In one provision of its January Notice of Proposed Rulemaking (NPRM), for Medicare Part D and Medicare Advantage, CMS proposed that it will accept no more than two stand-alone prescription drug plan (PDP) bids from each Part D plan sponsor, starting in coverage year 2016. The agency stated two reasons for this proposal. First, it would reduce beneficiary confusion in the Part D market by both lowering the number of choices that they face and ensuring that differences between competing options are clear and meaningful to them. Second, it would address the impact of one source of favorable selection that leads to higher costs for the government and the taxpayer. This note looks at evidence from Part D to help understand the context for this proposal.
Reducing the Number of Plan Offerings
The competitive market design of Part D requires that plan enrollees regularly evaluate their options. Our recent study shows that most Part D enrollees have not changed their plan selection from one year to the next, and seven of ten enrollees in stand-alone PDPs did not switch plans over a five-year period. Both the current CMS guidance and the new CMS proposal stem from the principle that available PDPs offered by a given plan sponsor should have “meaningful differences” to help ensure that beneficiaries are presented with a clear and understandable array of choices. The Part D program in 2014 offers the average beneficiary a choice of about 35 PDPs and 20 Medicare Advantage drug plans.
Currently, a plan sponsor may offer up to one plan with the basic Part D benefit as described in statute (or actuarially equivalent to the basic benefit) and two enhanced plans. If two enhanced plans are offered, a sponsor may enhance the benefit through lowering the deductible, cost sharing, or both. The second plan must add substantial coverage in the coverage gap (“doughnut hole”). Current CMS guidance further encourages plan sponsors to eliminate plans attracting few enrollees. Nevertheless, 330 of the 1,169 PDPs in 2014 have fewer than 1,000 enrollees (239 of them with fewer than 500 enrollees) — the level at which CMS encourages sponsors to consolidate smaller plans with another of the sponsor’s plan options.
In the proposed rule, CMS noted that elimination of the coverage gap by 2020, required by the Affordable Care Act, means that the second enhanced plan is losing its meaningful difference. The agency stated that if sponsors consolidate current enrollees in one of their remaining options, current enrollees would experience “minimal disruption.” This claim of minimal disruption was challenged, however, in a recent report by Avalere Health, which concluded that 7.4 million of the 7.9 million beneficiaries currently enrolled in enhanced PDPs would be affected if the proposed policy was adopted. Both it and a report by Milliman for the Pharmaceutical Care Management Association concluded that the change would mean beneficiary disruption and premium increases.
In fact, based on February 2014 Part D enrollment, the number of beneficiaries affected by the CMS proposal would be significantly lower: Only 1 million PDP enrollees would see their current plans disappear from the market if this action is taken in 2016 (and nothing else changes), while the other 6 million enrollees affected are in plans that are likely to survive the consolidation. For both groups, the impact may well be minimal.
For example, if UnitedHealth had combined its two enhanced plans in 2014, premiums in the surviving plan would have increased at most $2 per month – less than its actual $3 monthly increase from 2013 to 2014. The cost impact would actually be less because the premium in the sponsor’s more expensive plan reflects the cost of its increasingly unnecessary gap coverage. Similarly, if Humana consolidated its two lower-cost PDPs without making other benefit changes, enrollees in one PDP might see a $7 increase to their $13 monthly premium, but those in the other plan might see a $3 monthly decrease to the current $23 monthly premium. These premium shifts are within the range of recent typical year-to-year plan premium changes.
Furthermore, plan sponsors adjust their plan offerings regularly as part of market strategies. For example, UnitedHealth added an AARP Saver PDP in 2007, dropped it in 2011, and then added an AARP Saver Plus PDP in 2013. The company kept its AARP Preferred PDP throughout this period but re-categorized it as an enhanced plan while raising the monthly premium from $26 to $40. Humana dropped two of its three PDPs originally offered in 2006, while adding a new PDP in 2011 and another in 2014. Monthly premiums for the surviving PDP increased from $15 to $44 over nine years. Most beneficiaries have experienced disruptions and premium changes since 2006, including transfers when plans consolidated as sponsors reevaluated their positions in the marketplace. Administratively, transfers between plans offered by the same sponsors are handled seamlessly through a CMS crosswalk process. The changes envisioned under the recent CMS proposal will likely be less disruptive than these market-based year-to-year changes.
Reducing Risk Selection Effects
A second element of the CMS proposal on plan offerings addressed “low-value enhanced plans,” in which sponsors offer enhanced PDPs with the minimum level of enhanced coverage required by the meaningful difference tests. In 2014, monthly premiums for two of these low-value enhanced plans are less than those for the same sponsors’ basic plans. Humana’s new enhanced PDP is offered at $12.60 per month, whereas its basic PDP (Preferred Rx) is $22.74. Similarly, the enhanced PDP offered by Aetna/First Health is $44.53 per month, compared to $51.09 for the comparable basic PDP. For several other plan sponsors, the portion of the premium attributable to a plan’s basic benefits (thus excluding the value of any enhanced benefit) is lower for their enhanced PDPs compared to their basic PDPs.
CMS stated in the NPRM that lower premiums in enhanced plans reflect favorable risk selection that increases the cost for the taxpayer. Favorable selection occurs in part because no Low-Income Subsidy (LIS) beneficiaries are auto-enrolled in enhanced plans, and they tend not to select them voluntarily because they would have to pay premiums. In addition, non-LIS beneficiaries with high drug costs are attracted to the low-value enhanced plans by the combination of lower total premiums and features such as lower deductibles. In 2013, 71 percent of enrollees in the basic PDPs offered by the seven largest Part D sponsors were LIS beneficiaries, compared to only 15 percent of enrollees in the enhanced PDPs offered by those same sponsors. The taxpayer cost is higher because the federal government pays a large share of the higher premiums in plans in which LIS enrollees are enrolled.
In the NPRM, CMS included three options for addressing low-value enhanced plans. One would continue to allow separate basic and enhanced plans, but specify a required minimum level of supplemental coverage, for example by requiring that an enhanced plan cover a certain share of the actuarial value of the Part D benefit not included in the standard benefit. The second would deny any enhanced plan bid with a premium equal to or lower than the sponsor’s basic plan premium (or a specified multiple of that premium). The third would modify the approach to supplemental benefits so that enrollees would purchase a basic benefits plan plus a supplemental benefit rider and thus all beneficiaries selecting coverage from a particular sponsor would pay the same premium for the basic benefit. All these approaches are designed to reduce risk segmentation and have the potential to reduce spending by the federal government on behalf of LIS beneficiaries.
The competitive design of Medicare Part D works best if beneficiaries are well equipped to reevaluate their plan selections on a regular basis and if they switch plans when their current plan is no longer cost-effective for their particular health needs. The new proposal by CMS on plan offerings is designed to improve this choice environment by reducing the number of plans and encouraging clear distinctions among competing offerings. The proposal also offers a policy change to reduce the higher taxpayer costs that result from risk segmentation among plan offerings.