Helping People Find the Best Medicare Insurance
A fee-only financial advisor


Contact us by e-mail

Managing Medicare's Costs

Medicare’s Part D Stand-Alone Plans: Bending the Cost Curve (1 of 3)

Medicare’s Part D coverage is getting better. Among other improvements, the coverage gap known as doughnut hole is shrinking. Beginning this year, brand name drugs purchased in the doughnut hole are discounted by 50 percent and generic drugs by 7 percent. Next year the discount for generic drugs purchased in the doughnut hole doubles to 14 percent.

Also, the Department of Health and Human Services announced in August that Part D premiums will be lower in 2012 than they are this year. While premiums are not a good indicator of a plan’s cost-effectiveness, it’s still good that they are declining instead of increasing. And long-term pricing trends are favorable because of the large numbers of expiring patents for blockbuster drugs, opening the doors to generic equivalents that cost one-tenth as much. The statin drug Lipitor is just one example. The most prescribed brand-name drug for seniors, Lipitor will begin to lose much of its $7.5 billion in U. S. sales revenue in 2012 as a result of its patent expiration next month.

These changes can help retirees control their drug costs. But it’s important for retirees with stand-alone drug plans to take advantage of Medicare’s annual open enrollment period that begins October 15 and ends December 7. Even beneficial changes in drug pricing often re-shuffle the cost rankings of stand-alone plans for a particular set of drugs and in some cases create bargains.

Monitoring drug coverage is a neglected but important way to lower healthcare costs. Over a several-year period retirees can save thousands of dollars by annually reviewing their stand-alone drug coverage and switching plans when they find lower-cost options. Yet only six percent of Medicare beneficiaries change their stand-alone drug plans each year. Two studies have shown that those who do not switch plans pay several hundred dollars too much for their prescriptions, on average.

People sometimes mistakenly believe they have good coverage if their premiums are low. Because they are easy to compare, premiums are the first criterion that many people use when they choose a plan. Insurance companies anticipate this and keep premiums low by increasing other, less apparent costs. Nor is this particularly difficult, since every stand-alone plan has an almost countless number of moving parts that it can adjust to increase revenue, and premiums are only one of them.

A plan can reduce its monthly premiums by $3 a month, for example, and then more than compensate for lost premium revenue with a barely noticed $1 increase in co-payments for generic drugs. Or it can place a restriction on a low-margin brand-name drug, or raise the prices of five other drugs.

Thus premiums are not a valid measure of a plan’s cost-effectiveness except for those people who don’t take any prescription drugs. And that’s a small minority. According to the most recent Medicare Payment Advisory Commission Status Report on Part D (page 323), 92 percent of the people enrolled in Part D filled at least one prescription in 2008, and the average refill rate was 4.1 prescriptions a month.

One example of a little-noticed adjustment that can increase costs occurs when a plan changes its formulary, which is the list of drugs that the plan covers. While many formulary changes coincide with the start of the plan year, plans also change their list of covered drugs during the year. Medicare’s rules protect people from the impact of mid-year formulary changes for the balance of that year, but if retirees do not review their coverage during annual open enrollment, the following year they could be stuck in plans that no longer cover one of their drugs. They must then request an exception from the plan, and even if their request is approved, they will likely pay more for the non-formulary drug.

A Government Accountability Office report released last summer analyzed formulary changes for Part D plans in 2008 and 2009. The GAO analysis indicated that almost all plans changed their formularies one or more times during each calendar year. Almost 90 percent of the changes were enhancements which either added drugs to the formulary or removed restrictions on drugs that were already covered. The GAO also found that just over ten percent of the formulary changes were negative.

Regardless of whether a formulary change is an enhancement or has a negative effect, it may alter a stand-alone plan’s cost rank for a specific set of drugs. And since other insurers are simultaneously altering their plan formularies and prices, a plan’s rank for a specific set of drugs can move up or down by several hundred dollars each year. The impact of these and other hidden changes can be determined only by using the medicare.gov web site’s Rx Plan Finder, where people can compare plans’ costs for a specific set of drugs.

Retirees who use the Rx Plan Finder and who take only generic drugs will likely discover that their 2012 prescription drug costs will be roughly three to five percent higher than in 2011, apart from any savings they realize by switching plans. They will also likely find that their premiums are modestly higher — despite the government’s August announcement that premiums are dropping.

The government’s annual press releases that announce Part D premiums are misleading at best. To determine the average premium that it will publicize, Medicare combines the premiums of stand-alone drug plans and Medicare Advantage drug plans. The Rx drug premiums for Advantage plans, however, are almost always substantially lower than those of stand-alone plans, mainly because Advantage plans use some of their Part C subsidies to reduce drug costs and make their plans more appealing. Many Advantage plans, for instance, have zero premiums for drug coverage.

By lumping the two types of Part D plans together and determining an average for all of them, Medicare produces a number that’s artificially low for people enrolled in stand-alone plans. Thus the government’s August press release stated that the 2011 average monthly Part D premium is $30.76, but this year’s average stand-alone plan premium, weighted by plan enrollment, is $38.28 according to a recent Kaiser Family Foundation’s Issue Brief (page 11).

Finally, even though plans often trade-off lower premiums for higher cost-sharing, both premiums and co-payments have been averaging 7 to 8 percent annual increases over the past five years, as the table below indicates. And in 2011 specialty drugs required co-insurance payments that averaged 33 percent. Since the government pays for 75 percent of Part D benefits on average, one wonders how plans can charge one-third of a drug’s cost to retirees.

The following table shows the five-year growth rate for Part D stand-alone plan premiums, deductibles, and co-payments. Except for the average annual rate calculations, the data are from the Kaiser Family Foundation’s Issue Brief mentioned above.

Medicare’s Part D Stand-Alone Plans: Bending the Cost Curve (1 of 3)

© 2010-2018 Dover Healthcare Planning, LLC | Contact Us