Proposed Medicare Part D Rule Would Increase Medicare Costs

Eliminating preferred pharmacy networks in Medicare Part D would increase premiums by about $63 annually for over 75% of Part D enrollees. It would also raise program costs by $24 billion over the next 10  years, according an actuarial study by The Pharmaceutical Care Management Association (PCMA). “CMS’ proposal to eliminate preferred pharmacy networks will make it harder and more expensive for seniors to access prescription drugs,” said PCMA president and CEO Mark Merritt.

The study examines the sections of CMS’ proposed rule on preferred pharmacy networks. More than 75% of Part D beneficiaries are enrolled in plans that feature preferred pharmacy networks.
Key findings from the study include the following:

• As of February 2014, more than 75% of prescription drug plans (PDP) enrollees are in plans with preferred pharmacy networks; these enrollees could be adversely affected by the elimination of plans utilizing preferred pharmacy networks.
• The preferred pharmacy networks provision would increase premiums for the affected population by an average of about $63 per year for the 2015 plan year.
• The rule could increase cost sharing among PDP enrollees by an average of $80 to $100 per year.
• Since the rule would inflate the national average benchmark for Part D plans, CMS would pay an additional $64 in direct subsidies per beneficiary, per year in 2015, for a total increased payment of nearly $1.5 billion in 2015 across all PDP enrollees (based on Part D enrollment of about 23 million beneficiaries).
• Over a 10-year period, the increased cost of eliminating preferred pharmacy networks is estimated to be about $990 per affected enrollee, and the cost would be about $24 billion to CMS in the form of higher direct subsidy payments.

In addition, a recent poll found that seniors in plans with preferred pharmacy networks are overwhelmingly satisfied, citing lower costs and convenient access to pharmacies and other benefits, according to a survey from Hart Research Associates. The survey found that 85% of seniors surveyed are satisfied with their preferred network plan. In addition, the survey found that four in five seniors would be disappointed if their preferred network plan is eliminated.

Medicare Preferred Pharmacy Networks Offer Big Savings

Preferred pharmacy networks will reduce federal Medicare Part D costs up to $9.3 billion during the next 10 years, according to a study by Milliman for the Pharmaceutical Care Management Association (PCMA). “It was never in question that seniors love low-premium, low-copay Part D plans with preferred pharmacy networks. Now this game-changing study shows that preferred pharmacy networks save the federal government billions as well,” said PCMA President and CEO Mark Merritt.

The study includes these major findings:
* Preferred pharmacy network plans are expected to reduce federal Medicare spending by about $870 million in 2014.
* Over the next 10 years, preferred pharmacy network plans are expected to reduce federal Medicare spending by $7.9 to $9.3 billion.
* The largest two-year decrease in federal direct subsidies in the history of the Part D program coincides with the rapid adoption of preferred pharmacy network plans and the increased use of generic drugs.
* Post point-of-sale price concessions cause a greater reduction in federal Part D costs than equivalent drug discounts at the point-of-sale.

Separately, Part D seniors in plans with preferred pharmacy networks are overwhelmingly satisfied, citing lower costs, convenient access to pharmacies and other benefits, according to a survey from Hart Research Associates. The survey found that 85% of seniors surveyed are satisfied with their preferred network plan. In addition, the survey found that four in five seniors would be disappointed if their preferred network plan is eliminated.

According to a recent analysis of Part D data, more than 70% of Medicare Part D plans will feature a preferred pharmacy network in 2014. There are more drugstores in the U.S. than McDonald’s, Burger Kings, Pizza Huts, Wendy’s, Taco Bells, Kentucky Fried Chickens, Domino’s Pizzas, and Dunkin’ Donuts combined, creating a highly competitive environment.

Seniors Appreciate Part D Preferred Pharmacy Plans

Eighty-five percent of seniors say they are satisfied with Medicare Part D plans that offer preferred pharmacy networks. They cite lower costs, convenient access to pharmacies, as well as other benefits, according to a survey from Hart Research Associates by the Pharmaceutical Care Management Association (PCMA). More than 40% of Part D seniors are enrolled in plans with preferred networks. Eighty percent of those in preferred pharmacy plans say they would be very upset if their plan were no longer available.

“Seniors see Medicare Part D preferred networks as a ‘win-win’ because they offer good value without sacrificing access to convenient pharmacies,” said Geoffrey Garin, president of Hart Research Associates.

The study also reveals the following:
• The cost of premiums (50%) and copays (48%) are the most important considerations for seniors in selecting their preferred pharmacy plan.
• Seniors are very satisfied with the convenience of pharmacies (81%), the number of pharmacies in their network (74%), and the prescription medications available through their plan (75%).
• Cost is the top factor for seniors regardless of income, age, number of medications, and distance from their drugstore.
• Only 8% listed the number of pharmacies in the network as an important consideration.

