Big News: A Health Care Cost Indicator Went *DOWN*. AGAIN!

The national average bid for Medicare Part D drug coverage is going down, again. Since 2011, the average bid has declined every year. The amount of each year’s reduction, compared to the prior year, has ranged from 1.4% in 2011 to 5.8% in 2013. The 2014 decrease of 4.7%, fits the pattern. So why, you ask, is the price of Medicare drug coverage going down? And especially why is it going down at a time when drug plans are being required to fill in more of the coverage gap (aka “donut hole”) each year?

First, a detour to discuss the donut hole, the gap between coverage of routine prescriptions and catastrophic coverage: The Affordable Care Act includes a provision that requires Part D plans to fill in the hole for generic drugs, by covering 7% more cost each year, until they cover 75% by 2020. Meanwhile, manufacturers of brand name drugs will offer increasing discounts on their products until the cost of brand drugs for people in the “hole” is only 25% of retail. At that point, coverage in the hole will be equal to coverage before a beneficiary falls into the hole, with beneficiaries paying 25%.

So, all other things being equal, we would expect to see bids increase each year to fund the added cost of this annual 7% increment in coverage in the coverage gap. In addition, the Affordable Care Act imposes a fee on all insurance companies, starting in 2014, to help fund the premium subsidies for low income enrollees. This fee, which is a fixed dollar amount that is pro-rated among insurance companies based on their relative premiums, will fall more lightly on Part D plans, due to their relative low premiums compared with comprehensive health insurance. But it still represents an added cost that one would expect to flow through to the bid.

The logical conclusion, since the average bid went down instead of up, is that all other things are not equal.

Since the average bid was announced, there has been considerable speculation about what’s happening. Here’s my guess. First, remember that the national average bid is a weighted average, and so reflects the bids submitted by the behemoths of the industry. The small guys’ bids essentially don’t count. It’s logical to conclude that the big guys are continuing to improve their ability to wring more price concessions from both manufacturers and drug chains.

Second it’s just possible that medication therapy management (MTM) is beginning to make significant inroads into the cost of total drug therapy. Or, since the bids represent plans’ expectations about 2014 costs, it’s at least possible that plans expect MTM to make significant inroads.

Third, it’s possible that more of the total cost of the program is being transferred to the federal government through the reinsurance payments for catastrophic coverage. More on that in a minute.

And, finally, 2014 is the year that the 85% floor on medical loss ratios goes into effect for Medicare drug plans. If a plan is running a lower loss ratio, it will need to refund money to the government if it carries the low loss ratio into 2014. A low loss ratio is no longer a mark of success. Faced with a potential refund to Uncle Sam, the most profitable plans may have concluded it’s better to reduce their premium to achieve the minimum loss ratio floor, and use the lower premium to gain a market place advantage. Of course, if everyone has done this, they are really just avoiding the loss of market share.

Curiously, while the average bid has gone down every year since 2011, the base beneficiary premium has gone up in three out of those four years. The base premium is used to calculate the subsidy payment from Medicare to Part D plans. The subsidy is the average bid minus the base premium. The base premium is 25.5% of the average bid, adjusted to account for the expected payments from Medicare to plans to cover the catastrophic reinsurance segment of the Part D benefit. When a beneficiary exits the donut hole due to cumulative prescription costs above the upper bound of the gap, Medicare pays 80% of any additional drug costs. The calculation of the base premium is adjusted to compensate for these payments, in a way that varies the base premium in proportion with changes in expected catastrophic payments. As these reinsurance payments increase, the base premium increases. That is what we have seen in three of the past four years, meaning that the costs to Medicare of the catastrophic component are going up faster than the average bid is going down. Since Medicare pays 80% of these costs, and plans only pay 15% (members pay the rest), an increase in catastrophic, above-the-donut-hole, claim expenses will be borne disproportionately by Medicare, which would be consistent with slower increases, or absolute decreases, in the average bid. That is, more of the total cost of the benefit package is being shifted to Medicare from the Part D plans due to this catastrophic reinsurance provision. But increasing the base premium reduces the subsidy to the plans, since the subsidy is the average bid less the (higher) base premium.

Whatever is behind this, it’s been a trend since 2011, and this year’s result shouldn’t be surprising in that regard. Three conclusions suggest themselves:

1. Part D plans will get paid less because the average bid is less, and because the base premium that is deducted from the average bid is greater;
2. It’s going to be tougher for small plans to compete with big plans, if the main driver of low bids (and lower subsidies as a result) is better price negotiation due to bigness; and,
3. Herb Stein’s law will eventually overwhelm whatever else is going on.

Stein’s law, which is becoming my favorite response to criticisms of Medicare, and the general ill humor of the governing classes these days, says that “If a thing cannot go on forever, it will stop.”

So take heart. And, if you are a Medicare beneficiary, enjoy your lower premium.

Resources

The rapid changes to Part D regulations make the tracking and implementation of these CMS requirements exceptionally difficult — to say nothing of actually managing to them. Find out how GHG can help.

In 2013, GHG Forum attendees went on a detailed walk-through of Part D rejected claims including frequency, sampling, data validation and documentation. Learn what CMS was looking for in past audits, and what plans need to do differently when filing 2013 audits.

Navigating through the maze of Part B versus Part D coverage can be difficult. See how GHG Senior Consultant, Sharon Durfee, breaks down the differences between Medicare Part D and B.