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A Lesson From The New Part D Regulations

February 01, 2014

By Yevgeniy Feyman, Paul Howard

Recent regulations from the Centers for Medicare and Medicaid Services (CMS) threaten to undermine the highly successful Medicare Part D prescription drug program for seniors. The regulations replace market-based competition with government interventions that will drive up costs, erode incentives for innovation among Part D plan providers, and possibly result in worse health for seniors.

Rather than using heavy-handed regulations to address speculative monopolies, theoretical over-use of drugs, and generate pennies-on-the-dollar savings, CMS should focus on building on the success of Part D and tackling Medicare fraud, estimated to account for nearly 10 percent of annual Medicare spending.

It is odd for CMS to propose sweeping changes to a program that enjoys bipartisan support, high satisfaction rates among seniors, and has come in 40 percent below original cost projections.

Here are the key Part D provisions in CMS’s proposed rule:

  • For the first time, CMS is lifting the protected drug class status in Part D from three of six classes (these are drugs which all plans have to cover "all, or substantially all available therapies") , by removing protections from antidepressant drugs, antipsychotic drugs, and immunosuppressants. While this could save money, in theory, by allowing plans to negotiate larger rebates from seniors, the savings is marginal, at best – a rounding error ($144 million on average, according to CMS’s own calculations) in annual Part D spending. And the likely reduction in therapeutic choices for seniors could result in higher health care costs in other parts of the program, like Part A (for hospital care) or Part B (for physician services).
  • Also for the first time, CMS proposes interfering in plan and pharmacy negotiations, out of alleged concern about pharmacy costs. This will introduce enormous uncertainty into the market, just before plans submit their 2015 bids, potentially forcing them to raise premiums for seniors. It would also obstruct future innovations in pharmacy networks or benefit management by eliminating the economic incentive for pharmacy networks. Moreover, CMS is proposing to limit plan bids, to one "basic" and one "enhanced" plan per region. Given robust competition among Part D plans and significant evidence that seniors who switch plans can find significant savings, this could further undermine competition and incentives for additional innovations in plan design.

Part D Basics

Medicare’s prescription drug benefit – commonly known as Part D – has been viewed, in its short life, as one of the more successful government health programs. Premiums in the program are relatively low – an enrollment-weighted average of just over $40 per month. And as we have noted in a recent report, the program’s use of private insurers to deliver the drug benefit is an important factor in its success, evidenced by the use of private-sector innovations like preferred pharmacy networks (the equivalent of narrow physician networks) and multi-tiered benefit designs.

Protected Classes

One reason Part D beneficiaries have such strong access to necessary drugs is because Medicare requires coverage of "all or substantially all" drugs in six "protected" drug classes. CMS’ new regulations essentially cut this down to three drug classes. While the agency does cite some supporting evidence for their decisions (although not a full cost-benefit analysis), the benefits may not outweigh the costs to beneficiaries. For instance, under the proposed rules, a beneficiary would lose access to 61 percent of currently covered generic antidepressant drugs under a typical formulary.

The clinical concerns cited by the agency may be valid – for instance, they worry about the over-prescription of some psychiatric medications (in 2009, 58 percent of individuals prescribed psychiatric medications were not diagnosed with a psychiatric condition). However, as CMS notes, private insurers can still apply utilization management strategies to limit overuse of drugs, and determine the most effective drug formularies. Newly diagnosed patients can also be subjected to step therapy, pre-authorization requirements from the insurer, and other tools to encourage appropriate prescribing.

However, narrowing access to new medicines can have adverse effects on beneficiaries. Indeed, an analysis of the Veterans Administration restrictive formulary (which tends to use older drugs), found that the reduced access to newer drugs reduces longevity gains among VA patients, at a social cost of about $25,000 per beneficiary (the social cost here, refers to the "value" of the years of life lost). Again, if there are inappropriate prescribing trends, CMS can address those concerns through targeted communications with patients and prescribers, fines or sanctions against providers, and working with professional associations to ensure physicians are using the latest evidence-based guidelines.

"Speculative Monopolies"

Ironically, while CMS is removing the protected classes to lower drug costs, it’s taking other steps that are likely to increase them. This is because CMS’s new rules on preferred pharmacy networks basically eliminates the economic incentives for creating them, resulting in increased costs for plans and higher premiums for seniors.