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Spending on Specialty Medications Likely to Increase 67% through 2015

U.S. spending on specialty prescription drugs will increase 67% by the end of 2015, according to a forecast by Express Scripts. Specialty medicines are prescription drugs that require special handling, distribution, and administration. Many are biologics that are delivered via an injection or an infusion to treat chronic, complex diseases.

“The very high cost of these drugs creates difficult decisions for plan sponsors on which medicines to cover,” said Glen Stettin, M.D., of Express Scripts. By the end of 2015, drugs for cancer, multiple sclerosis, and inflammatory conditions, such as rheumatoid arthritis, will command higher drug spending than any other therapy class except diabetes .

Hepatitis C drug spending is expected to quadruple over the next three years, which is, by far, the largest percentage increase among therapy classes. The reason is that interferon-free medications are expected to gain FDA-approval in 2014. Also, new screening guidelines are expected to increase the number of people diagnosed with Hepatitis C.

Dr. Stettin said, “Plan sponsors can greatly improve the utilization trend and spending…by taking control of the pharmacy benefit.” A recent study demonstrated that payers who implemented Express Scripts’ cost management and patient care programs achieved 50% lower increases in specialty drug spending. Plan sponsors also saw higher medication adherence rates, which equates to better health outcomes and cost savings. Hepatitis C patients who received specialized clinical care from Express Scripts’ specialty pharmacy were 60% more likely to achieve an optimal adherence level, which leads to medical savings by curing the patient and avoiding further disease progression.

Also, safe, effective, and less-costly alternatives could become available once patents expire on marketed biologics. The country would save $250 billion from 2014 to 2024 if the 11 most likely biosimilar candidates were launched, according to Express Scripts.

Spending on traditional prescription drugs to treat common conditions will decline 4% by the end of 2015, largely because of the availability of generic medications. Only two of the top 10 traditional therapy classes, diabetes and attention disorders, are likely to see spending increases over the next three years, but those increases will be significant. Despite the availability of generic equivalents for many attention disorder therapies, spending is expected to increase 25% over the next three years due to higher utilization among middle-aged adults as well as wide geographic variation in diagnosis. Also, diabetes-medication spending is expected to rise 24% because of high prevalence and new therapies. For more information, visit

How Pharmacy Benefits May Evolve

Pharmacy benefit programs are evolving from simply using cost shifting to providing more complex offerings and adopting new management tools, according to a report by the Pharmacy Benefit Management Institute. The report reveals the following trends:

More Cost-Sharing Among Tiers – The use of four-tier, copay designs continues to grow, fueled by the addition of a separate tier for specialty drugs. Innovative cost-share structures with five or more tiers are emerging, but it is unclear whether they will become mainstream. Tier categories include preferred and non-preferred generics as well as a split by clinically and cost-effective therapies. In addition, the copay differential continues to widen. The average difference between generic and preferred brand copays is $19 compared to $7 about 10 years ago. The average difference between preferred and non-preferred brand copays is $23, compared to $13 a decade ago. As benefit designs move towards more tiers, the use of coinsurance designs are declining. This may be due to concerns over the members’ out-of-pocket costs.

Alternative Incentives for Behavioral Change – Several studies have challenged the assumption that copay waivers increase medication adherence or help to contain overall health care costs. However, when alternative incentives are provided, most employers still focus the incentives on participation.

Management of Purchasing Channels– Benefit programs often vary the cost share by the type of pharmacy in order to encourage members to use certain channels. Copays are less for a 90-day supply filled once in a mail pharmacy than for a 30-day supply filled three times at a retail pharmacy. A new trend is to provide incentives to use certain retail pharmacies. This allows plan sponsors to keep the broad network while managing costs since the preferred retailers typically offer better pricing.

Limited Networks– Limited pharmacy networks were not talked of much before 2012. But they have become more of a consideration after the contract dispute between Walgreens and Express Scripts. Providing the broadest access to providers may no longer trump the more favorable pricing of a narrowed network.

Trend Management– Drug benefit plans often exclude medications deemed nonessential. Even when medications are covered, employers use coverage limitations to promote appropriate use, such as prior authorization, quantity limits, refill-too-soon limits, and step therapy. The vast majority of plan sponsors already use prior authorization, refill-too-soon, and quantity limits. Sixty-five percent of plans use step therapy. The one exception is pill splitting, which has never experienced widespread adoption. PBMs generally do not promote these programs due to safety concerns.

Specialty Drugs– Traditional pharmacy benefit management strategies are now used widely for specialty drugs. The strategies include the use of pharmacy networks, formulary management, prior authorization, and step therapy programs. Quantity limits are also common, in which specialty products are limited to a 30-day supply. Another strategy is to limit the first fill to one or two weeks to ensure the patient tolerates the medication.

