Medicare Rx Regions Favor Large Insurers, Small PBMs

The decision to create 34 separate regions for stand-alone drug plans under Medicare Part D is intended to encourage more sponsors to participate in the program, Centers for Medicare & Medicaid Services Administrator Mark McClellan said during a Dec. 6 press conference.

"We didn't want a region to have too many beneficiaries for plans to scale-up and get started in 2006," McClellan explained.

"That's why you'll see the drug plan regions are sometimes smaller than the PPO regions. We didn't want too large a scale right off the bat to get in the way of many plans participating in the drug benefit."

CMS announced Dec. 6 that the drug benefit will be conducted through 26 regions for Medicare Advantage preferred provider organizations, along with 34 regions for stand-alone PDPs.

The ¹ regional map is intended to establish Medicare markets large enough to attract the interest of potential plan sponsors, but not ones so big as to be unmanageable, McClellan explained.

"Each region must be large enough to support strong networks," McClellan said, but they also "need to be small enough to make sure that plans can start right away."

The decision to create more PDP regions than Medicare Advantage regions is in some respects counterintuitive, since there is a well-established national model for pharmacy benefit managers, while the largest HMOs remain fundamentally regional.

By carving up the Part D market into smaller regions, however, CMS will make it easier for smaller, start-up PBMs to establish a foothold in the market.

Former CMS Administrator Tom Scully suggested that the Medicare benefit will cause a significant expansion in the PBM sector. Instead of three national PBMs and a handful of small players, Scully predicts that the PBM sector will ultimately evolve into about 10 national firms (² (Also see "Rx Industry Must Change “Mission” To Prepare For Medicare – Scully" - Pink Sheet, 15 Nov, 2004.), p. 17).

McClellan's comment that the goal of the map is not to have too many people in a region "right off the bat" may be an indication that the agency expects to increase the size of the regions over time.

The Medicare Modernization Act directed CMS to define between 10 and 50 regions for both the Medicare Advantage and stand-alone PDP markets.

At the time the Medicare law passed in 2003, CMS was considering a map with relatively large regions - on the order of 15-17 (³ (Also see "Medicare Rx Regions Will Define Managed Care Market For “Next 20 Years”" - Pink Sheet, 24 May, 2004.), p. 16).

The Medicare regions are likely to have a far-reaching impact on the structure of the healthcare market in the U.S.

Medicare Advantage plan sponsors will have tremendous leverage over providers in the non-Medicare market as well. Over time, CMS expects the Medicare market and the private insurance markets to overlap.

For the pharmaceutical industry, the most immediate impact of the map may be in determining whether and where any "fallback" plans are. The law directs CMS to contract directly with a PBM to provide the benefit in any region without at least two Rx plans (either two PDPs or one PDP and one MA plan).

From the brand name industry perspective, widespread use of the "fallback" plan is viewed as making federal price controls all but inevitable.

McClellan has maintained since he joined CMS that there will be no need for any fallback plans in 2006, and the proposed implementing rules make the option as unattractive as possible for potential sponsors (⁴ (Also see "Medicare Rx “Fallback” Plans Ensured Small Role Under CMS Rule" - Pink Sheet, 9 Aug, 2004.), p. 17).

Deputy Administrator Leslie Norwalk maintained that the decision to use a relatively large number of PDP regions will further help stave off the fallback. Norwalk is "more confident now than a month ago" that beneficiaries will have sufficient plan choices.

Stakeholders are understood to have told CMS that a large influx of enrollees in the first year of the program could overwhelm their administrative capacities, including customer support. In addition, the creation of small regions may help address potential sponsors' reluctance to accept insurance risk.

The opportunity to select more narrowly defined markets may make it easier for the national PBMs to accept risk - and to experiment with different models in different regions to find the optimal approach.

The "big three" PBMs - Medco, Caremark and Express Scripts - have expressed strong skepticism about bearing risk in Part D. However, the companies appear to be warming up to the idea (⁵ (Also see "Caremark May Offer Medicare Rx Plan If Risk Is Minimized, CEO Says" - Pink Sheet, 11 Oct, 2004.), p. 21)

The Medicare drug discount card program offers one sure sign that PBMs remain interested in Part D: all current card sponsors plan to stay in the program for 2005 (⁶ (Also see "Medicare Rx Card: All Sponsors Return For 2005 Run-Up To Part D Benefit" - Pink Sheet, 6 Dec, 2004.), p. 29).

Smaller regions, however, may also mean less leverage for any plan in negotiations with manufacturers over drug prices.

CMS' final Part D PDP map establishes 25 regions comprising only one state, compared to 11 single-state regions for PPOs (see maps, p. 18).

Several states that are joined together to form one MA region are divided for the PDP program. Virginia and North Carolina, Mississippi and Louisiana, and Wisconsin and Illinois are among those states that are coupled for MA but split into single-state Part D regions.

CMS did design several multi-state regions that are identical for MA and Part D. For instance, Vermont, Massachusetts, Connecticut and Rhode Island form one region for both sides of the drug benefit; seven contiguous rural states also are combined for a region extending from Montana to Iowa.

However, those larger regions still fall within the population limits set out by the agency. CMS determined that 400,000 individuals must be eligible for Part D benefits in a given region in order to make it viable for two competing PDPs.

By CMS' estimate, more than 3 mil. eligible beneficiaries in a single region would be too many to manage. In that instance, "plans may have difficulty enrolling and providing services to beneficiaries, especially in the start-up year," the agency said.

Many of the MA regions approach the upper limit of 3 mil. beneficiaries. However, with the expectation that only a relatively small portion of eligible beneficiaries will choose MA coverage over a Part D plan, health plans are less likely to be overtaxed in 2006.

The agency noted that it balanced several principles in drawing the maps, including adequacy of patient populations, compatibility of the PDP regions with MA and limited variation in drug spending across states in a region.

CMS noted that it considered slightly different goals in crafting the MA regions: that all Medicare beneficiaries have the chance to enroll in a PPO; that the largest possible number of insurers participate; that cost variations across states in a region are minimized; and that configuration reflect beneficiaries' tendencies to cross state lines for medical care.

The establishment of more multi-state regions for MA appears to favor insurers with pre-existing provider networks and insurance licenses in multiple states.

Several large insurers commended CMS' system of geographic regions. Humana, for instance, said the map allows it to finalize plans to participate in the PPO program, pending its review of the final implementing regulations expected in early 2005. Humana added that it will continue to consider participation in the PDP program.

Aetna and United Health Group also expressed support for CMS' establishment of 26 PPO regions.

The BlueCross BlueShield Association, on the other hand, maintains that the agency's map will make timely participation in MA more difficult for its 40 member plans.

BCBSA wanted a regional map composed of single-state regions (⁷ (Also see "Caremark May Offer Medicare Rx Plan If Risk Is Minimized, CEO Says" - Pink Sheet, 11 Oct, 2004.), p. 18). With 40 member plans operating exclusively in areas across the country, the Blues would have been well suited to assume a role in Medicare Rx in that scenario.

Instead, interested members will have to form joint-ventures in order to participate in that portion of the drug benefit, which could create considerable delay, BCBSA said.

According to a draft timeline set out by CMS, interested parties will have to decide quickly whether they want to participate in the bidding process to provide benefits. A statement of intent is due at the agency by February (see ⁸ (Also see "Medicare Rx Sponsors Must Notify CMS Of Part D Intentions In February" - Pink Sheet, 13 Dec, 2004.)).