Medicare’s Part D program is gaining momentum with several large for-profit health plans expanding on their plans to offer the program to seniors. Among the plans, Aetna, United Health Group, and Cigna are launching programs nationally, with Humana doing so in over 40 states.
According to the Detroit Free Press,
“Goldman Sachs projects that nearly 17.5 million seniors — about 41% of those eligible to participate — will enroll in the drug plan in 2006….Participating seniors will spend an average $792 for prescription drugs in 2006, excluding premiums, or 37% less than the $1,257 cost without the benefit, according to a July 2004 report by the Congressional Budget Office.”
That begs the question – why won’t the other 59% enroll? The reason is simple – their premiums will be higher than the anticipated costs. Thus, the seniors that will join up will be those who will financially benefit, and the ones who won’t see savings won’t enroll.
Doesn’t sound like a money maker for the PBMs, unless their losses are subsidized by Uncle Sam.
I still can’t figure out what makes this so attractive to private health plans.
The Medicare Part D marketing wagon train has hit the road, with CMS Director Mark McClellan leading the effort to convince skeptical seniors to enroll in the program. By all accounts, the effort has yet to hit its stride (free subscription required), as some seniors are confused about the coverage, while healthy seniors appear uninterested in the benefit, and the chronically ill are concerned that the benefits will not be rich enough.
I have been saying for some months now that Medicare Part D is a bad idea primarily because it does not take into account adverse selection. Simply put, the only people who will sign up are those who need the benefit. Others will not sign up until they get sick; while there is a financial penalty for delayed entry into the program, it is so small that it is unlikely to act as a deterrent. In fact, a study by Brandeis University of seniors using drug discount cards indicates the cards were purchased disproportionally by seniors who were already significant drug consumers.
It is therefore difficult to see how this program will be a financial success. Yes, the government will subsidize money losing plans (where those funds will come from is somewhat of a mystery), yes there will be some price concessions on individual drugs as pharmacy benefit managers negotiate better deals with manufacturers, yes some employers will save money by having the Feds pick up their retirees’ Rx costs. But the fundamental flaw is that seniors will only sign up if they get more out of it then they pay in premiums.
Unless and until someone figures out how to overturn human nature, Medicare Part D is a dead duck.
Jon Coppelman at Workers’ Comp Insider has a great post on the influence of lunches, meetings, and sales reps (detailers) on prescribing habits of physicians. The quick take – MDs who attended Vioxx lunches prescribed four times more than those who just met with detailers. Oh, they weren’t consuming vioxx at the lunches, just hearing about their wonders.
MDs were also paid $750 – $1000 to present at these educational gastronomic events. The presenters talked about related conditions, indications, etc. Jon notes:
“the participating doctors insisted that they are not flacks for the drug companies — they say that they answer questions at these sessions honestly and candidly. In the example of the migraine headaches above, the lead doctor mentioned the availability of generic medications, in addition to those made by the sponsoring company.”
These are pretty common events – almost a quarter million of these doctor presentations took place last year, compared to under 140,000 detailer sales calls. Figure 237,000 events x $750 honorarium per presenter, that’s $178 million.
While the investment was huge, “The return on investment for the presentations involving a doctor was twice that of the other sessions.”
What does this mean for you?
If you are seeking ways to “counter-detail”, you better have a big budget.
There are signs that drug marketing is beginning to change, as the FDA focuses on off-label use and some of the big pharmas cut back on their sales forces. This may well be as part of big pharma’s efforts to defuse some of the harsh criticism leveled at them by physicians, consumer groups, and health plans frustrated with pharma’s aggressive marketing tactics.
David Wilson’s Health Business blog notes that Wyeth and Pfizer have both announced plans to cut sales staff. The reasons are:
1. “Mirrored sales teams –the practice of sending multiple sales reps to the same doctor to talk about the same drug– are causing a backlash from doctors and also making it hard to measure the effectiveness of individual sales people
2. There is little new to talk about –because of fewer product launches and in the case of Wyeth the curtailment of uses for its hormone replacement therapy. (Could it be that the more a doctor knows about hormone replacement therapy the less they will prescribe?)
3. The availability of efficient, effective outsourced sales forces available from Ventiv, Innovex and PDI have enabled pharma companies to reduce fixed costs.”
