The New Medicare Prescription Drug Benefit: An Actuarial Primer on PDP Bids and Bid Strategy
The New Medicare Prescription Drug Benefit: An Actuarial Primer On PDP Bids And Bid Strategy
Careful examination of risk sharing components and regional variations in prescription drug claims will provide valuable data for positioning future PDP bids.
Starting on Jan. 1, 2006, Medicare eligible individuals who had no access to prescription drug coverage will now be able to buy prescription drug coverage through Medicare-endorsed Prescription Drug Plans (PDPs) or Medicare Advantage plans that also offer prescription drug coverage (MA-PDs). In all 34 PDP regions designated by the Centers fro Medicare and Medical Services (CMS), at least 10 organizations will be offering at least one benefit option, and most organizations will be offering more than one option, so beneficiaries will likely have the "luxury" of choosing from at least 20 different options regardless of where they live.
The rest of this article will provide some additional background about PDPs and the standard benefit package offered under Medicare Part D, it will provide a basic overview of the bid development process for a PDP and it will summarize some general strategies and observations used in developing the 2006 bids that will likely be used for 2007.
From an actuarial/marketing perspective, there are several potential markets for PDPs. For standalone PDPs, the primary market is probably going to be the individual market in 2006, which would include the dual Medicare/Medicaid eligibles that will be auto assigned into plans that fall below the low income benchmark in each region. The low income benchmarks were released in early August, with the lowest benchmark at $23.25 per member per month and the highest benchmark at $36.39 per member per month. For Medicare Advantage plans, the target markets are primarily individuals and employer groups, with some special plans available for certain populations such as dual Medicare/Medicaid eligibles and institutionalized individuals.
Employer groups will also play a key role in the new prescription drug program. They have several options for participating, including becoming their own PDPs or contracting with a PDP in order to offer the basic Medicare coverage and then "buying up" by adding supplemental coverage. They can also receive a direct, federally tax-exempt subsidy from the federal government if they choose to maintain their current coverage and meet certain actuarial tests. For 2006, the deadlines for an employer to become their own PDP or to receive the federal subsidy have passed, but employers can choose these options for 2007.
The standard Medicare Part D benefit design provides the following benefits/cost sharing in 2006:
- $250 member deductible;
- 25 percent member cost sharing for allowed costs between $250 and $2,250;
- 100 percent member cost sharing after $2,250 in allowed costs until the member hits $3,600 in "true" out-of-pocket costs (TrOOP). The $3,600 in TrOOP is reached at $5,100 in allowed costs under the standard plan, but can vary under alternative plans. This is referred to by CMS as the "coverage gap"; and
- After the member reaches the TrOOP limit, they pay the greater of 5 percent of the cost of the prescription or $2 for generic prescriptions/$5 for brand prescriptions.
PDPs and MA-PDs also have the option of offering alternative plan designs as long as they are "actuarially equivalent" to the standard plan design, or they can offer "enhanced" plans that provide richer benefits. CMS announced the actual organizations that are offering PDPs and MA-PDs in late September/ early October, along with the benefit designs and premiums for those plans. As expected, the variation in plan designs and prices was significant. Some plans eliminated the initial deductible, while others kept the deductible and converted the coinsurance to copayments. There were also a number of MA-PD plans that will offer enhanced benefits if an individual enrolls with the Medicare Advantage plan that provides some coverage in the coverage gap.
Bid Development Process
In order to develop a Part D bid, an actuary has to complete four or five of the six worksheets in the CMS specified format. These worksheets summarize the projected costs for offering both the standard Medicare prescription drug benefit design and the actual benefit design being filed by the PDP. In order to offer alternative plan designs, the benefit has to pass a number of actuarial tests as well.