Site-of-Care and White Bagging– White bagging is a fairly new strategy, which has gained ground recently. It’s the practice of having medications or supplies delivered directly to the practice setting (outpatient infusion center, physician office, hospital) for use by a specific patient. The idea is to allow the payer to purchase the drugs for less from a specialty pharmacy. Also coverage of drugs can be shifted from the medical benefit to the pharmacy benefit. There are potential drawbacks, such as patient safety, wasted medication, and operational headaches for the provider. Once a drug is received, providers have the burden of storing it separately from their regular inventory. If there is a last-minute change to a treatment plan, a new or additional drug may need to be ordered, resulting in delays in care.

Copay Assistance– Specialty drug manufacturers frequently offer copay assistance programs that cover the member’s share of the cost. Many programs will cover the member’s cost share up to $500 a month, and very few have a maximum income requirement. This may be an effective strategy to maintain patient adherence. However, many employers say the programs only add more complexity.

Over the past few years, there has been a significant increase in the number of copay programs for non-specialty medications, mainly because many brand drugs have come off patent. Plan sponsors say these programs undermine copay tier structures, which provide incentives for patients to use lower-cost alternatives, such as generics. Some advocate the use of coupons to make drugs more affordable, thereby increasing adherence. The authors say that plan sponsors would be prudent to develop a strategy for drug coupons on the traditional pharmacy side. For more information, visit

Exchanges Bring Big Opportunities for the Industry

The following is based on a comprehensive analysis by PWC Health.

The new state-based exchanges represent a major business opportunity for the insurance industry — an estimated $205 billion in premiums by 2021. One year from now, 12 million Americans are expected to begin purchasing health insurance through exchanges. Federal subsidies will entice many to the program with coverage starting in 2014. By 2021, the exchange market is expected to more than double, marking the largest expansion of health coverage since the creation of Medicare in 1965.

“This is the largest open enrollment in our careers,” said Kim Jacobs, vice president of product and innovation at UPMC Health Plan. Individual state exchange members in 2021 are projected to range from 100,000 in states such as Maine to 3.5 million in California. “Public exchanges will create an irreversible shift in the insurance market that will ultimately change the way medical care is sold in the U.S.,” said Joel Ario, managing director of Manatt Health Solutions and the former head of insurance exchange planning at HHS.

Private Exchanges

Private, employer-focused exchanges have much to gain. Unbounded by public exchange requirements, private exchanges can experiment with different approaches and adapt rapidly to consumer demands. They may lead the way in the quality of customer experience. “In an exchange, employees spend money differently than employers think. Individuals often buy up when they understand their choices,” said Ron Goldstein, president and CEO of CHOICE Administrators. Choices can include services such as vision, chiropractic service or more coverage for family members. “We’ve relied heavily on the broker network to educate the individuals; as more choice is introduced into the system, we’ll need the brokers to continue to play that educator role,” he added.

Ario, said, “Private exchanges, already up and running in a handful of markets, may serve as innovation models in this new purchasing environment targeting employers and consumers seeking lower costs, greater transparency and convenience.” In many ways, the private exchange is the precursor to the public exchanges envisioned in the ACA. In the future, private exchanges will create an alternative for employers and for individuals who don’t qualify for government-subsidized insurance.

Private exchanges offer an alternative for employers to move toward a defined contribution approach that caps costs while offering access to a wider array of benefits. Starting in March 2013, employers will be required to notify employees about the new exchanges, providing detailed information on services offered and subsidy eligibility. The business must also clarify that it will not provide a contribution toward coverage if the employee enrolls in an exchange plan.

Medicaid Managed Care

Medicaid Managed Care organizations, which have experience addressing the needs of a lower income population, may be well equipped to serve the market. In the latter years, the average income of exchange participants trends slightly upward as higher income people join the exchanges. For example, in 2014, HRI estimates that 16% of the individual exchange population will have incomes above 300% FPL. The portion rises to 35% in 2021.

Challenges for Insurers

For carriers, thriving in this new market won’t be easy. Insurers will need to maintain a balance of healthy and sick members to limit adverse selection. Providers and insurers will face challenges in serving a new customer base with a demographic profile and health needs that differ from today’s insured population.

Insurance companies must determine how to price at the different levels of plans laid out in the ACA — bronze, silver, gold and platinum — each having cost sharing percentages. Consumers care about price; with all else being equal, price will win. That’s where health plans will start competing in the exchanges. Some plans will price low to attract new customers while some may price higher to avoid the sickest, costliest patients. Higher-priced plans with a better fitting provider network could beat out some lower-priced plans. As previous HRI research has shown, 47% of consumers are willing to pay more for additional insurance features, such as dental or vision coverage. Even more important to consumers is the quality of insurance coverage. Consumers cited benefits and provider network as their top two aspects that define quality. Lower costs came in third.

