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A First Look At The New Medicare Prescription Drug Plans

Abstract

 
Medicare began offering an outpatient prescription drug benefit through private plans in January 2006. Using nationwide data, we examine the availability, costs, and benefits of regional and local plans offering these benefits to beneficiaries. Because they are an entirely new concept for Medicare, we focus on stand-alone prescription drug plans, comparing them with other Medicare health plans offering drug coverage. The infamous "doughnut hole" exists for all but a few of these plans. One national stand-alone drug plan, though, covers brand-name drugs with no gap. Variations in cost sharing and formularies provide beneficiaries with choices as well as complexity.

Three main types of private plans contract with Medicare to provide this coverage: local Medicare Advantage (MA) managed care plans, which are the successors to the Medicare + Choice plans; regional preferred provider organizations (PPOs) operating under the MA program; and regional stand-alone prescription drug plans (PDPs).² The diversity of plan types, number of plans, and variations in cost sharing and formulary design have been reported in the media to be sources of confusion among beneficiaries.³

Local MA plans, which contract with Medicare county by county, are not new. Local managed care plans, generally health maintenance organizations (HMOs), have been part of Medicare since 1982. Until January 2006, such plans were the only way beneficiaries could obtain Medicare coverage for outpatient prescription drugs.⁴ Although most local MA plans will provide drug benefits, they are expected to operate primarily in urban areas, as they have in the past.⁵

Some PPOs have participated in Medicare in the recent past, mostly as part of a demonstration.⁶ One feature of the new regional MA PPOs is the requirement that their service areas be defined in terms of twenty-six multi-state regions that include rural areas. This constraint puts regional PPOs at a competitive disadvantage relative to local MA plans, which is offset, although perhaps only partly, by increased regional PPO payments, regional payment adjustments, and a temporary MA Stabilization Fund.⁷ Regional PPOs have entered twenty-one MA regions in 2006 and must offer beneficiaries a basic drug plan.

Stand-alone PDPs are a new source of outpatient prescription drug coverage in Medicare and the only available source for some beneficiaries. Unlike local MA plans and regional PPOs, PDPs offer drug coverage only, not comprehensive health insurance. Beneficiaries enrolling in a PDP rely on traditional fee-for-service (FFS) Medicare for coverage of nondrug services. Like regional MA PPOs, the stand-alone PDPs are regional plans with service areas defined in terms of thirty-four PDP regions.⁸ Little is known about PDPs, because they did not exist before January 2006.

This study, based on data from the Centers for Medicare and Medicaid Services (CMS), analyzes the availability, costs, and benefits of PDPs participating in 2006 in the context of other Medicare drug plan options. We analyze plan characteristics, which can appear different to beneficiaries depending on their eligibility for low-income subsidies from Medicare. Certain low-income beneficiaries and those dually eligible for Medicaid or receiving Supplemental Security Income (SSI) qualify for full or partial premium subsidies and reduced cost sharing. Also, those who are eligible for subsidies but do not select a drug plan will be automatically enrolled in one by the CMS.

Study Data And Methods

Top Study Data And Methods Study Results Discussion NOTES

 
Data on characteristics of all local MA and regional MA PPO drug plans and all stand-alone PDPs were obtained from the CMS Web site in March 2006.⁹ Data elements include insurer, plan name, premium, deductible, gap coverage, percentage of the top 100 drugs covered, percentage of the top 100 drugs requiring prior authorization, and percentage of the top 100 drugs with a copayment below $20.¹⁰.

