VideoBlame Uncle Sam for the latest anxiety overwhelming the health-care sector. For the better part of a year, health insurers and pharmacy benefit managers have been preparing bids to provide prescription drugs to the nation's 43 million seniors. If their bids hit the mark, these providers stand to reap a sizable chunk of the prescription-drug market for seniors. If their bids fall short, they risk becoming marginal players in a market that is set to explode as more baby boomers enter retirement age.
This nail-biting bidding process, part of the government's plan to provide Medicare Part D drug benefits to eligible seniors when the program goes into effect on January 1, 2006, is secret and unparalleled — the first passing of the baton from the public sector to the private sector for the administration of a federal health-care program. Among the hundreds of health-insurance providers and pharmacy benefit managers gearing up to introduce the new prescription-drug plans (see "Let the Bidding Begin," at the end of this article) is PacifiCare Health Systems, which is spending an estimated $50 million this year to prepare itself internally to develop and market products, establish lists of preferred drugs, enroll and educate beneficiaries, and deal with mountains of federal regulations.
The company, which had previously considered dropping its Medicare offerings, is now basing its future success partly on the bid it presents to the government to provide the drug coverage to seniors. "The government has set up this unique bidding process where we can all become government contractors and provide these services at competitive rates," explains Gregory Scott, executive vice president and CFO of PacifiCare, a Cypress, California-based managed-care services provider with $12 billion in 2004 revenues.
Like other providers, PacifiCare is enticed by the potential financial gain — sharing in an estimated $59 billion in Medicare payments to private plans for the drug benefits next year, a figure expected to double within five years. Nothing is guaranteed, of course. While all bidders are eligible to become Medicare Part D providers, "the reality is that if your bid is not competitive, you're not likely to attract any customers," concedes Scott. "If you bid 50 cents to provide a particular drug and another provider bids 25 cents, people won't buy your product. We don't want to bid too conservatively and not get market share, or bid too aggressively and wind up with market share but a product that doesn't perform from a P&L perspective. Hopefully, we're smart enough to avoid getting egg splattered on our face."
To assure the best bid possible, Scott has assembled a dedicated team of a dozen finance, marketing, and customer-service professionals. This group is working with several consultants to design a cost-effective system for providing benefits in the 34 regions where PacifiCare has applied to offer Part D services. Each region requires a separate bid, based on respective market dynamics, notes Scott. "Frankly, I've never seen anything like this in my business career," says the CFO, adding that "a large, new market [has been] created with the swipe of a pen and put in the private sector — a $400 billion to $500 billion program over the next 8 to 10 years. And in my view, we are making a $50 million venture-capital investment in a brand new business that could pay off nicely down the road."
Jump In, the Water's Fine
All bids for plans sold individually to seniors are due June 6 to the Centers for Medicare and Medicaid Services, the federal agency that administers the Medicare programs. The insurers and pharmacy benefit managers (PBMs) will then negotiate over the bids and thus over how much they will be paid by CMS. By October, contracts will be signed, and come January, eligible providers will administer the drug benefits to the nation's seniors.
How well the investment will pay off for providers depends mostly on the purchasing choices seniors make. It also depends on how corporations respond. While seniors have until May 15, 2006, to sign up individually for a prescription-drug program, companies have no mandate to offer the benefit to their retirees. But starting in 2006, companies will have several options that will allow them to receive financial rewards if they provide retiree drug coverage.
What corporations will choose to do is uncertain. In fact, CFO called more than a dozen finance chiefs and employee-benefit managers and asked them about their upcoming plans regarding Medicare Part D, but the companies declined to discuss their retiree benefits before the implementation of the new drug program. "Employers are just not at the point where they want to discuss this openly," explains Dana Sohn, a media specialist at Chicago-based Aon Consulting.
Their reticence is understandable given that companies first have to decide whether or not they want to participate in Part D. They have shied away from providing prescription-drug benefits over the past two decades, because of the high cost of many drugs, the rising cost of health care generally, and the need to slash bottom-line expenses. "If you look at large employers back in 1988, about 66 percent offered drug benefits to retirees," says Leslie Norwalk, CMS deputy administrator. "By 2002, that percentage had dropped to 37 percent, and we feel it has continued to fall since."
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