Insurers focus on finding the sweet spot in product pricing and managing the influx of enrollees. It may be easier for larger insurers to turn a profit under the small margins, said Ario. Large-scale acquisitions are a likely outcome. However, regional insurers and accountable care organizations could provide tough competition to larger companies in markets with fewer players because they know their customer base and they can be competitive on price and benefits.

The pace of state exchange planning poses challenges for insurance companies. The timeline to begin qualifying health plans begins in October, but no state is ready. High progress states, such as California and New York, hope to begin health plan certification in early 2013. Only a few carriers may find it realistic or worthwhile to participate in all 50 public exchange markets.

Plans will compete head-to-head in the exchanges and against plans operating outside of the exchanges. Increased competition and pricing transparency will pressure insurers to control costs while maintaining benefits and quality. As the insurance exchange population becomes more demanding, plans will need more than price to attract and retain members.

Insurers that decide to compete in an exchange must keep a careful eye on administrative costs. Plans must already keep these costs below 15% to 20% of premiums under the ACA’s medical loss ratio requirements. Even if the company does well, it will be required to relinquish a portion of profits above 3% for the first few years as part of the “risk corridor function,” which is a temporary program that limits gains and losses by insurers operating in the exchange. And while there are controls in place to limit plan loss and liability from high-cost members, there are no guarantees of long-term profitability.

In addition to public exchanges, insurers look for opportunities in the private exchange world, including with small businesses. Insurers may work to create their own single carrier exchanges or participate in broader third-party exchange networks. As the environment shifts to a direct-to-consumer market, segmentation will be an important means to offer differentiated products to consumers and potentially also manage risk. Winners are likely to find a way to communicate with consumers in a way that non-healthcare professionals can understand.

Insurers will put pressure on providers to deliver value over volume. Enrollment in exchanges could speed up new expectations of care such as more online capabilities, improved transparency, and an increased focus on customer experience.

Provider Organizations

Once the exchanges are established, expect to see provider organizations developing products to compete with insurers on all lines of business. Provider-owned health plans and ACOs could be well positioned, said health industry investor Stephen Jackson. They will be able to offer lower-cost products with the advantage of local name recognition/reputation and insurers could become the backroom for these organizations.

Pharmacy Benefits

Depending on the type of benchmark plan selected by states, there will be various pharmacy benefit structures ranging from restrictive formularies to a comprehensive benefit similar to that offered through the Federal Employee Health Benefits Program (FEHBP). Over time, qualified health plan participation rules may impose additional requirements, such as evidence that demonstrates superiority to medications and devices already covered in a therapeutic category. If more states choose to adopt the FEHBP open formulary design as a default, it could be a boon for branded drug manufacturers looking for continuity and maximum pharmaceutical coverage. On the other hand, more limited formularies would further drive usage of generic medications. Generous purchasing subsidies built into the ACA provide a large and rapid cash injection into the burgeoning health insurance exchange market.


Many employers will not see dropping their health benefits as a viable solution. The ACA’s $2,000 penalty for dropping coverage for a full-time employee may seem small compared to the cost of providing health insurance. But that penalty multiplies. The annual penalty calculation is the number of full-time employees minus 30, times $2,000. The penalty grows each year by the growth in insurance premiums.

Employers that drop coverage lose numerous tax advantages that come with offering health benefits. Also, employees view healthcare as a valuable benefit. The employers that are most likely to consider  dropping coverage are those with high concentrations of lower-wage workers who willqualify for federal subsidies through the individual exchange markets.

With the law and its subsidies, exchanges could revolutionize the health insurance market by shifting the focus to the individual and prompting insurers to act in a more retail-oriented manner. There will be a push for clarity in products and their value, convenience for buyers and competitive prices. Yet the 2010 law is neither the first nor the last word on the future of exchanges. Even if a future Congress and administration scale back or repeal the law, exchanges remain a hot prospect, as evidenced by the private sector entering this new market.

Investors view 2014 as the start of a major new trend in the US health system –away from employers managing coverage to a robust, open marketplace. Ongoing cost concerns will continue to spur change, both in the form of commercial innovation and more traditional government pressure. Under the ACA, regulators already have MLR limits on premiums and the power to review rate increases. In addition, states may follow Massachusetts in implementing all-payer pricing systems for providers.

The Congressional Budget Office projects that exchange membership will reach 25 million in 2021 for the individual exchange and 4 million for the small group exchange.
Exchange shoppers are not likely to overwhelm the healthcare system or substantially drive up costs immediately after gaining coverage. However, they will be less familiar with the insurance system; in 2014, approximately 75% of public exchange enrollees will be newly insured. Over time, outreach and education efforts by states and insurers will need to match the changing needs of exchange members as they transition from newly-insured to more sophisticated customers. To get the report, visit

Last Updated 01/19/2022

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