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Managing Medicare's Costs

With Medicare Part D, it pays to be nimble

Two years ago the Humana-Walmart Preferred Rx drug plan had the lowest premium of any national Medicare Part D stand-alone plan. Boosted by a several million dollars in television and print ads, the newly launched plan enrolled almost one million people by the end of 2011, its first year of operation.

This year its premiums jumped 23% as it led the way in premium increases among the 10 largest stand-alone plans, seven of which raised premiums by 11% or more according to an analysis by Avalere Health.

Those premium hikes of the large stand-alone plans are at odds with the government’s upbeat press releases saying that Part D costs remain stable. The most recent announcement said that the average Part D monthly premium, which held steady at $30 for the last three years, will increase in 2014 by only one dollar, or about one-third of one percent.

People who have seen sustained increases in their stand-alone plan premiums may be puzzled by the government’s sleight-of-hand.

When the Department of Health and Human Services reports annual premium increases for Part D, it combines the premiums of two kinds of plans – stand-alone and Medicare Advantage. Yet as their name indicates, stand-alone plans cover prescription drugs and nothing else. On the other hand, Advantage plans cover medical as well as drug benefits. Thus Advantage plans can redeploy the generous the subsidies and bonuses they receive for medical treatments to keep drug costs low.

Many Advantage plans have very low or no drug premiums, an attractive feature for new enrollees. As the chart below indicates, premiums for all plans (including stand-alone plans) have grown at a reasonable rate since Part D began in 2006. But stand-alone plan premiums have increased more than twice as much.

Part D Chart

Premiums get the most attention, but they are not important for the more than 90% of seniors who take medications. Often a low-premium plan turns out to be a high-cost choice once a plan’s cost-sharing is taken into account. Premiums are important only for people who don’t take prescription drugs (since their only cost is the premium). And even a plan whose premiums and cost sharing look good on paper may turn out to be a poor choice if the plan has strict rules that discourage seniors’ use of one or more of the drugs they take.

The expertise needed to evaluate a Part D plan is sometimes mind boggling.Even health experts tend to throw up their hands in frustration at the complexity. New York Times health care columnist Jane Gross described her three bewildering days of trying to find the best Part D plan when she turned 65. She consulted Medicare’s web site, talked to sales reps, and finally contacted a state insurance counselor in trying to find a low-cost Part D stand-alone plan for the drugs she takes. She settled on a slightly higher-cost plan that would allow her to use her neighborhood pharmacy.

This confusion would be more manageable if it were a one-time event. With Part D though, the best plan can change from one year to the next. That’s because Part D insurers enjoy wide-ranging leeway to alter benefits and shift costs so long as they comply with Medicare’s fairly broad standards. They can raise or lower a particular drug’s co-payments by several hundred dollars a year by merely shifting it to a different tier. They can hide a plan’s utilization requirements in the footnotes, making it a necessary to read and interpret the fine print.

Despite the occasional critiques, Part D is seen as a resounding success. Today 90% of Medicare beneficiaries have good drug coverage whereas only 75% did before Part D began seven years ago. During that period, Part D’s program costs have been $248 billion lower than the CBO’s initial projections. What’s more, quality ratings for stand-alone as well as Medicare Advantage Part D plans are higher for the third year in a row. And plans have played a central role in encouraging people to switch to lower-cost generics, one reason for the program’s strong financial performance.

On the flip side, seniors not agile enough to compare their plans’ costs to other alternatives often spend thousands of dollars too much over a several-year period. One encouraging sign is that the percentage of enrollees who voluntarily switch plans has grown to 13%, according to MedPac. Still, that number is low in light of studies showing that roughly 90% of Part D enrollees are not in the lowest-cost plans for their drugs. In addition, many seniors’ ability to navigate the Part D maze diminishes as they grow older – 15% of those ages 65-69 voluntarily changed plans between 2010 and 2011 but only 10% of those 80 and older did so, according to MedPAC data.

One confusing part for seniors is that plans shift drugs among tiers each year. As an example, the AARP Medicare Rx Preferred plan currently has co-payments that are $540 a year more for a Tier 4 than for a Tier 3 drug. Someone in that plan who takes a single brand-name drug could see his or her co-payments increase by that much or more next January if the plan changes the drug’s pricing tier from 3 to 4.

Plans can offset these spikes in co-payments for certain drugs by offering very low copays for others so that their overall benefit package meets Medicare’s standards. The Humana-Walmart Preferred Rx drug plan (the same one whose premiums went up 23% this year) has no co-pays for certain drugs as long as they are filled by mail order. It also has one-cent co-payments for several generic drugs used to treat high blood pressure if the prescriptions are filled at one of the plan’s preferred pharmacies. This lower-than-cost pricing allows plans to get away with steep increases in the cost of other drugs and still remain compliant with Medicare’s standards.

This cost imbalance among tiers has a positive result, since it encourages people to use widely prescribed and highly effective Tier 1 drugs like statins and antihypertensives. But it also enables plans to charge high co-payments to people with serious illnesses. Some advocates complain that tier pricing discriminates against the sickest and often poorest seniors.

Part D plans also lower their costs by tweaking their formularies, which are the lists of drugs that they cover. That’s important because it allows plans to include newer, more effective drugs and no longer cover obsolete ones. The downside is that seniors who don’t read the mailed letters saying that their drug is being dropped from their plans’ formularies learn too late (usually after the first of the year) that their drug is no longer covered. At that point their only option is for their doctors to request an exception. And even if the request is approved, it will usually require much higher co-payments than when the drug was on the formulary.

Plans can likewise change their pharmacy networks each year. Unfortunately, many seniors pay hundreds of dollars more at their customer pharmacy than if they went to a pharmacy two blocks away. How do seniors know if their pharmacy is a preferred one? If they get mail-order refills, they’re using a preferred pharmacy. But if they get retail prescriptions, they will need to call the plan or do a Medicare drug plan search to verify that their pharmacy is preferred.

As MedPAC and others have reported, preferred networks are a quickly emerging trend. An Avalere Health analysis of the 2013 Part D plans found that the five lowest-cost national or near-national stand-alone plans use preferred pharmacy networks. And these narrower networks can benefit seniors if they use a preferred pharmacy.

There are two times when most seniors can choose (or change) their Part D coverage – when they first enroll in Medicare and then each year during annual open enrollment (October 15-December 7). Their best resources are their nearest state health insurance programs, or SHIPS, where they can get expert assistance at no cost. Most people will save money, and even if they decide not to switch plans, perhaps because the savings are minimal, they have the comfort of knowing exactly how much they are overpaying. What’s important is that they monitor their costs and compare options. ◊◊

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