Medicare PBMs Could Offer "Loose" And "Tight" Rx Options - Rep. Johnson

The number of prescription plan choices under Medicare could be doubled by requiring competing pharmacy benefit managers to offer both high- and low-premium drug benefits, House Ways & Means/Health Subcommittee Chairwoman Johnson (R-Conn.) suggested during a March 27 hearing.

Johnson proposed that the Medicare prescription drug benefit "require that every PBM who participates... provide two options, a tight option with a lower premium, and a looser option with a higher premium."

"So, actually, if you have two PBMs, you would have four plan choices," Johnson continued. The chairwoman asked Congressional Budget Office Director Dan Crippen, who testified at the hearing, to examine how such a benefit design might affect costs.

Johnson's suggestions build on the idea of having PBMs compete for Medicare beneficiaries, an important component of the House-passed prescription drug bill developed by Rep. Thomas (R-Calif.), who now chairs the Ways & Means Committee. Johnson previously suggested offering Medicare drug plans with variable stop-loss levels (¹ ).

The chairwoman indicated the day after the hearing that last year's House bill and the Democratic alternative to that bill failed to adequately address disparities in income. As a result, she will look to income-related premiums as the basis for prescription drug legislation in the 107th Congress.

Johnson plans to hold additional hearings and member educational sessions in preparation for drafting drug legislation. The March 27 hearing was the committee's third on Medicare modernization and a prescription drug benefit.

At the March 27 hearing, Johnson also asked Crippen to investigate the impact formularies would have on cost. "We would certainly need to know the implication of PBMs having the right to negotiate formularies, because if you were going to give them that right...you would certainly want to have more than one PBM," she said.

"The issue of whether you have one or more PBM has to do to some extent with what powers you give them," Johnson added.

Crippen agreed that, in general, "the more tools the PBMs are allowed to have, the fewer the restrictions along things like formularies, the more the discounts could be."

However, Crippen suggested in his prepared testimony that PBMs' drug discounts could be offset by other costs incurred by the companies.

"Competing PBM/insurer partners who bore insurance risk would have a strong incentive to use such tools as restrictive formularies and three-tier payment structures to aggressively manage cost," he said.

"However," he continued, "they would also incur certain 'load' costs - such as marketing expenses to attract enrollees and a premium for accepting insurance risk - that a single PBM would not."

On the other hand, in a single PBM model, it "might prove politically difficult to allow the designated PBMs to use cost-control tools aggressively if enrollees have no choice of provider in each region," Crippen testified. Additionally, "non-risk bearing PBMs might have too little incentive to use strong tools."

Crippen presented cost scenarios for examples of possible Medicare drug plan designs in 2004 (² see chart: Cost of a Medicare Rx Benefit). The CBO estimates were based on the use of one PBM with all insurance risk borne by Medicare and the assumption that all Part B beneficiaries would enroll in the plan. CBO also assumed the PBM could achieve a 12.5% discount off retail prices for drugs through price and utilization controls.

A base benefit in which the federal government would pay 50% of beneficiaries' coinsurance, with no deductible and no benefit cap and stop-loss protection after $4,000, would cost the federal government $31.6 bil. in 2004. Beneficiaries and other third party payors would be responsible for $83 bil. The monthly premium under this scenario would be $55.50.

Adding a $250 deductible would reduce the federal cost to $29.6 bil., Crippen said, while moving the stop-loss to $6,000 would result in a federal cost of $30.7 bil.

Creating a benefit cap at $2,500 in total spending before stop-loss kicks in at $4,000 reduces the federal contribution to $28.1 bil.

A plan that includes a deductible, a benefit cap at $2,500 in total spending and a stop-loss at $6,000 would cost the federal government $23.4 bil.

Asked by Rep. Stark (D-Calif.) if the 2004 estimates would change if a larger PBM discount were assumed, Crippen responded that a higher drug discount would not necessarily translate into reduced drug spending overall, since utilization could go up as a result of the lower prices.

"Part of the problem," Crippen said, is that "there are offsetting factors. The cheaper you get the price down, the more likely you are to increase utilization."

"So...in terms of the gross spending, you may have more drugs out there," he added.

Johnson asked if a pharmaceutical benefit would help reduce spending in other healthcare segments.

"Studies that suggest savings to overall medical expenditures from access to pharmaceuticals are not very compelling," Crippen maintained.

"On the other side," he added, "there are costs as well having to do with things like adverse events from prescriptions. So at the moment, we assume no net savings to other parts of Medicare from the implementation of a pharmaceutical benefit."

Johnson asked "if we put in place a system that reduced errors and reduced the likelihood of adverse interactions, would that help the scoring?"

"We do not assume PBMs, in and of themselves, reduce dramatically the number of adverse events," Crippen responded. Although PBMs can look for interactions between prescriptions, "the places that seem to show the most promise are hospitals" for reducing errors, he said.

Under revised estimates, CBO now expects drug spending by Medicare enrollees to total $1.5 tril. over the next 10 years (2002-2011), about 32% higher than last year's projection of $1.1 tril. for 2001-2010 (³ (Also see "Medicare Rx Baseline Cost Would Be $728 Bil. Over 10 Years For 50% Subsidy" - Pink Sheet, 26 Mar, 2001.)).

Crippen explained that "the jump results from assuming a higher growth rate and replacing an early low-cost year [2001] with a late high-cost year [2011]."

The March 28 House Budget resolution allocated $153 bil. for a drug benefit over 10 years. Crippen noted this would fund roughly 10% of a universal benefit for every Medicare beneficiary. If a proposal were designed to cover the 12 mil. uninsured, the allotted amount could fund 40% of their average annual spending, Crippen said.

In Stark's prepared testimony, he called for the subcommittee to develop prescription drug legislation based on Medicare beneficiaries' needs rather than on the $153 bil. allocated.

"The bottom line is that the Health Subcommittee should not be held hostage to a budget that shortchanges a Medicare drug benefit....I think we would be better off reporting no drug benefit than reporting a $105-153 billion plan," Stark said.

He added that if the subcommittee cannot move forward with a Medicare benefit "then we should continue working on mechanisms to lower drug costs through reimportation, improved payment policies for the limited drugs Medicare currently covers, patent reform" and other proposals.

Under the budget resolution, the full committee must report out a drug bill to the House Budget Committee by July 24. Budget Committee Chairman Nussle (R-Iowa) can allocate additional funds, above the $153 bil., from both Medicare and general contingency funds.

Johnson has predicted that Nussle will ultimately add money to the benefit. "There is money outside of the hospital trust fund that I am assured can be used for prescription drugs," Johnson said.