To complete the bid form, the actuary has to be able to identify where individuals would fall in a number of cost bands, primarily related to the "breaks" in the standard plan design (i.e. $0 - $250; $250 - $2,250; $2,250 - $5,100; and $5,100+). Generally, this requires relatively good actual historical claims data and then adjustment of the data to reflect the following key assumptions:
- Pharmacy discounts, dispensing fees and rebates;
- Formulary differences (covered drugs in the historical data versus covered drugs under the PDP's formulary);
- Projected generic utilization due to changes in formulary and benefit design;
- Mail-order usage;
- Induced utilization if "enhanced" plan that includes richer benefits than the standard benefit design;
- Potential selection due to covered drugs and benefit design versus competitors;
- Risk score of the projected population versus the population included in the data;
- Differences between aged and disabled;
- Medicare eligibles;
- Differences between dual Medicare/Medicaid eligible individuals and other enrollees;
- Regional differences in utilization and risk score; and
- Administrative cost and profit requirements.
Since 2006 was the first year in which bids were developed and filed, a lot of assumptions and actuarial judgment were needed in developing these assumptions and determining how to adjust the historical data to reflect the assumptions. In addition, since actual enrollment is likely to be determined by benefit design and premium, and because the mix of enrollment between dual eligibles and other enrollment has a direct impact on the bid, the process in 2006 was somewhat iterative in order to develop the final bid. A PDP must offer a single, uniform premium for all individuals who enroll in the PDP, so the PDP can not submit separate bids for the dual eligibles and other enrollees. Since the bids from previous years, the low income benchmark thresholds, and actual enrollment (at least for the first couple of months) will be available for 2007 and future years, some of the assumptions will be easier to make, although clearly all of these items will still be important in future years.
Risk Sharing for PDPs
To encourage entities to become PDPs and to help alleviate the potential risk in providing a new product, the federal legislation that created the Medicare prescription drug benefit includes three different "risk sharing" components for the PDPs. The first risk sharing component is the risk score that each individual is assigned based on historical medical claims. Individuals with more diagnoses or more serious diagnoses have a higher risk score, and the PDP will receive a higher payment from the government for that individual.
The second risk sharing component is the individual reinsurance the government provides once a member exceeds $3,600 in TrOOP. At that point, the government will pay 80 percent of any actual claims incurred by the individual above the TrOOP limit, with the member paying minimal copayments and the plan paying the balance.
The third risk sharing component is comprised of the risk corridors, which are in essence a form of aggregate risk sharing. Since this is a new program and the government recognizes that historical experience is sparse, the legislation includes risk corridors that "kick in" if the plan's aggregate experience is more than a certain percentage above or below the initial plan estimate for prescription drug claims. This risk sharing component is "two way," with the plan potentially paying back the government if the experience is significantly better than expected. The "trigger" percentage at which the risk corridors start will increase in 2008 and again in 2012. However, they may be phased out entirely as early as 2012. While these risk corridors do provide some protection against significant variation between the projected costs and actual costs, they will also likely constrain any profit or loss in the first couple of years of the Medicare prescription drug program. In addition, the risk corridors do not apply to administrative expenses, so PDPs have a much greater risk on that portion of their costs.
National Average Bid and National Average Member Premium
After CMS receives all of the bids from the PDPs and MA-PDs on the first Monday in June, they calculate the national average bid and national average member premium using the data from the bids. The national average bid is a weighted average of all of the bids, with the enrollment in each PDP or MA-PD plan used as the weights. For 2006, since the PDPs did not have any enrollment, CMS estimated the number of people in each region minus the MA enrollment and allocated those people equally to each PDP organization. Since the actual enrollment distribution in 2006 will likely not be equally distributed, the national average bid could be very different for 2007 even if the actual bids for the PDPs do not change from 2006!
CMS effectively calculates the national average member premium by calculating a national average reinsurance payment amount (using weights comparable to those used in calculating the national average bid), adding the national average bid to this national average reinsurance, and then taking 25.5 percent of the total. This national average member premium reflects what a plan with a bid equal to the national average bid would charge a member. If a plan has a bid below the national average bid, then the "savings" are a direct offset to the member premium, and vice versa if the PDP's bid is above the national average bid. For 2006, the national average bid was $92.30 and the national average member premium was $32.20. Hence, if a PDP had a bid of $90.00, the member premium for that plan would be $29.90.