Comprehensive data on formularies for Medicare drug plans were not available at the time of this study. However, the CMS has placed an interactive tool on its Medicare Web site, http://www.medicare.gov, that allows users to see which drugs are covered by each plan’s formulary. We developed a protocol that used this Formulary Finder tool to query the underlying formulary database. For tractability, we focused on specific, frequently prescribed, brand-name drugs and on a restricted set of stand-alone PDPs available nationally (or nearly so). We queried the Formulary Finder with twelve brand-name drugs, selected because they are among the thirty most commonly prescribed to the elderly participating in the Pennsylvania Pharmaceutical Assistance Contract for the Elderly and also among the fifty with largest national sales volume.¹¹ For the twelve selected drugs, we used the Formulary Finder to learn whether or not the drug was covered and, if it was, its formulary tier.¹² We did this for fifteen specific plans, selected because they (1) are offered by large insurers, (2) are offered everywhere (or nearly so) in the country, and (3) have nearly constant copayment amounts across their service areas.¹³ For convenience, we refer to these plans as "national plans" and note that our list of national plans differs from those publicized by other organizations.¹⁴

Study Results

Top Study Data And Methods Study Results Discussion NOTES

 
MA drug plans. There are two types of MA drug plans: those offered by local MA plans and those offered by regional PPOs. Some insurers offering an MA plan of either type offer multiple drug coverage products: a basic plan and one or more enhanced plans with higher premiums and more generous coverage. For example, in Cook County, Illinois, Humana offers four local drug plans: two through HMOs (a basic one with zero monthly drug premium and an enhanced one with a $26 monthly drug premium), one through a local PPO ($31 monthly drug premium), and one through a private FFS plan ($23 monthly drug premium). All four plans have a zero drug deductible and are identical in nearly all available measures of cost sharing and formulary generosity. Some small differences exist across the plans in copayments for some tiers, the interpretation of which is difficult without detailed formulary data (not available for this study).¹⁵ The Humana PPO is unique among the four in covering generic drugs in the gap. Note, however, that gap coverage among local MA drug plans is uncommon; only 14 percent of plans offer it.

In earlier work, we forecast that regional PPOs would not participate in large numbers.¹⁶ Although they are fewer in number than stand-alone PDPs and local MA plans, regional PPOs are present in all but five MA regions (Exhibit 1). The average MA region has 2.4 regional PPO offerings, all of which offer at least a basic drug benefit (62 offers in 26 MA regions), while the average county has 3.6 local MA drug plan offerings (11,646 offers in 3,274 counties) and the average PDP region has 42 stand-alone PDP offerings (1,429 offers in 34 PDP regions).¹⁷

Stand-alone PDPs. Relative to regional PPOs, stand-alone PDPs are available in larger numbers. All PDP regions have at least twenty-seven PDP options, and a few have more than fifty. On average, the monthly drug premium for a PDP is $37—well above the averages for local MA drug plans and regional PPOs. A smaller proportion of PDPs (about half) have zero deductible for drugs, relative to local MA plans and regional PPOs. About 34 percent of stand-alone PDPs have a $250 annual deductible, approximately the same as for regional PPOs but a higher percentage than for local MA drug plans. Seven percent have a $100 deductible, and 1 percent have other deductible levels ($50, $150, or $175).

Like the local and regional MA plans described previously, some insurers offer multiple stand-alone PDPs in the same region. Typically one product is a high-deductible plan, and one or more are low-deductible plans. Low-deductible plans outnumber high-deductible plans nationally and in every region by about two to one (Exhibit 2). The national average monthly premium for low-deductible plans is $10 higher than that for high-deductible plans.

Despite this within-region premium variability, the mean premium across regions does not vary greatly for either deductible type (Exhibit 2). The mean percentage of the top 100 drugs covered is also nearly constant across the PDP regions: about 93 percent for both low- and high-deductible plans (data not shown).

Some important differences between low-and high-deductible stand-alone PDPs are not shown in Exhibit 2. Low-deductible plans charge a copayment under $20 for fewer of the top 100 drugs than high-deductible plans do: an average of fifty-eight of the top 100 drugs in low-deductible plans versus an average of seventy-two in high-deductible plans. But more low-deductible plans (23 percent) than high-deductible plans (0 percent) offer gap coverage. Plans with any gap coverage charge relatively high premiums: $50 per month on average—about $10 per month more than the average low-deductible plan premium. Those with generic and brand-name (as opposed to just generic) gap coverage charge the highest monthly premiums: $61 on average, or $20 more than that of the average low-deductible plan.

