Association for Public Policy Analysis & Management

Since the introduction of the Medicare Prescription Drug Benefit (Part D) in 2006, six therapeutic drug classes—anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals, and immunosuppressants—have been designated as “protected”. Insurance providers’ formularies must cover “all or substantially all” FDA-approved drugs for these protected classes in plans offered through Part D. While the rule is intended to prevent adverse selection, it significantly restricts insurers’ abilities to design formularies in ways that manage utilization. This decreased flexibility introduces a wedge in the competitive negotiations between insurers and drug manufacturers on formulary placement and drug prices that has the potential to significantly increase the manufacturer’s monopoly power. I use 2010-2013 data on Part D prescribing and plan formularies from the Centers for Medicare and Medicaid Services (CMS) to examine the effect of a drug being in a protected class on formulary placement and Medicare spending. I create a county-level competitiveness index using price-cost margins for all drugs in the protected classes in addition to drugs in comparable unprotected classes. By interacting the competitiveness index with a protected class status, I estimate the impact of a drug’s protected status on its inclusion in formularies, its tier placement within formularies, and Medicare spending. Having a better understanding of these outcomes is important as CMS has recently revisited this policy and proposed eliminating protection for certain classes.