The issue of pharmaceutical detailing has been extensively addressed in DB’s MedRants, a highly entertaining and informative blog authored by physician Robert Centor. Centor has also commented on the recent decision by Bristol-Myers-Squibb to impose “a ban on advertising its new drugs to consumers in their first year on the market, adopting voluntary restrictions that go further than what is anticipated in an industrywide advertising code to be announced next month.” Centor notes
“The optimist in me hopes that the outcries from physicians has influenced their policy. The skeptic in me believes that they understand the DTC drug advertising carries both risks and benefits. Big Pharma has a major image problem. TV drug ads generally hurt their image. ”
As to the issue of off-label use, this is a significant area of concern for many payers, including workers compensation insurers. In my firm’s “Second Annual Survey of Prescription Drug Management in Workers’ Compensation”, payer respondents noted off-label use as a significant concern. Typical was the use of Actiq as a pain med for musculoskeletal pain. Actiq is a brand drug used for break through pain associated with cancer; thus its use in workers comp is the very definition of “off-label”.
What does this mean for you?
If big pharma is finally getting the message, that bodes well for a “decrease in the rate of increase” in pharmaceutical inflation. However, these companies are the ultimate capitalist organizations (that is not intrinsically bad) so they will seek to maximize their returns. And we all know who pays for those “returns”.
Well, our officials in Washington have lost their minds. How else to explain the requirement by Medicare officials that the new Medicare Part D programs “”offer a surprisingly generous array of prescription drug choices”?
Pharmaceutical firms are likely ecstatic about the news, as the “open formulary” combined with the prohibition against the Federal government negotiating drug prices means that there is likely to be many drugs offered at what the pharmas will deem to be appropriate prices.
CMS Administrator Mark McClellan,and Babette Edgar, a pharmacist at CMS both claim that the diverse population covered under the Medicare and Medicaid programs necessitates a diverse formulary. According to a New York Times article cited in California HealthLine, the original cost assumptions for the Part D program may have to be reworked, as they assumed a narrower formulary. The result – costs will be higher than previous projections. Here’s the quote:
“In 2003, the Congressional Budget Office estimated that the Medicare prescription drug benefit would cost $395 billion over 10 years, but earlier this year, CBO raised the estimated costs of Part D drugs to $849 billion between 2006 and 2015 (California Healthline, 3/11). According to the Times, CBO cited the federal formulary requirements as one factor in its higher estimate.
CBO Director Douglas Holtz-Eakin said the agency’s estimates so far have assumed that Medicare drug plans would use “restrictive formularies” to help control spending. He added, however, that with the broader drug lists being required by the government, CBO “now expects that prescription drug plans will be slightly less effective at controlling drug spending than we had previously assumed.”
CMS denies costs will be driven up, citing the plans for the Part D vendors to use cost control mechanisms similar to those used by commercial plans. The problem with that statement is that Part D vendors are specifically prohibited from using many of these techniques, such as prior authorization.
The last estimate indicated the program, originally forecast to cost $395 billion over ten years, will actually cost just under $900 billion over the same period. With these “unforeseen changes” costs may get close to the trillion dollar mark.
What does this mean for you?
I’m not sure; but if the Chinese decide to stop providing loans to the Federal government, it is either higher taxes, drastic cuts in other governmental programs (it is tough to get $100 billion by cutting HeadStart or NASA budgets), or cancellation of the program.
Kevin Piper summarizes the good, the bad, the ugly, the winners and losers from the new Medicare Part D program in his blog “the Piper Report”. As more information has become available, it is clear that there will be substantial changes to the pharma supply chain, with most entities seeking to better understand utilization and price drivers and squeeze margins wherever possible.
Piper notes winners will include:
–low income Medicare recipients without Rx coverage today
—private employers with generous retirement medical plans will reap a multi-billion dollar windfall, although legislation may reduce this.
—large national insurers seeking to expand market share in this rapidly growing market of seniors
–lobbyists actuaries and consultants.
That may be true, but the fundamental problem of adverse selection still exists. It is getting lonelier by the day out here in the “but the business model just does not make sense” woods, but I have yet to hear anything that makes it sound like Part D providers will be protected from adverse selection.
What does this mean for you?
I’d be very careful of Part D; just because others seem to believe in this does not mean you should not carefully assess the risks.
Legislation has been introduced in the US Senate that would prevent pharmaceutical companies from including the cost of advertising in calculating drug prices for governmental programs. Moreover, the legislation also requires that the HHS and Veterans Affairs Departments “negotiate reduced prices on drugs that are advertised directly to consumers in other programs” (quote from California HealthLine).
The legislation is sponsored by John Sununu (R NH) and Ron Wyden (D OR), senators that are not exactly on the same philosophical plane on many other issues.
According to Wyden, since companies’ advertising expenses are already a tax deduction, “[t]axpayers shouldn’t have to further subsidize the drug companies’ marketing efforts through Medicare and Medicaid.”
