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Managing Medicare's Costs

Medicare’s Part D: does competition among plans reduce seniors’ costs? (2 of 3)

Despite the acclaim that Medicare’s Part D currently enjoys, it fails seniors in several important ways. Studies have shown, for instance, that most of them are paying substantially too much for their drug benefits.

Seniors probably aren’t aware that they’re overpaying for their prescription drugs, however, because the government covers 75% of the costs. Also, Part D is complex enough that the only way someone can know whether they’re overpaying and by what amount is to use the Medicare web site to compare plans.

Still, Part D has produced sufficiently impressive results that even Democrats have complimented it. In a telephone press conference a year ago, Medicare’s acting chief at the time, Don Berwick, an appointee of President Obama, said that “we’re seeing effects of good competition among Part D plans.”

Republicans like it too. The Wall Street Journal has lauded Part D’s competitive aspects, and The Heritage Foundation, a free-market think tank, recently had a blog post saying that Part D proves that competition lowers healthcare spending. Insurance companies also point to Part D’s competitive benefits. Last summer Karen Ignani, the president of the industry association America’s Health Insurance Plans (AHIP), said that “beneficiaries will have more affordable prescription drug coverage next year as a result of vigorous competition in the Part D program.”

There may actually be too much competition, though, for the typical retired person. Today every state has 25 or more Part D stand-alone plans. Relatively few people are adept enough to maneuver year by year through the shifting plan formularies and pricing tiers. Not counting those who receive government subsidies, there are 11 million people in Part D stand-alone plans, and the evidence is that most of them are paying way too much for their prescription drugs.

Only six percent of Part D enrollees change plans each year, according to the Medicare Payment Advisory Commission (MedPAC). One large study of Part D drug records found that 94% of enrollees weren’t in the least expensive plan for their drugs, and that they overpaid by an average of $520 a year (in this study, almost one half of Part D enrollees weren’t even in a lowest-quartile plan for their drugs). A later analysis based on a different data set said that 88% of Part D enrollees were not in the lowest-cost plan for their drugs.

Part D is complicated enough that even if you know what to do, it takes 10 or 15 minutes to enter the necessary data at the Medicare web site’s Plan Finder and then compare the various plan options. Before choosing a plan, you need to understand its utilization requirements and whether they’ll make it difficult for you to get one or more of your drugs. Even though a drug is shown on a plan’s formulary, the utilization rules may make it difficult to get that without intervention from your doctor. It’s good that plans do this for brand-name drugs that have generic equivalents, but in a few cases the rules may be intended to get you to use a drug that has a higher profit margin for the plan.

Also, you need to compare mail-order and 30-day refill costs if you want to be sure you’ve found the lowest-cost plan. And you may want to verify that your pharmacy is a preferred one in whatever plan you’re considering, or else you’ll spend a few dollars more when you get retail prescriptions. Finally, how does Medicare rate a particular plan’s quality? Drug plans’ quality ratings are based primarily on the number of complaints and surveys of their enrollees. Sometimes it may be better to choose a plan with a superior rating in place of a slightly cheaper one with an average rating and more utilization restrictions.

Not many seniors can reasonably be expected to go through this evaluation process every year. But if they don’t compare plans at least every two years, they’ll likely pay too much for their drugs. The process is complicated enough that seniors age 85 or older are pretty much left out in the cold. For one thing, an estimated forty percent of them show signs of cognitive impairment, and less than one-half know how to use a computer. In a competitive model, they (or their relatives) would call their state’s Medicare counseling program, whose experts would use the Medicare web site’s Plan Finder to compare plans and prices. Yet only a handful of the very elderly do that, sticking instead to high-cost drug plans they’ve been enrolled in since Part D began in 2006.

The confusion among seniors about how to select a Part D plan is similar in some ways to the confusion they had about Medigap policies before Congress required standardization. Until the early 1990s, there were so many different Medigap benefit designs that even insurance agents couldn’t keep them straight. Formularies make it more difficult to standardize Part D plans than it was to standardize medical benefits. Formularies need to change yearly to include improved and less expensive drugs.

But there should be more standardization of Part D’s utilization rules. As it is, the rules are sometimes unclear and the only way to be sure about how a particular requirement will be applied is to contact the plan’s sponsor before enrolling. MedPAC has said that the number of drugs with utilization rules continues to grow.

The tendency of seniors to remain in the plans they initially enroll in means that insurance companies are competing primarily for Medicare’s incoming beneficiaries. Medicare will see a huge influx of enrollees over the next 20 years – an average of 3.5 million annually – and these are the people for whom Part D’s competition will likely work best. They use the fewest drugs and are the ones most likely need low-premium plans (older retirees who take more prescriptions often find that low-premium plans have high cost-sharing for the drugs they take).

The beneficial effects of Part D competition were seen in October 2010 when Humana and Walmart rolled out a co-branded product. The Humana-Walmart Preferred Rx plan has the lowest premiums in every state ($15.10 a month), $5 or smaller co-pays for 30-day refills of 1,300 generic drugs, and zero co-payments for mail-order refills of some generics. According to the Kaiser Family Foundation, the plan already has eight percent of all Part D stand-alone enrollees. Most of them likely are from new Medicare enrollees during the last two years (the Classes of 2011 and 2012).

This plan may someday be an MBA case study in retailing synergy. Two large firms have created a product that helps consumers and enhances profits. It combines Walmart’s expertise in retailing and Humana’s skills in health plan administration. One analyst has predicted this plan will take over 20% of the Part D stand-alone market within the next few years.

The Humana-Walmart plan’s super-discounted co-payments are available only through its 4,400-store preferred pharmacy network. Walmart profits because retail customers must go to a pharmacy in a Walmart store or a Walmart-owned Sam’s Club or Neighborhood Store. Once in the store, some people will also buy aspirin or toothpaste or an iPad. And Humana profits by handling all mail-order refills and charging plan administration fees.

To put it mildly, a government-run private payer plan would not be so nimble. Congress still hasn’t significantly revised Medicare’s horse-and-buggy benefit structure, which has been in place since 1965. Yet despite Part D’s success in the Humana-Walmart example and a few others, some experts believe a government-run would less expensive in the long run because of its bargaining leverage and the fact it doesn’t need to show a profit (operating margins for stand-alone Part D plans are usually in the 5-10% range).

Given Part D’s popularity, that’s not going to happen anytime soon, though, and it perhaps never will. If policymakers can find a way to standardize plans without taking away Part D plans’ needed flexibility, that would be ideal.◊◊

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