Part D beneficiaries' incentives and responses under preferred pharmacy networks

The share of Medicare stand-alone prescription drug plans with a preferred pharmacy network has grown from less than 9% in 2011 to 98% in 2021. This article assesses the financial incentives that such networks created for unsubsidized and subsidized beneficiaries and their pharmacy switching.

We analyzed prescription drug claims data for a nationally representative 20% sample of Medicare beneficiaries from 2010 through 2016.

We evaluated the financial incentives for using preferred pharmacies by simulating unsubsidized and subsidized beneficiaries' annual out-of-pocket spending differentials between using nonpreferred and preferred pharmacies for all their prescriptions. We then compared beneficiaries' use of pharmacies before and after their plans adopted preferred networks. We also examined the amount of money that beneficiaries left on the table under such networks, based on their pharmacy use.

Unsubsidized beneficiaries faced substantial incentives-on average, $147 annually in out-of-pocket spending-and moderately switched toward preferred pharmacies, whereas subsidized beneficiaries were insulated from the incentives and demonstrated little switching. Among those who continued to mainly use nonpreferred pharmacies (half of the unsubsidized and about two-thirds of the subsidized), on average, the unsubsidized paid more out of pocket ($94) relative to if they had used preferred pharmacies, whereas Medicare bore the extra spending ($170) for the subsidized through cost-sharing subsidies.

Preferred networks have important implications for beneficiaries' out-of-pocket spending and the low-income subsidy program. Further research is needed about the impact on the quality of beneficiaries' decision-making and cost savings to fully evaluate preferred networks.