General Strategies and Observations
When developing the bids, actuaries have to make estimates and perform scenario testing to try and ensure that their bids will achieve the organization's goals while still complying with actuarial standards. With the release of the premiums and general information about the plan designs, along with the low income premium benchmarks, we can now make a number of observations and provide some significant insights.
Clearly impacting the low-income benchmark by region was the level of Medicare Advantage enrollment in each region and the Part D bids by the MA plans. For example, the average member premium in Nevada was about $30.00, but the low-income premium benchmark was $23.46 since a couple of MA plans offered an MA-PD with no premium for the Part D piece. If the enrollment in these MA plans increases in 2006, then the low-income benchmark could be even lower in 2007, even if the PDP bids increase.
It will be very interesting to observe in 2006 the cash flow and monthly gain/loss for PDPs. For two reasons, cash flow and monthly/gain loss for the Part D benefit are likely to be very different from a typical prescription drug benefit. The first reason is that the standard Part D benefit is a very front loaded benefit. After meeting the deductible (assuming the plan has one), for people that do not meet the TrOOP threshold, the benefit only extends until $2,250 in allowed costs. So if a member has $4,500 in total allowed costs and enrolls in January, that person will have used up their entire benefit by the end of June. For a PDP, the costs are all in the first six months of the year, while the revenue is spread over 12 months, which has an impact on cash flow and monthly gain/loss. In addition, since open enrollment extends until May 15th in 2006, an individual that knows they will spend $4,500 on prescription drugs in 2006 may decide to wait until May 15th to enroll in order to save the monthly premium. In that case, the PDP will pay exactly the same amount in claims but only receive seven months of revenue instead of 12 months. These two issues make cash flow and monthly gain/loss items that will be very important to watch over the first couple of months of 2006 in order to incorporate them into the bids for 2007.
Many plans will be watching how well the risk scores work in 2006. Since the risk scores are composed of both a "demographic" component and a "medical diagnosis" component, everybody will have a minimal risk score due to the demographic component, even if they have never been to a doctor and have no prescription drug claims. By definition, the average risk score of the aggregate population must be 1.00; however, people with no prescription drug claims will be assigned a risk score based on their demographic profile that could range from 0.26 to 0.70. Since these individuals, in a perfect world, would have a risk score of 0.00, the risk score of people who do have prescription drug claims must, on average, be lower than necessary to compensate the PDP for the risk for people with claims. An analysis of a significant block of retirees indicated that for people with claims in excess of $5,100, the average risk score was approximately 1.25, but the actual claim liability for those individuals relative to the average claim liability for the entire group was closer to a 2.00. If that is the case, then PDPs will be paid only 65 cents on the dollar for the high cost individuals, which could be an issue for PDPs that attract those individuals if they do not have a significant number of lower cost individuals for whom they are overpaid.
It will also be very interesting to watch as plans begin to analyze their 2006 experience and identify regional variations in prescription drug claims and risk scores. Based on the CMS published data and other data sources, significant variation in utilization occurs by region across the country. The average bids by region and the different bids by the national PDPs in each region indicate that most PDPs recognized this variation. What will be interesting to review is whether any or all of the variation disappears when a standard benefit design and formulary is offered to individuals in all 50 states, or if the regional variation reflects true consumer behavior and health status.
There will be 10 national PDPs in 2006, with at least 12 organizations in each of the 34 PDP regions. The bids and member premiums are fixed for 2006, as is the formulary to a large extent. The level of success for each of these organizations might be impacted somewhat by the level and quality of marketing, but if a PDP's bid is too high or too low (or just right) relative to their plan design and formulary, a certain level of success is likely already guaranteed.
For 2007, PDPs will be focusing on getting the most information possible out of their data to identify ways to improve their bid and market position. Even though only four months of data will be available in time to develop the 2007 bids, focusing on items such as enrollment patterns, cash flow, geographic differences and risk scores will be extremely important for a PDP to identify areas for improvement or adjustment.
Corey Berger is a senior consultant for Reden & Anders.