Plans Seek Higher Drug Rebates To Counter Erosion Of “Risk Corridor” Loss Protection

Part D prescription drug plan sponsors are asking for higher rebates for the 2008 contract year as a way to compensate for the government’s reduced safety net against losses.

A contracting director for a pharmaceutical manufacturer confided to Medicare Drug Focus that negotiations for 2008 have already begun and that plans are trying to move rebates "north" because the Part D risk corridor will no longer protect them to the same extent it has in 2006 and 2007.

"Oh, sure," Bob Atlas, a senior VP at the consulting firm Avalere Health agreed during an interview, "one of the things that will be done to squeeze down on costs will be tightening down on negotiations with drug manufacturers."

Plan benefit designs for 2007 demonstrate how plan sponsors are already maneuvering for bigger price concessions from drug manufacturers. The disparity in cost-sharing levels between the lower formulary tiers and the upper tiers has widened since 2006, pushing beneficiaries toward first tier generic and second tier preferred brand drugs, at the expense of brands that end up in higher tiers.

According to an Avalere analysis comparing stand-alone prescription drug plan (PDP) formularies in 2006 and 2007, the most common four-tier design had a $7 tier-one copay, a $22 tier-two copay, a $60 tier-three copay and 25% coinsurance for tier four. In 2007, those amounts are moving down in the lower tiers, while holding steady in the upper tiers, with copayments of $5, $20, $60 and 25%. The prevalence of four-tier models is also increasing, from 35% of plans in 2006 to 64% in 2007. Atlas said "it's a safe bet we'll see perhaps 80% of enrollment in four-tier designs" next year.

"If you're a manufacturer, you really don't want to be in the third tier or the fourth tier, because the incentives are so strong for the beneficiary not to go there. You really want to get to tier two if you can, and that means giving deeper discounts," Atlas said.

The Medicare Modernization Act established the risk corridor to decrease the financial exposure of plans when allowed costs exceed plan payments for the basic Part D benefit, as an incentive for sponsors to enter an unfamiliar market. The statute set the parameters for government reimbursement of those excess costs. If plans underestimate their costs, they must also share those savings with the government.

Potential Impact Of Shifting Corridors On PDPs

Many experts believe PDP sponsors - especially those plans that bid low in 2006 and 2007 to gain market share - will have to become more aggressive in ensuring their revenues are in line with their plan bids for that year and beyond, either by raising premiums, tightening formularies and drug utilization management tools, or seeking higher rebates.

The risk corridor situation "is serious ... even for a large player like a Humana or United," Medco CEO David Snow said at the recent Avalere Medicare Congress in Washington, D.C. "You're talking very, very large drug spend, and a mistake of even a percentage point can be meaningful money on the PDP side, so it is significant."

Snow noted that some plans "may use the corridors as sort of a safety net and may be more focused strategically on a land-grab today. ... Even if it was a loss-leader, the relative risk they were taking was small because of the corridors."

For those companies, "when those corridors get loosened and get wider, they're going to have to underwrite more precisely, and in those cases you might see a bigger bump in terms of premium price when those corridors come off."

The CEO noted that Medco has approached its PDP "as though that corridor didn't exist, so that we want to make sure we're underwriting the way we think it will work."

One fall-back for plans could be to tighten formulary requirements. At a "Wall Street Comes to Washington Conference" sponsored by the Center for Studying Health System Change in June, Morgan Stanley Executive Director Christine Arnold said "I anticipate we will see tightening formularies. ... I think the plans that shot for the membership and cover 99% of drugs, they are going to start pulling that lever on the formulary which they have not done yet in 2006" largely because of the risk corridor widening.

WellCare Senior Actuary Corey Berger described the potential for margin losses due to the shifting risk corridor during a recent World Research Group Part D conference in Arlington, Va. He explained that "if your total bid in '06, '07 or '08 is $85, your [estimated] drug cost is $70, and then your actual drug cost is $77, your final net loss ratio would be about 85.8% [in 2006 and 2007]. In 2008, it would be 88.5%, so you lose an extra [2.7%] in margin with exactly the same bid and exactly the same experience."

Berger added that "definitely due to the loss of risk corridors, people probably will not be quite as aggressive in bids, and the membership versus margin discussion that probably happened to most plans this year probably intensifies next year," potentially resulting in higher premiums.

Many industry experts have been predicting there will be a shake-out of PDPs in 2008 through mergers and acquisitions or plans dropping out, largely based on profitability calculations that are based on the experience from the first two years and the widening risk corridor.

Snow, for example, noted that "you'll see shrinkage through just acquisition, and you'll see fewer and fewer players who get very proficient at this."

However, even if some plans' risk calculations for 2008 cause them to consider mergers or dropping out of Part D, Avalere's Atlas noted, "that's not a problem: you'll still have plenty of offerings."

Are Some Plans Giving Rather Than Receiving?

Another point of view on the risk corridors is that rather than receiving safety net payments, some plans may be doing well enough financially that they will end up making risk-sharing payments to the government.

Atlas noted that "the other school of thought is saying, well plans right now are net payers to the government, in other words under the current risk sharing arrangement, it turns out plans are actually having relatively favorable experience, and so they're actually writing checks to the government for the government's share of gains."

"It is a little bit of a head scratcher why premiums are lower than anticipated, why plans are doing well enough to be writing checks back to the government," Atlas continued. "There's some speculation in the early going that beneficiaries didn't understand how to use their benefit and thus did not take full advantage of it."

Humana, even though it has some of the lowest premium plans available in 2006, appears to be having a better than expected experience with Part D. In its third quarter earnings call on Oct. 30, the national PDP sponsor said it anticipates making a 2006 risk-sharing payment of $600 mil.-$800 mil. to Medicare. Humana CFO Jim Bloem observed that "the amount of the risk share payable increases as the MERs [medical expense ratio] associated with a defined standard benefit in each of the PDP and MA-PD drug plans improves during the year." He added that Humana expects to remit the risk share amount to the Centers for Medicare & Medicaid Services in the third quarter of 2007.

A spokesman for America's Health Insurance Plans (AHIP), the association that represents many Part D plan sponsors, said that the premiums and benefit designs that came out for the 2007 plans suggest plans are doing well enough to pass on savings to beneficiaries. Premiums for 2007 are on par with the 2006 premiums, and many plans have added features such as covering drugs through the coverage gap, zero deductibles and zero copays for generic drugs.

"So the experience there, what that says to us is that plans have been very focused on being able to bid and price appropriately in order to do two things. One is show that the benefit can work within the parameters of what the federal government was planning to spend ... but also to be able to provide more robust benefits for beneficiaries," the AHIP spokesman said.

The risk corridor situation is not serious enough for AHIP to have yet considered lobbying for an extension to the current thresholds. "We have not so far advocated on any extensions on the risk corridor," the spokesman said.

- Scott Steinke ([email protected])