Thus, although there is considerable premium variation within each region, some broad characteristics of PDP offerings (for example, total number of plans, ratio of low- to high-deductible plans, mean premiums, number of top 100 drugs covered) vary little across regions. There are also substantial differences in characteristics between low- and high-deductible plans. On average, plans compensate for a lower deductible by charging both a higher premium and higher copayments. Compared with high-deductible plans, low-deductible plans have a $10 per month higher premium, on average, and have about 19 percent fewer of the top 100 drugs with copayments under $20.

Characteristics of national PDPs. Exhibit 3 summarizes the characteristics of fifteen national PDPs offered by six insurers; these constitute a subset of the PDPs described above. (National PDPs are offered by a single insurer in nearly every state and have nearly constant benefits.) All but one insurer (UnitedHealthcare) offers multiple plans, typically one high-deductible plan and two low-deductible plans. One of the low-deductible plans has more generous coverage for a higher premium: either more generous coverage of the most popular drugs or provision of some coverage in the gap, or both.

One measure of generosity is the deductible. All plans in Exhibit 3 offer either a zero or a $250 deductible. Among the same insurer’s offerings, low-deductible plans have a higher premium. Another measure of generosity is degree of coverage of popular drugs. Some higher-premium plans cover a larger share of popular drugs, cover more without requiring prior approval, or cover more at lower cost. Finally, gap coverage comes at a higher price, particularly for brand-name gap coverage. Only one-third of these national plans offer gap coverage, and only one, Humana’s PDP Complete, offers gap coverage of brand-name drugs.

This one-third offering gap coverage is a much higher percentage than is true for all stand-alone PDPs (15 percent) and local MA drug plans (14 percent). Gap coverage for generic drugs only is offered by five or six stand-alone PDPs in all but one region (region 8, NC), where eight PDPs offer gap coverage for generics. Gap coverage for brand-name drugs is more rare, offered by only one or two PDPs in all but three regions (data not shown). No brand-name gap coverage is available in regions 1, 33, and 34.

To examine the generosity of the national PDPs in greater detail, we checked the availability of and cost sharing for twelve of the most popular brand-name drugs among the elderly (Exhibit 4). Exhibit 5 provides cost-sharing details for each of the popular drugs listed in Exhibit 4 and for each national PDP listed in Exhibit 3. Few plans offer coverage for all twelve of the drugs. For insurers offering multiple plans, if only one plan covers all twelve, it is the highest-premium plan (for example, Aetna’s Medicare Rx Premier and Unicare’s Medicare Rx Rewards Premier). Celexa (drug A in Exhibit 5) is the least likely of the twelve drugs to be covered, and when it is covered, it has the highest copayment. Products offered by WellCare cover the fewest of these twelve drugs, while all of Humana’s products cover all of them, although with relatively high cost sharing for some. UnitedHealthcare’s AARP MedicareRx, which covers all but Celexa, and Aetna’s Medicare Rx Premier, which covers all twelve, have relatively low mean copayments.

Top Study Data And Methods Study Results Discussion NOTES

Broad PDP characteristics do not vary much from region to region. However, within regions, characteristics vary widely, which has been reported in the media as a source of confusion for beneficiaries. The complexity is reduced by focusing only on national plans offered by large insurers.¹⁸ Each of the large insurers we examined offered up to three plans: a high-deductible ($250) plan with the lowest premium, a zero-deductible plan with a midrange premium, and a zero-deductible plan with the best coverage and highest premium. These national plans constitute a basic set of plans available to nearly all beneficiaries.

Even when attention is restricted to national plans, beneficiaries have meaningful choices, with much variation in cost and generosity. Some plans, like those offered by WellCare, have both restrictive formularies and high premiums relative to other plans like UnitedHealthcare’s AARP MedicareRx. Of course, the importance of formulary restrictions will be different for each beneficiary, depending on which drugs he or she expects to use. In addition, beneficiaries face different out-of-pocket cost-sharing liability, depending on whether or not they qualify for low-income subsidies.