My sense is this is a backdoor way for Congress to encourage HHS to negotiate prices with pharma. The Medicare Reform Act specifically prohibits HHS from negotiating prices, a situation that rankles many legislators and taxpayers. Of course, Sununu et al are quick to claim this is not the intent. Regardless, it is a clear indication that some in Congress are looking for creative ways to reduce the cost of pharmaceuticals to the government, and taxpayers as well. With the present budget deficit and focus on same, look for this motivation to result in some meaningful price discussions.
What does this mean to you?
Watch pharma pricing carefully; due to the “flexible” nature of Average Wholesale Price (AWP), (sometimes referred to as “Ain’t What’s Paid”) price reductions in one sector can often be offset by increases to other payers. And as we have noted before, price is but one component of the pharma cost equation of price X utilization X frequency = total cost.
Several readers have noted that there are other reasons for getting involved in the new Medicare drug program, citing the government’s “loss prevention” financial arrangements, the sophistication of PBMs in managing formularies, and the desire to enter what will be a growing and eventually huge market.
The Piper Report has an excellent summary of th program and pays particular attention to a partnership between Cigna and NationsHealth. The post also has numerous links to other sources that further explain part D.
While all this is interesting, I sense a “bleeding edge” aspect to these programs. For most entrants into this market, this will be their first large-scale initiative into senior drugs management. The challenges they face will include:
–inexperience about seniors and their drug-consuming habits
–the inherent problems with adverse selection noted in previous posts here
–their inability to control, or even impact, the treating physician, widely acknowledged as the primary driver of pharmaceutical utilization
This last may be the most significant. At the end of the day, PBMs are transactions processors, administering (in large part) what physicians order. If they can’t intelligently address and positively impact prescribing behavior in a way that does not put the beneficiary in the middle, they will find themselves caught between the doc and the patient – a very uncomfortable position.
What does this mean for you?
It is highly likely that early adopters will get burned in this deal, and slower movers will glean vital knowledge from observing without entering the fray. This is one of those rare circumstances where I would advise caution.
Workers’ Comp Insider has an excellent summary of NCCI’s recent report on prescription drug costs in workers’ comp. Author Jon Coppelman raises some interesting questions, including:
“why are doctors relying on brand names, when there are very powerful generic drugs available for pain? Why prescribe Oxycontin? Why is Neurontin so popular?
Is this what consumers want?”
Coppelman rightly cites the power of detailers, the armies of attractive, intelligent, well-dressed primarily young men and women who call on physicians to encourage them to write scripts for their particular drugs.
I would also note that PBMs make money only when scripts are filled through their contracted pharmacies. Therefore, while there is indeed an incentive to the PBM to drive network penetration, there is also no incentive to prevent scripts. Certainly some PBMs work hard to “do the right thing” and there are some notable successes, but when they are financially motivated to fill scripts, there is somewhat of a conflict of interest.
Moreover, some PBMs do not understand the WC business, but are jumping into the market because margins are much more attractive than those in group health.
What does this mean for you?
Watch drug utilization growth carefully, learn about this business, and start talking to your PBM about alternative fee structures. There is no quick answer but with drugs accounting for 12% of WC medical spend, it is well worth your time to look for a longer term solution.
The growing popularity of Medicare Part D (the Medicare Drug program) among health plans pharmacy benefit managers (PBMs), is a mystery. As I have noted before, the program as presently conceived is guaranteed to drive adverse selection with only the seniors who will get more from the program than they will pay in likely to subscribe.
I asked national health policy expert Bob Laszewski of Health Policy and Strategy Associates (not affiliated with my firm) if I’m missing something, if there is a good reason why PBMs and health plans are jumping into this business. Bob pointed to a Brandeis University study that indicated those seniors who purchased the drug discount card tended to he high users of drugs. No surprise there – what is revealing is the underlying statistics. Drug card purchasers saved 20% (on average) but used the card twice as often as seniors who received a card automatically from their health plan.
Defenders of the Part D program cite PBMs’ expertise in formulary management, bulk pricing arrangements, cost-sharing with seniors (co-pays etc.) as evidence of their ability to control costs.
Perhaps most telling is the Federal government’s announcement that they will protect PBMs and health plans from excessive losses incurred as a result of their Part D drug programs.
The net – this is one of those “if everyone else is doing it, we better too” businesses. It is reminiscent of the pricing cycles in property and casualty insurance, where as soon as carriers start losing money they raise prices, and as soon as they start making money they cut prices to capture volume. This pattern has been as consistent as the tides, and likely as inevitable.
What does this mean for you?
For those of us on the sidelines, observing the outcome of the rush into Medicare Part D drug cards will be instructive. It is possible that I am missing something here, that PBM programs actually can address utilization (although I have never seen evidence that they do, and because they traditionally make money only when prescriptions are filled, utilization management is not in their DNA).
But I doubt it.