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Providers are rushing to participate in Medicare's new drug-benefit program. Companies are proceeding with caution.
Russ Banham, CFO Magazine
June 1, 2005
Blame 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."
In this era of corporate austerity, explains Norwalk, "companies that think about where they can cut costs to be competitive are choosing to cut retiree benefits, depending on their union contracts." But under Part D, there is a major financial incentive to reconsider, she says. "We're saying to them, 'Stay in the game, and we'll write you a check that could be worth hundreds of thousands of dollars.'"
There's no catch. Companies that decide to offer retiree drug programs under the new Part D program will receive financial rewards. There's a tax-free subsidy from the government that its actuaries estimate will pay companies on average about $668 per retiree — a sizable chunk of cash for companies with large retiree populations — as well as certain tax benefits. CMS hopes those rewards will be enough to coax companies that currently do not offer drug benefits to alter their stance.
"Clearly, a major reason why an employer or union may want to do this is because it won't have to pay the entire premium," says Norwalk. In other words, for those that don't offer drug benefits, "now may be the time to rethink."
Prepare for Red Tape
Opting to participate, however, means facing an array of administrative and communication choices associated with Medicare Part D. Blame it on the Medicare Modernization Act of 2003, which gave birth to Medicare Part D and its complex payment methodologies. The system is based on a standard deductible/copayment model in which seniors and the government share the cost of prescription drugs. In 2006, the first $250 of drug expenses, for example, will be borne by seniors as a deductible. They must also fork over 25 percent of the next $2,250 in claims and 100 percent of the cost for prescription drugs between $2,250 and $3,600 — what Norwalk calls the "doughnut hole" in the law. After a total of $5,100 in all drug spending (which includes the amount the beneficiary pays — the $3,600 — and the amount the plan pays) is reached, seniors will pay 5 percent of total catastrophic drug costs.
Companies that elect to incorporate Medicare Part D into their existing benefits have three basic options, although there are permutations within each.
The first option is to simply accept the plan-sponsor subsidy of $668 per year. In effect, plan sponsors offer their benefit plans as a substitute for Part D. "If a plan sponsor decides to go this route, it will receive a check from the government representing 28 percent of annual prescription-drug spending between $250 and $5,000 per retiree — the government's figure of roughly $668 per retiree," says Michael Morfe, vice president and national content expert on Medicare Part D at Aon.
This is easier said than done, however. "You must pass an actuarial equivalence test, which in its simplest form means that your deductibles, coinsurance, and cost-sharing are as good as those found in the Medicare plan," explains Morfe. Both Aon and The Segal Co., a New York-based employee benefits consulting firm, can conduct actuarial equivalence tests for companies, and, assuming they pass, provide the required "actuarial attestation" that employers must file with CMS by September 30, 2005, to receive the subsidy in 2006.
The second option for an employer is really to offer an enhanced version of the first. For example, the employer can contract with CMS to become an official Prescription Drug Plan (PDP) under Medicare and offer the official Part D benefit to retirees themselves. To do that, it must file an application with CMS and submit its formulary for review by June 6 and a bid by July 1. Alternatively, the employer can hire an outside PDP or Medicare Advantage plan to serve as its employer-specific plan. Health insurers Aetna, Blue Cross/Blue Shield, or PacifiCare, or PBMs like Caremark, Medco, or Express Scripts are all developing competitive bids.
The third option is to offer a separate benefits plan that "wraps around" Medicare Part D. CMS's Norwalk says companies pursuing this route can fill in retiree drug-benefit voids. "The way retiree coverage works with Medicare generally is for employers and unions to wrap around the Medicare benefit, for instance, through a supplemental plan in which Medicare pays 80 percent of the cost of a physician and the corporation picks up all or a portion of the remainder," she explains. "With Part D, the employer could pick up the cost of the deductible in a supplemental plan or a percentage of the doughnut hole. Or they could pick up 25 percent of total out-of-pocket costs. There are many different [ways for] employers to step up to the plate and offer a competitive benefit, which in the long run will help them attract and retain higher-quality employees."
Kathryn Bakich, vice president and national director for health-care compliance at Segal, says the first option (accepting the plan-sponsor subsidy) seems to be the preferred choice. "Most of them are taking the subsidy because it really is the easiest route," she says. "The tax-advantaged status of this payment is another financial attraction," says Aon's Morfe. For a company in a 25 percent tax bracket, the tax-free $668 estimated subsidy per retiree works out to about $890. For those in the 35 percent bracket, the figure is closer to $1,035.
The other two options are drawing only cursory interest, say observers. "While some may consider moving their retirees into a Part D plan (option two), since the marketplace doesn't yet exist, no one knows who the vendors are or what they will charge," says Bakich. "It's hard to contract with an entity you don't yet know." The third option creates similar hesitation. "Most pharmacies are not equipped to deal, from a systems and technology perspective, with a retiree who has two benefit plans — Part D and a wraparound benefit provided by the employer," explains Morfe. "While the government says it will make this work in the future, the potential of subjecting retirees at present to unproven pharmacy systems is making this option less than desirable. Our clients have said they don't want to incur complaints from confused retirees burdened by an untested service."
Could It Backfire?
Although one of the stated goals of the Medicare Modernization Act is to preserve private-sponsored retiree plans, there is a flip side to Part D: the possibility that companies with prescription-drug benefit plans may eliminate them now that Medicare is in the game. PacifiCare's Scott speculates that many companies that do not offer prescription-drug benefits will stay the course.
"Now that the government is involved, companies will have the best excuse not to offer drug benefits," he says. "If drug coverage is available from the federal government, why should a corporate sponsor provide it? That sounds harsh, but I think most CFOs looking at the size of their benefits bill are not going to increase retiree entitlements."
Scott, in fact, could be a bellwether of the trend. PacifiCare, "oddly enough," says Scott, does not provide retiree prescription-drug benefits. And, he adds, "we have no plans to put them in place."
Russ Banham is a contributing editor of CFO.
|Let The Bidding Begin
Some providers expected to participate in Medicare part D.
|Insurer||Regions||Current Drug Plan|
|Aetna||All regions except the territories||Medicare Advantage HMO and PPOs, supplemental plans
(not offered in all 50 states)
|Blue Cross and Blue Shield of Florida||1 region, Florida||Medicare suplemental and Advantage plans|
|Cigna HealthCare||34 regions||Medicare Advantage plan in Arizona|
|Health Care Services||3 regions, Illinois, Texas and New Mexico||Traditional Medicare and Advantage plans|
|Highmark Blue Shield||1 region, Pennsylvania, and West Virginia||Medicare Advantage Plans|
|Humana||31 regions||Traditional Medicare and Advantage plans (HMO and PPO)|
|PacifiCare Health Systems||34 regions||Medicare Advantage plans, Secure Horizons prescription plan|
|Universal American Financial||Minimum of 21 regions across 29 states||Medicare Advantage plans, teamed with PharmaCare Management Services, CVS's pharmacy benefits management company|
|United Health Care, Ovations||All regions except the territories||Medicare Advantage plans, teamed with Walgreens Health Initiatives|
|Sources: News reports and company data|