First, it’s important to understand how preferred pharmacy networks function. Under a preferred network, insurers limit which pharmacies beneficiaries can use in exchange for lower cost-sharing; pharmacies agree to accept lower reimbursements from insurers in exchange for more customers. And while some criticize preferred networks for limiting choices, Part D beneficiaries have been flocking to preferred networks. In 2014, 75 percent of seniors have enrolled in plan with a preferred network; and close to 72 percent of Part D plans include a preferred network.

So how would CMS affect preferred networks? The new rules will require insurers to offer the same cost-sharing agreements to any willing pharmacy that can offer the same level of discounts. By implementing this "any willing provider" clause, CMS basically eliminates the economic incentive to join preferred networks – after all, if insurers can no longer drive enrollees to preferred pharmacies, pharmacies have much less reason to join networks by offering significant discounts.

CMS Ignores Their Own Analysis

CMS relies on their own analysis of cost differences between preferred and non-preferred pharmacies, arguing that they are concerned about some preferred pharmacies being more expensive than non-preferred pharmacies. This is puzzling because the topline result of the study finds that preferred pharmacies have costs from 3.5 to 24.1 percent less than non-preferred pharmacies. Indeed, branded drugs were 3.3 percent less expensive, on a claims-weighted average basis; generics were 11 percent cheaper.

Moreover, higher costs should be captured in higher deductibles or higher premiums, which would make these plans less attractive to Part D beneficiaries – and CMS’s analysis notes that only 11 percent of Part D enrollees in 2012 were in preferred networks that were more expensive than non-preferred. But if higher-cost plans are still attractive, it could be because they offer other attributes that consumers value, like pharmacies closer to home.

Lobbying By Any Other Name

Certainly, there’s a constituency that feels threatened by the economics of large preferred pharmacy networks: community pharmacies.

For instance, the CEO of the National Community Pharmacists Association said, in reaction to the CMS study:

"NCPA has opposed these preferred pharmacy plans because they are not in the best interest of many patients, they have been deceptively marketed and they amount to government-sanctioned bias against small business, community pharmacies since they do not require plans to offer participation to all pharmacies…There is a simple solution to this problem…[a]llow any legitimate pharmacy provider that is willing to accept a health plan’s terms and conditions, including reimbursement, to participate in that plan’s network, whether it is a preferred network or a traditional one."

The point missing here is that preferred networks work because of scale, which community pharmacies are unable to deliver. And economies of scale exist in many industries; mom and pop shops might feel threatened by a new Walmart nearby, for instance. But that’s no reason to discourage big-box retailers, which have enormous benefits for consumers. Discouraging preferred networks to protect community pharmacies makes for bad policy and bad economics.

How To Make Part D More Efficient?

If CMS is truly concerned about making Part D more efficient and less costly, the agency should embrace a recent analysis by Milliman (full disclosure: the analysis was funded by the Pharmaceutical Care Management Association) finding that Medicare Part D can save $7.9 to $9.3 billion over 10 years thanks to preferred pharmacy networks. These networks show significant promise for Part D, but are still in their infancy (they have only become prominent since 2011) – CMS should allow plans to experiment with and expand these innovations rather than stifling them.

CMS proposed regulations could be charitably described as trying to reap minor savings at the margins of a very successful program. In fact, a 2008 Milliman study found that lost rebate savings due to protected drug classes were a meager $1.68 PMPM (per member per month) for all six protected drug classes. For most seniors the tradeoff in premiums that are $1.68 greater, in exchange for unfettered access to these drug classes, is likely worth it. (And this savings estimate may be even lower now, given the large number of branded drugs [including drugs in the protected classes] that have lost patent protection since 2008.)

CMS’s prescriptive and heavy handed approach is almost guaranteed to generate the opposite of its intended goals and undermine the foundations of Part D’s success. While we applaud the agency for its laudable goal of improving Medicare, its resources would be far better devoted to reducing fraud in Medicare (which a RAND Corporation researcher estimated is up to $98 billion annually), rather than "fixing" a program that isn’t broken.

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