The House is expected to vote this week on legislation (H.R. 4160) that would block the Centers for Medicare & Medicaid Services (CMS) from implementing any part of recently proposed regulations affecting the Medicare prescription drug benefit (Medicare Part D).[1] Although one provision of the proposed regulations — scaling back a requirement that insurers cover all drugs in certain protected classes[2] — raises significant concerns, other provisions are sound and should be implemented. Blocking the entire regulation, as the House bill would do, would throw the proverbial baby out with the bathwater.
Although insurers typically support greater flexibility in what drugs they must cover, America’s Health Insurance Plans (AHIP), the trade association for health insurers, has joined with drug manufacturers and some patient groups to urge CMS to withdraw the rule in its entirety.[3] That’s because insurers dislike a number of other provisions.[4] One such provision would make it simpler for beneficiaries to choose better, potentially more affordable, drug plans. Another provision would reduce costs to beneficiaries and the federal government. This analysis explains why CMS should retain these provisions when it implements the final rule, and hence why the House should not block the entire rule.
The premise of the Medicare Part D program is that Medicare beneficiaries would make informed choices among an array of plan options, which would encourage competition among Part D insurers based on price and quality. A growing body of research shows, however, that only a small percentage of Medicare beneficiaries are enrolled in the Part D plan that would minimize their out-of-pocket costs (premiums, deductibles, and other cost-sharing) considering the prescription drugs they actually use.[5] Moreover, as a Kaiser Family Foundation analysis finds, on average, the overwhelming majority of Part D enrollees — 87 percent — did not change their plan during annual open enrollment periods between 2006 and 2010, even though people who voluntarily switched plans were more likely to lower their costs. Overall, 72 percent of Part D enrollees who were continuously enrolled in Part D between 2006 and 2010 remained in the same plan throughout. Even beneficiaries facing relatively large monthly premium increases of $20 or more for the following year did not switch to more affordable plans; nearly 72 percent of enrollees facing such premium increases remained in their existing plans.[6]
To help beneficiaries make more informed choices, CMS has instituted several requirements to reduce beneficiary confusion and to make differences between plans more transparent. For example, CMS now requires insurers to only offer plans that have “meaningful differences” in their benefits and prohibits them from offering more than three plans per region (one plan with “basic” benefits and two plans with “enhanced” benefits[7] ). As part of the new rule, CMS proposes to reduce the maximum number of plans an insurer can offer to two plans per region (one basic and one enhanced) starting in 2016.
The enhanced plans that insurers offer have tended to provide some coverage in the coverage gap (commonly called the “donut hole”). CMS points out, however, that it is no longer necessary to allow two such enhanced options because health reform has extended Part D coverage to the donut hole and will close it over time. As a result, two enhanced plans can no longer be meaningfully different from each other in how they provide more generous coverage than the basic plan, when the basic plan already provides some (and, eventually, full) donut hole coverage. Moreover, as CMS notes, some insurers offering a second enhanced plan have used that plan to cherry-pick the healthy. Some of these plans offer very few added benefits but end up charging lower premiums than basic plans because their enrollees are healthier and hence lower-cost. That leaves enrollees in basic plans sicker-than-average overall, which raises basic plan premiums. Because low-income beneficiaries eligible for the Low Income Subsidy (LIS, which subsidizes premiums, deductibles, and cost-sharing) can only be automatically enrolled in basic plans and few LIS-eligible beneficiaries enroll in enhanced plans, this raises federal LIS costs as well. (CMS is also considering other policy changes to address insurers’ use of enhanced plans to segment risk.)