Among PDPs, a small minority offer coverage in the gap (or "doughnut hole"). Only one national plan, Humana’s PDP Complete, offers brand-name gap coverage. Humana has adopted a strategy unique among national plans, one that exposes it to risk of adverse selection but that also holds the potential to capture substantial market share. Whether this strategy will prove to be profitable ought to become evident during 2006.

More generally, whether the PDP sector receives either favorable or adverse selection will be key to the stability of this component of the Medicare prescription drug program. Recent work suggests that stand-alone PDPs will experience substantial adverse selection but will nonetheless remain stable, as long as subsidies are not cut too deeply.¹⁹ The temptation by lawmakers to rein in subsidy spending is already evident. For example, late in 2005 a Senate budget reconciliation bill (S. 1932) included a provision to phase out a fund created by MMA to encourage insurers to offer prescription drug coverage.²⁰ Some plans could make up for a loss in government payments by increasing their deductibles or copayments or by changing formularies. Plans already offering the statutory minimum benefit and restrictive formularies would have to increase premiums to make up the loss. If this happens, beneficiaries expecting to have low drug usage might judge the increased premium not worth the benefit and decline coverage, potentially destabilizing these plans.

THE LANDSCAPE OF PRIVATE Medicare plans is dynamic. In addition to the familiar plan entries, exits, and service-area refinements, as of 2008 the moratorium on new local PPO entry written into MMA will be lifted. It will be interesting to see how regional drug plans, both PPOs and PDPs, respond when this change takes place.

Editor's Notes

 
Austin Frakt (frakt{at}bu.edu) is a health systems research scientist at the Veterans Affairs Boston Healthcare System in Boston, Massachusetts. Steven Pizer is a health economist there.

This research was supported by Grant no. 5115 from the Robert Wood Johnson Foundation’s (RWJF’s) Changes in Health Care Financing and Organization (HCFO) Initiative. The views expressed in this paper are those of the authors and do not necessarily reflect the positions of the RWJF, Boston University, or the Department of Veterans Affairs. The authors thank Yumiko Stenstrum and Cathy Comstock for assistance in data preparation and the reviewers for their thoughtful comments on earlier drafts.

NOTES

Top Study Data And Methods Study Results Discussion NOTES

 

