formulary, which gives payors a new option of shifting a drug to a less-preferred tier rather than dropping it completely, should also be an effective negotiating tool.