PBMs Still Skeptical Of Part D; Is “Donut Hole” A Lifesaver?

Potential Medicare prescription drug insurance plan providers should consider the "donut hole" to be a form of reinsurance that limits their exposure to risk, the Centers for Medicare & Medicaid Services suggests.

In an effort to encourage private companies to take on insurance risk under Medicare Part D, CMS is characterizing the "coverage gap" built into the drug benefit design as a way to minimize the downside for plans.

The standard Part D drug benefit provides for a $250 deductible, 75% coverage of pharmacy costs up to $2,250 and then no coverage until beneficiaries reach $3,600 in out-of-pocket spending (¹ (Also see "Medicare Rx Poised For Passage; $26 Bil. In New Funding For Drugs In 2006" - Pink Sheet, 24 Nov, 2003.), p. 3).

The so-called "donut hole" between the standard drug coverage and the catastrophic limit is purely a function of the budgetary realities that governed the Medicare Rx debate.

Coverage Gap As Reinsurance

CMS is advising potential plan sponsors to think about the impact of the coverage gap on the risks of offering insurance.

In effect, the hole represents 100% reinsurance for drug costs between $2,250 and $5,000. Once seniors cross the catastrophic threshold, the government will bear 80% of the costs. Beneficiaries will pay a 5% copay, leaving a residual liability to PDPs of just 15%.

Private drug insurance plans will therefore be at risk only in the very broad part of the distribution curve for drug expenses, CMS notes, with the estimated median current expense ($2,400) falling essentially at the start of the donut hole.

The proposed regulations to implement the Part D benefit were released for comment July 26.

Although the regulations go a long way towards defining the structure of the drug benefit, they do not answer the most important question about how the Part D benefit will actually work in 2006: Will there be any companies willing to offer private drug insurance plans to Medicare beneficiaries?

Under Part D rules, CMS will administer a "fallback" plan in any region where stand-alone drug insurance plans do not enter the market.

CMS believes there will be no need for the fallback plan in 2006, and the implementing rules appear to be crafted to make the fallback as unlikely as possible. For example, CMS is proposing to accept bids from PDP sponsors that involve different levels of risk sharing in order to encourage more participation early on in the benefit.

PBMs Remain Risk Averse

However, the "big three" PBMs (Caremark, Medco and Express Scripts) still appear skeptical of the prospects that stand-alone drug insurance plans can work.

All three of the PBMs had their second quarter earnings conference calls the week the proposed rules were unveiled.

Each offered a similar message stressing the need for time to analyze the regs, a desire to work with the Administration on the program and a reluctance to accept insurance risk under Medicare.

During a July 27 call, Medco CEO David Snow steered clear of repeating earlier comments suggesting that the PBM is more interested in the "fallback" plan than in going at-risk under Part D.

Medco More Diplomatic

Medco told the recent Goldman Sachs investor conference that it expects to be a "fallback" administrator beginning in 2006 (² (Also see "Medco Committed To Medicare Rx, But Not Part D; Backing The “Fallback”" - Pink Sheet, 14 Jun, 2004.), p. 16). The company's comments provided fuel for critics of the Medicare legislation (³ (Also see "Medco “Fallback” Comments Create Fallout On Capitol Hill" - Pink Sheet, 21 Jun, 2004.), p. 31).

Snow was more diplomatic during the quarterly earnings call, saying that Medco will work with CMS to develop ideas that improve the chances of private drug insurance plans participating in the Part D benefit.

Medco has "been directly encouraged by CMS, and [Administrator] Mark McClellan specifically, to give other thoughts and ideas that might make the program more widely accepted," Snow said.

"As it stands today, we're not willing to take risk, but we are going to work with CMS to try to make it manageable so that they preserve the spirit of private competition without a flawed underwriting model."

Snow did not back away from the position that Medco considers the private drug insurance model fundamentally flawed.

"Medco's position has been that it doesn't really feel that you can underwrite individuals the way that's prescribed in the bill," Snow said. However, "we need to read the details of [the regulations]. We haven't had a chance to do that yet."

"Fallback" Opportunity?

Medco remains interested in the opportunity that would be presented by the "fallback" plan. "We certainly are willing to look at the administrative services required for those areas where there isn't enough private competition," Snow said.

However, he added, "it isn't clear what model they'll use to direct-contract and until we saw that, we wouldn't be terribly comfortable with promoting that avenue," Snow said.

Medco is clearly most comfortable with working through the Medicare Advantage side of the program to offer drug benefits as part of private health insurance plans.

Asked whether Medco would be giving up some "control" if it participated in Medicare solely through managed care partners, Snow responded: "You never have control when you're working direct with the federal government. So perhaps...I'm more comfortable with the level of control I have working with known health plan partners."

Express Scripts Wants Refinements

During a July 29 conference call, Express Scripts CEO Barrett Toan offered more specific ideas for reshaping the risk-bearing model under Part D.

"There are elements of that program that we would like to see refined so that we could participate in a more robust way than we would if we had to take the risk of [adverse] selection and the risk of over-utilization," Toan said.

"Hopefully as the regs are commented on and eventually as they are settled out, we will have a very competitive program," Toan said. "But we can't take risks we can't manage."

Toan previously sounded more enthusiastic about the prospects of Express Scripts going at-risk under Part D. He told an industry conference in February that the PBM would be a "national provider" of drug insurance (⁴ (Also see "Express Scripts Sees Discounts From All Rx Firms For Medicare Card" - Pink Sheet, 1 Mar, 2004.), p. 29).

The company's initial experience under the Medicare drug discount card program may have diminished its enthusiasm for the full benefit; Express Scripts reduced its earnings guidance for the year during the call because of the slow uptake of the cards (see releated story, p. 14).

Toan was asked specifically about Express Scripts' interest in serving as a "fallback" administrator.

"I just think we would need to know more about how the program would be administered and what role that fallback provider was to play and what the margins on a business like that would be," Toan responded. "I don't have enough information to give you a good answer."

Caremark Position Unchanged

Caremark has been the least enthusiastic about the potential for the Medicare Rx program throughout the legislative debate.

During a July 29 conference call, CEO Mac Crawford repeated the company's position that it will not take on insurance risk.

"My position hasn't changed as far as taking substantial risk in this program," Crawford said. "We've been consistent in what we've said in that we're not in the risk business as typically you would think of an insurer being in the risk business."

Caremark is not ruling out participating directly under Part D if the risk definitions are adjusted. "Would I put fees at risk? Yes," Crawford said.

"We will be very supportive of the Medicare program. I still think it makes sense to get drugs to seniors."

However, "I still believe that most of the activity upon which we will engage in will be in support of those customers of ours, primarily health plans, that offer the Medicare product and serving them through their pharmacy side," Crawford said.