1. Although plans might offer more-generous coverage, the "standard" benefit includes a premium that covers 25 percent of the drug benefit, a $250 deductible, 25 percent coinsurance up to $2,250 in total drug costs, 100 percent coinsurance (that is, no coverage) from $2,250 to $5,100 in total drug costs (the gap or "doughnut hole"), and 5 percent coinsurance above $5,100 in total drug costs.
2. Medicare risk HMOs were authorized by the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. The precursor to the Medicare Advantage program, Medicare+Choice (M+C), was established by the Balanced Budget Act (BBA) of 1997.
3. R. Pear, "Confusion Is Rife about Drug Plan as Sign-Up Nears," New York Times, 12 November 2005; and J. Yang, "Elderly Confused by Medicare Prescription Drug Plan," ABC News, 13 November 2005, http://abcnews.go.com/WNT/Health/story?id=1306814 (accessed 17 November 2005).
4. Some beneficiaries obtain coverage for outpatient prescription drugs outside of Medicare through a Medigap policy, a plan sponsored by a current or former employer, or a state Medicaid or pharmacy assistance program.
5. In 2001 under M+C, a beneficiary in an urban county was more than twenty times more likely than one in a rural county to have access to a local private plan. See S.D. Pizer and A.B. Frakt, "Payment Policy and Competition in the Medicare+Choice Program," Health Care Financing Review 24, no. 1 (2002): 83–94.[Medline]Preferred entry by local plans into urban counties has continued under the MA program. See B. Biles, G. Dallek, and L.H. Nicholas, "Medicare Advantage: Déjà Vu All Over Again?" Health Affairs 23 (2004): w586–w597 (published online 15 December 2004; 10.1377/hlthaff.w4.586).
6. L. Greenwald et al., "Medicare Preferred Provider Organization (PPO) Case Study and Implementation Report" (Prepared for the Centers for Medicare and Medicaid Services by RTI International, CMS Contract no. 500-00-0024), March 2004, http://www.cms.hhs.gov/DemoProjectsEvalRpts/downloads/PPO_Implementation_Report.pdf (accessed 10 May 2006).
7. S.D. Pizer, R. Feldman, and A.B. Frakt, "Defective Design: Regional Competition in Medicare," Health Affairs 24 (2005): w399–w411 (published online 23 August 2005; 10.1377/hlthaff.w5.399).
8. A list of the states in each MA and PDP region is available at CMS, "Overview," 2 March 2006, http://www.cms.hhs.gov/PrescriptionDrugCovGenIn/(accessed 9 March 2006).
9. Ibid.
10. The top 100 drugs are the 100 most commonly purchased by Medicare beneficiaries using Medicare-approved drug discount cards. CMS staff, personal communication, 12 April 2006.
11. The list of thirty brand-name drugs most prescribed to seniors participating in the Pennsylvania Pharmaceutical Assistance Contract for the Elderly was compiled in Families USA, Sticker Shock: Rising Prescription Drug Prices for Seniors, Pub. no. 04-103 (Washington: Families USA, 2004).Because the program’s formulary likely influenced the number of prescriptions written for a drug, we eliminated from consideration any drugs not in the top fifty brand-name drugs sorted by retail sales volume as compiled in Drug Topics, "Top 200 Brand-Name Drugs by Retail Dollars in 2004," 21 February 2005, http://www.drugtopics.com/drugtopics/data/articlestandard/drugtopics/112005/150644/article.pdf (accessed 28 April 2006). We eliminated from consideration Vioxx (because it has been recalled) and Celebrex (because its popularity likely declined as a result of concerns of increased risk of heart attack or stroke).
12. The twelve drugs selected are listed in Exhibit 4.
13. Service area and copayment amounts were obtained from plans’ Web sites and marketing material or from plan representatives. The fifteen selected plans are listed in Exhibit 3.
14. Other organizations, including the CMS, have circulated lists of "national plans" that differ from ours. Our list includes plans offered by large insurers that might not be available everywhere (for example, Humana’s PDPs are not offered in four states). Lists made available by other organizations include plans with copayments that vary widely across regions. We excluded these; we do not consider such plans to be true national plans because a fundamental characteristic (cost-sharing) varies greatly by region. However, we did include United’s AARP MedicareRx, which has a third-tier copayment that varies by one dollar across regions. This is such a small variation and the plan is such an important one that we thought it worthwhile to include it.
15. According to Humana marketing materials, in Cook County, Illinois, the two Humana HMOs have the same copayment structure: $0/$35/$55/25 percent for spending between $0 and $250, $10/$35/$55/25 percent for spending between $250.01 and $2,250, and 100 percent for spending between $2,250.01 and the catastrophic limit (when out-of-pocket spending reaches $3,600); the PPO differs only in the $2,250.51 to catastrophic band with a copayment structure of $10/100 percent/100 percent/100 percent; the private FFS plan differs only in the lower two bands with a copayment structure of $5/$30/$70/25 percent for spending between $0 and $2,250.
16. Pizer et al., "Defective Design."
17. In these figures, an "offer" is a unique plan-region or plan-county pair. So when an insurer offers the same product in two regions (or two counties), this counts as two offers.
18. It is by no means clear that beneficiaries have focused attention on national plans. Enrollment data, when available, will reveal which plans attracted the most beneficiaries.
19. M. Pauly and Y. Zeng, "Adverse Selection and the Challenges to Stand-Alone Prescription Drug Insurance," NBER Working Paper no. W9919 (Cambridge, Mass.: National Bureau of Economic Research, August 2003).
20. "White House Threatens Veto over Changes to Medicare," AmericanHealthLine, 2 November 2005.

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