CMS expects minimal disruption from this provision, as second enhanced plans constitute only 2 percent of total enrollment in stand-alone Part D plans; many of the second enhanced plans have only very limited enrollment.[8] Jack Hoadley, a Part D expert at Georgetown University’s Health Policy Institute and lead author of the Kaiser Family Foundation study, concurs that only a relatively small share of beneficiaries are enrolled in plans that would no longer be offered. (He also finds that based on the latest enrollment figures, insurers have substantially exaggerated their estimates of the number of people who would be affected.) Moreover, among those who would be affected, the impact would likely be modest; although some beneficiaries may have to switch to plans with somewhat higher premiums, the expected premium increases would fall within the range of typical year-to-year premium changes within a single plan. Hoadley also notes that beneficiaries’ current plans are frequently dropped or modified; he finds that these annual disruptions, including the resulting premium increases, have a greater impact than the CMS proposal would.
Hoadley concludes that the provision would “reduce beneficiary confusion in the Part D market by both lowering the number of choices that they face and ensuring that the differences between competing options are clear and meaningful to them.” [9]
Part D insurers are increasingly using preferred pharmacies, through which enrollees may face lower co-payments or co-insurance than if they use other in-network non-preferred pharmacies. Pharmacies may pay insurers periodic lump-sum payments (usually based on the volume of prescriptions filled) in exchange for this preferred status. While these payments effectively lower insurers’ drug costs, some insurers aren’t incorporating those discounts in the official “negotiated price” they supposedly are paying the preferred pharmacies for drugs dispensed to Part D enrollees.
These lump-sum payments lower overall plan costs and hence beneficiary premiums, which are based on plan costs. But not factoring them into the official price of the prescription drugs adds to overall federal costs. That’s because the federal government — through reinsurance — picks up a portion of the cost of drugs furnished to beneficiaries with high drug spending, as well as nearly all of LIS beneficiaries’ cost-sharing charges, which are based on these official negotiated prices. In other words, for reinsurance and the LIS, the federal government is reimbursing those insurers based on the official negotiated prices, which are higher than insurers’ actual drug costs (net of the lump-sum payments).
Failing to factor the lump-sum payments into the official negotiated drug prices can also raise beneficiaries’ costs in some cases; for example, if a beneficiary is charged a percentage of a drug’s cost, basing that charge on a drug’s official negotiated price rather than its actual cost will make his or her cost-sharing higher than it would otherwise be. The CMS rule proposes to remedy these problems by requiring that insurers incorporate these lump-sum payments into their official negotiated prices.
In addition, CMS has found that in some Part D plans, negotiated prices for drugs dispensed in preferred pharmacies are higher than prices for drugs dispensed in non-preferred in-network pharmacies, particularly among preferred mail-order pharmacies. In other words, in some plans, beneficiaries who use preferred pharmacies face lower co-payments or co-insurance to encourage them to use those pharmacies for their prescriptions, even if the negotiated price of a drug is higher than in non-preferred pharmacies. That drives up federal costs, since Medicare reimburses insurers based, in part, on those negotiated prices (as discussed above). CMS is concerned that in the case of mail-order pharmacies, this may be the product of a conflict of interest; insurers and their pharmacy benefit managers (PBMs) may be using lower cost-sharing in preferred pharmacies to spur enrollees to get their prescriptions at preferred mail-order pharmacies that the PBMs own. As a result, CMS proposes to continue to allow insurers to charge lower co-payments or co-insurance when their prescription drugs are purchased at preferred pharmacies, but only if the insurers ensure that they are offering “consistently lower” negotiated prices in the preferred pharmacies. In other words, insurers can still encourage enrollees to use preferred pharmacies by offering lower cost-sharing charges as long as that would reduce both beneficiaries’ out-of-pocket costs and federal costs.[10]
Concerns over the proposed rule’s provision related to the protected drug classes and their potential impact on beneficiary access to needed drugs should not extend to the entire proposed rule. As the Medicare Rights Center, a beneficiary advocacy organization, states, “each of the proposed policies reflected in the rule should be evaluated on its own merits — as opposed to supporting or opposing the proposed rule as a whole.”[11]
The provisions related to plan offerings and preferred pharmacy pricing issues are sound. The House should reject efforts to block the entire rule (effectively barring CMS from instituting any of its individual provisions), and CMS should retain these two provisions in its final rule.
